End of NAFTA would trim 0.55% off Canada’s economy, report finds

Both studies’ authors agree these findings carry a lesson for Canadian negotiators: they can bargain with confidence and not feel pressured to sign a bad deal, because the end of NAFTA is far from a total scare scenario.

The damage would be much smaller than the financial crisis of 2008; smaller even than the impact of the soaring loonie of the late 2000s; and would be roughly comparable to the national effect of the 2015 oil-price plunge, says BMO’s chief economist.

“It’s an important risk to the outlook. It would be a fundamental change in the trading relationship. But I happen to believe we’ve dealt with much bigger challenges before, in the last 20 years,” said BMO’s Douglas Porter.

“It’s a serious risk — but it’s a manageable risk.”

His research finds the hardest-hit area would be Ontario and the auto sector. It finds that other provinces have more diverse trade, like B.C. with Asia and Quebec with Europe; while provinces reliant on oil and gas would get a reprieve from lower tariffs on those products.

The paper also assumes the Canadian dollar would drop five cents, lowering the cost of investment in Canada.

But Porter cautions that his paper only addresses the second-most-dramatic scenario: that’s NAFTA ending without the original 1987 Canada-U.S. trade agreement being reinstated, and with the U.S. reimposing tariffs.

It doesn’t map out what-if outcomes for the most dramatic scenario, one Porter sees as unrealistically remote — that’s Trump entirely scrapping international trade norms, bypassing the World Trade Organization and reimposing tariffs beyond the current international rates.

He still says ending NAFTA would hurt all three countries unnecessarily: “I don’t mean to dismiss it. One per cent of GDP is still serious stuff… And it’s totally unnecessary… Normally policy-makers bend over backwards (to increase GDP).”

The author of the other study uses a metaphor to describe the effect: he compares it to erecting a wall down the centre of Toronto, on Yonge Street. He says people would find workarounds and, after the initial disruption, the economy would grow again — but it would produce a permanent nuisance.

“You would create a dead-weight cost, an inefficiency,” said Dan Ciuriak, a former federal official who now runs a consultancy, in an interview about his just-completed paper for the C.D. Howe think-tank.

“There would be a permanent reduction in the efficiency of the economy.”

Ciuriak found that the end of NAFTA would shave 0.55% off Canada’s GDP, push 25,000-50,000 Canadians out of the workforce and reduce exports by 2.8%. The damage predicted in his report is far less than the 2.5% GDP loss he said he was expecting to find when he was interviewed as he began his work last month.

The damage would be almost completely offset if Trump were to allow the reinstatement of the original 1987 Canada-U.S. Free Trade Agreement, Ciuriak said. It would barely be offset if Canada and Mexico remained in NAFTA alone, which he said would soften the 0.55% GDP loss by a mere 0.08%.

Ciuriak did not analyze how currency reactions might soften the blow. He merely looked at the direct effect of a NAFTA cancellation, and plugged tariff rates into computer models to assess how the new costs would affect trade.

What he found was not so striking.

“In a good growth year (a 0.55% downturn)… it’s not (enough to cause) a recession,” he said.

“It is fairly modest. That means Canada’s negotiators do have this luxury, if you will. Accepting a bad deal is not necessary. A bad deal may be worse than no deal at all. That’s … where this (research) is taking us.”