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Report on Business Canada’s economy would be hurt the most if NAFTA is fully revoked, report by major central banks says

Canada would be the biggest loser if the North American free-trade agreement were fully revoked.

A report prepared by the Bank for International Settlements (BIS), a group comprised of the world’s central banks, found that scrapping NAFTA would cause a 2.2-per-cent dip in Canada’s GDP, compared with declines of 1.8 per cent for Mexico and 0.22 per cent for the United States. It cited Canada’s vulnerability in the auto sector as the main reason for the difference.

The report, released Saturday, comes as both the United States and Mexico showed optimism that trade differences between the the two countries could be resolved soon. U.S. President Donald Trump said Saturday on Twitter that a “big Trade Agreement” with its southern neighbour was close, and Mexican Economy Minister Ildefonso Guajardo said Sunday that the U.S. and Mexico are "practically into the final hours of this negotiation.” The developments may lead to Canada soon rejoining the negotiations aimed at securing a new three-way deal.

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Earlier this year, U.S. President Donald Trump threatened to slap tariffs on vehicles and auto parts made in Canada. The BIS report found that automotive workers would be hit the hardest in Canada and Mexico, while oil refinery and coke production workers would lose out the most in the United States.

It also noted that every Canadian province and Mexican state, as well as 434 of 435 U.S. congressional districts, would see an overall real wage decrease.

Canada would suffer a GDP loss of US$37-billion, compared with US$40-billion in the U.S and US$22-billion in Mexico, the study said.

“One thing is certain: Retreating into protectionism, by raising tariffs and ripping up trade agreements, will not fix inequality,” BIS general manager Augustin Carstens said in prepared remarks for the Economic Policy Symposium in Wyoming.

Citing the report, he stressed that revoking NAFTA “would create only losers, certainly at the national level in Canada, Mexico and the United States, but also generally across North American regions.

“While higher trade barriers would shield some domestic industries from import competition, the resulting wage gains would be more than offset by the damaging effects of reduced export opportunities and the increased cost of imported inputs for manufacturing firms,” he added.

CIBC Capital Markets chief economist Avery Shenfeld said the impact of tearing up NAFTA depends on how the U.S. government would impose tariffs on Canadian goods. If the U.S simply moved tariffs to a level used for countries designated a most-favoured nation by the World Trade Organization, then a 2.2-per-cent hit to the GDP would be unlikely, Mr. Shenfeld said. However, if tariffs increased past that level, it would create the kind of uncertainty that could be even more damaging.

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"That uncertainty would have companies leaning to locate themselves in the largest market, which is the U.S.,” he said. “In that case, a 2-per-cent or so hit to Canadian GDP looks reasonable, although ultimately, the economy would recover, helped by lower interest rates and a much weaker exchange rate.”

Mr. Carstens also warned in his speech that there would be negative impacts globally if broader trade protectionism trends continue.

“Recent measures to reverse globalisation and to retreat into protectionism alarm me, as they no doubt alarm many of you,” he said, according to a copy of his remarks. “After decades of setting rules to liberalize trade, we are seeing moves to rip up that rulebook. After decades of striving to open markets, we are seeing attempts to close them.”

He pointed to the rise of populism in Europe and the Brexit vote in Britain as examples of protectionism gaining traction across the Western world.

“It’s paradoxical that the United States is starting to put obstacles in the road at a time when its economy is firing on all cylinders,” he said. “In the long term, protectionism will bring not gain but only pain. Not just for the United States, but for us all.”

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