What the Termination of NAFTA Could Mean for the Canadian Economy

Financial

Jan 10

NAFTA’s potential end could hurt the Canadian economy but the country’s exports could head elsewhere, experts said.

The North American Free Trade Agreement is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. In 1994, NAFTA came into effect, creating one of the world’s largest free trade zones and laying the foundations for strong economic growth and rising prosperity for Canada, the United States, and Mexico.

In a recently released report the Bank of Montreal (BMO) said while the Termination of the North American Free Trade Agreement would hurt the Canadian economy, it is a “manageable risk” that businesses, markets and policymakers would adjust to fairly quickly.

The report also said that no single industry would have to bear the brunt of the end of NAFTA and that consumers would be the biggest net losers if the agreement ends.

Canada’s GDP predictions will have to be adjusted if NAFTA ends. BMO said that GDP figures would be between 0.7 per cent and 1.0 per cent lower than expected over a five-year period. Consumer prices are also expected to surge due to a weaker exchange rate.

BMO added that it expects Canada to reject U.S. demands for the NAFTA dispute resolution mechanism to be scrapped or weakened.

“It is critical to note that policy would not stand still in the event of a negative outcome for NAFTA,” said Doug Porter, Chief Economist, BMO Financial Group. “Monetary policy would be looser than it would otherwise be, the Canadian dollar would adjust lower, and even fiscal policy would potentially adjust,”

In the event of a negative outcome for NAFTA, Canadian policy would be adjusted to adapt, Porter added. Despite the fact that North America’s economies would ultimately adjust and adapt to a world without NAFTA, the report also concludes that the agreement has been a net positive for all three economies. “It is deeply unfortunate that we are even considering this possibility,” Porter said.

“We expect that Canadian trade policy would be aggressively aimed at diversifying Canada’s interests by securing new arrangements with faster growing economies like the TPP and Mercosur nations, India and China, while seeking to achieve full benefit of the recently enacted Canada-European Union Comprehensive Economic & Trade Agreement,” The report said.

Canada’s trade interest would be diversified with new deals with the growing economies which could help some of the economic damage be mitigated. However experts have said that the end of NAFTA could mean a drop in Canadian household income and GDP. Job losses are expected as well as exports are expected to decrease by around 2.8 percent.

“The bad news for Canada is that every NAFTA scenario ends with continued economic uncertainty for us, and the U.S. coming out on top,” Rona Ambrose, member of Canadian government’s NAFTA advisory panel, said in an article in the Financial Post.