Global Commerce Centre
Global Commerce Centre
Senior Manager, Research and Business Development
Forecasting and Analysis
Feverish speculation grew earlier this month that U.S. President Donald Trump will soon issue a North American Free Trade Agreement (NAFTA) termination letter. The end of NAFTA would put at risk Canada’s privileged and certain access to the U.S. market and the highly integrated nature of Canada-U.S.-Mexico supply chains. Regardless of the President’s threats, we are still a long distance away from the end of NAFTA. Canada now needs a three-pronged strategy: continue to push for a better NAFTA, deal with the threat of NAFTA termination, and prepare for and minimize the impact of an end of NAFTA scenario.
First, the NAFTA negotiations still offer Canada, the U.S., and Mexico the chance to expand, improve, and strengthen NAFTA. For all its benefits to all three member countries, NAFTA is now 24 years old. It is an old trade deal, no longer in synch with the reality of how business operates today.
Modernizing the agreement could advance Canada’s trade interests in services, data, ideas, and expertise. The June 2017 Conference Board of Canada report, NAFTA 2.0 and Canada: Upgrading a 20th Century Deal for a 21st Century World, identified five principles:
- maintaining a trilateral agreement with the U.S. and Mexico;
- improving the cross-border mobility of business people;
- maintaining North American content rules in the auto sector, obtaining a permanent waiver from Buy America provisions, and negotiating stable and predictable access to the U.S. market for Canada’s softwood lumber exports, while being prepared to ease protections in supply-managed sectors;
- adding an e-commerce chapter in the agreement;
- modernizing elements of the agreement such as rules-of-origin, investor-state dispute settlement, and labour and environmental agreements standards.
When the negotiating teams meet again in late January in Montréal, we continue to believe they should press to modernize the deal with these principles in mind.
Second, Canada needs to minimize the chance of NAFTA being terminated. President Trump has said he would not withdraw the U.S. from NAFTA until after the Mexican presidential election in July.1 Even if President Trump does issue a letter of termination, this is likely a tactic to extract concessions at the negotiating table. Moreover, it would mark the beginning of a process to leave NAFTA, not a conclusion.
Each of the three countries can exit NAFTA with six months notice; but, in that interim period, NAFTA is still in place.
A termination letter only sets in motion a complex and uncertain process.2 Many elements of the agreement would require Congress to eliminate them. So, with enough pressure from U.S. business interests and Congress, the agreement could end up being officially terminated by the President, with its provisions still remaining in force—this would represent a Zombie NAFTA.3
The Trump Administration’s withdrawal from NAFTA would not mean a clean break in trade, but it would be a confrontation. Members of Congress would balk; some business stakeholders, such as the U.S. Chamber of Commerce, would react critically; as would negatively affected industries, which would increase their lobbying efforts in Washington. And there would also likely be a number of lawsuits triggered.
Canada’s best option is to continue to work with its allies in key industries, in Congress, and among the states to press the point that NAFTA partners essentially make things together in an integrated supply chain. Penalizing Canadian and Mexican trade essentially penalizes U.S. trade and would lead to U.S. job loss.
Third, Canada must be fully prepared for the possibility of U.S. withdrawal from NAFTA. The end of NAFTA would deal a blow to Canadians and the Canadian economy, directly and in terms of consumer and business confidence. In new analysis, the Conference Board estimates that both U.S. and Canadian economies would be weaker and households would be worse off.4
Canadians would face higher prices, reduced international competitiveness, and lower demand from the U.S. Most of this impact would take place relatively quickly, with increased prices for goods sourced in the U.S. A lower dollar and interest rates would cushion the blow, but economic growth and job growth would slow and might even go negative for a short time. Canada would also become less attractive as a destination for foreign investment among international firms that want to sell in the whole North American market.
If NAFTA eventually falls through, it will be even more important for Canada to position itself as open to the global movement of products, expertise, people, and technologies. To cushion the blow, Canada will need to aggressively pursue its interests in other markets. The scale and growth potential of opportunities on offer in Asia and elsewhere globally is massive, and though these markets are more distant geographically, many of them are growing much more rapidly than the U.S.
These three strategies will help Canada stay firmly focused on its interests as it navigates the continued inevitable twists and turns still to come in the NAFTA story.
After NAFTA: The Potential Economic Impact for Canada
The Conference Board of Canada, March 8, 2018 at 02:00 PM EST
Live Webinar by Brent Dowdall, Matthew Stewart