NAFTA negotiations: A perspective from the C.D. Howe Institute

The Ritcey Report

Written by Lynn Healy-Goulet
December 14, 2017

The NAFTA talks are much in the news these days. But rather than discuss the politics of the negotiations, I wanted to examine the possible implications of the talks on Canada’s auto industry and agriculture, the two hot button trade issues on the table.

These two sectors of our economy are so crucial to our wellbeing that they – and other key drivers of our economy – have been the subject of an important research study initiated by the C.D. Howe Institute1. The findings are speculative rather than definitive, but they make disturbing reading.

What is NAFTA?

First, some background. As most of you know, NAFTA was ratified in 1994 and lowered tariffs for most traded goods and services between the U.S., Canada and Mexico. The treaty also introduced rules covering food safety, intellectual property rights and dispute settlements. Trade between the three countries has more than tripled since ratification, although to the disadvantage of the U.S. according to President Trump.

C.D. Howe Institute

The C.D. Howe Institute is a Toronto-based independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is widely considered to be Canada’s most influential think tank.

The forthcoming study commissioned by the Institute and deconstructed in detail by Greg Keenan, The Globe and Mail2 (November 20, 2017), paints a somewhat alarming picture about the effect of the end of NAFTA would possibly have on the economies of the three NAFTA partners:

  1. The United States would sustain more economic damage than Canada, while Mexico would suffer most.
  2. Gross domestic product in each of the three countries would take a hit, with exports of goods and services within the region slumping by about $110-billion (U.S.) or 9% by 2023.
  3. The damage would be especially acute in agriculture and autos.

As part of their research, The C.D. Howe Institute study ran economic models to assess the impact of three possible outcomes from the negotiations:

  1. The pact lapsing and the relationships among the three countries reverting to World Trade Organization rules.
  2. An end to the tripartite deal but the prior Canada-U.S. free-trade agreement remaining in place.
  3. A Canada-U.S. free-trade deal supplemented by a separate Canada-Mexico agreement.

Predictions and projections

Terminating the agreement would cost Mexico $25-billion in economic welfare, based on the combination of a reduction in wages and increases in prices as tariffs rise.

The comparable figures for Canada and the United States are $14.5-billion and $20-billion, respectively.

The impact on Canada from termination would be less extreme, in part because 75% of Canada’s tariffs are at zero under the Most Favored Nation (MFN) regime that would apply if there were no free-trade agreement.

But some sectors in Canada would take billion-dollar hits, including business services, autos and chemicals, rubber and plastics. Those exports to former NAFTA partner countries would decline.

U.S. bilateral auto exports would slump by $13.2-billion.

The beef, pork, poultry and dairy industries in the United States would each take hits of about $1-billion in exports.

The auto sector would be hit hard in Mexico as well, in part because of the so-called chicken tariff of 25% that the United States levies on pickup trucks imported from non-NAFTA countries.

The U.S. Chamber of Commerce

The U.S. Chamber of Commerce3 issued a report recently that said the 12 U.S. states most likely hurt by that country’s withdrawal from NAFTA all voted for Mr. Trump a year ago.

Michigan, home to the head offices and several manufacturing operations of the Big Three automakers, topped the list.

Dave Ritcey, The Ritcey Team, Scotia Wealth Management