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Briefing highlights

  • How ‘bad NAFTA’ could hit Canada
  • TPP meeting fails to take place
  • Trudeau a no-show at planned chat
  • Trump, Xi face off on trade at APEC
  • Markets at a glance
  • China widens foreign access to financial sector
  • Canadian dollar squeezes CPPIB
  • Fairfax boosts stake in Torstar

From 'bad NAFTA' to 'tantrum'

Royal Bank of Canada believes the country would obviously take a hit, but that a "bad" outcome in trade talks with the U.S. and Mexico would hardly be disastrous.

RBC isn't the first to suggest Canada could survive a gutted North American free-trade agreement, or even the death of the deal, but the bank's economists take a fresh look as the outlook darkens before talks resume in Mexico City late next week.

"A 'bad' NAFTA result - either a renegotiated agreement that delivers less trade or a tear-up of the deal - appears increasingly likely," said senior economist Nathan Janzen and economist Matthias Hartpence.

"Our view: The end of NAFTA would be a negative outcome for the Canadian economy, but a manageable one, provided the U.S. continues to respect its [World Trade Organization] commitments," they added in today's report.

"We estimate that an effective hike in tariffs up to WTO levels could lower Canadian GDP by a total of about 1 per cent over five to ten years. And while job losses are difficult to tally, it's likely that a minotiryt of the half-million Canadians working in highly trade-senstive sectors would be affected."

Foreign Affairs Minister Chrystia Freeland and U.S. Trade Representative Robert Lighthizer leave a news conference in August. While trade talks are tough, the two are said to have built a good working relationship.

Here's how Mr. Janzen and Mr. Harpence see things:

Tariffs

It's hard to predict how things could look in a post-NAFTA world because it all depends on what tariffs come into force.

While some believe Canada and the U.S. could go back to the old trade deal that preceded NAFTA, the Trump administration's "protectionist bent" may not shelter us. They cited the recent trade decisions on softwood lumber and the Bombardier Inc. C Series program.

As other observers have noted, WTO tariffs are not outrageous under the most-favoured-nation status, standing in the U.S. at 3.5 per cent and in Canada at 4.1 per cent.

But even small increases in tariffs can have a marked impact, they noted.

"Though the auto sector gets cited most often, tariff hikes would hit numerous other sectors," Mr. Janzen and Mr. Harpence said.

"Sectors with trade with the U.S. of at least double their Canadian production footprint make up roughly 6 per cent of Canadian GDP and about 5 per cent of Canadian employment," they adding citing industries from appliances and cleaning products that could see tariffs of at least twice their production bases.

Impact on economic growth

This, too, is hard to peg, but RBC estimates that a 4-per-cent jump in tariffs would cut Canadian growth by 1 per cent over the course of up to 10 years.

"The implied annual impact of 0.1 per cent to 0.2 per cent might not appear all that large, but it adds up to a substantial amount of foregone production potential - about $20-billion (in today's dollars) of annual output over time," the RBC economists said.

"Broader spillovers into non-trading industries, the impact of uncertainty on business investment, and the potential cost of non-tariff barriers are more difficult to quantify," they added.

"The partial or complete dismantling of NAFTA would likewly spark near-term financial market volatility, further weighing on near-term business and consumer confidence and, therefore, growth."

The loonie would erode, and the Bank of Canada would probably go even slower on raising interest rates.

Who gets whacked

This table says it all:

Top 15 industries (by GDP size) with trade/GDP ratios of 200% or more

IndustryShare of GDP (%)Trade/GDP ratio (%)Employment (x1,000)Employment (% of total)
Petroleum and coal product manufacturing0.6217190.12
Primary metal manufacturing0.55332540.34
Motor vehicle parts manufacturing0.48511720.45
Plastic product manufacturing0.46205820.51
Aerospace product and parts manufacturing0.43217460.29
Motor vehicle manufacturing0.411250430.27
Basic chemical manufacturing0.31231120.07
Pharmaceutical and medicine manufacturing0.28279280.18
Miscellaneous manufacturing0.25267560.35
Pulp, paper and paperboard mills0.24256230.15
Other general-purpose machinery manufacturing0.19345290.18
Resin, synth rubber/artificial/synth fibre/filament mfg.0.1842260.04
Agricultural, construction & mining machinery mfg.0.15367280.17
Grain and oilseed milling0.1429570.04
Other electronic product manufacturing0.14390200.13

RBC Economics Research

"Production chains in these sectors are simply too entrenched to change quickly, so tariff hikes would likely hit corporate profits and consumer prices sooner than workers," Mr. Janzen and Mr. Harpence said.

"The end result might be a slow decline in these sectors, rather than an immediate disruption.

Then there are the ripple effects.

"The income earned by auto workers, for example, helps to support other industries like retail and construction that do not have a major trade footprint."

And its not just production, even though that's what we tend to look at most. There's also services

A 'tantrum'

Of course, Mr. Janzen and Mr. Harpence predicated their scenarios on trade reverting to a WTO regime. What if that doesn't happen?

A "more remote possibility," they said, is a "Trump tariff tantrum."

What they mean by that is the Trump administration not only killing NAFTA, but also thumbing its nose at the WTO.

"The outcome of this potential scenario is uncertain, but could result in significantly more distortionary tariffs along the lines of the 20-per-cent import duties on softwood lumber and 300-per-cent tariffs on Bombardier C Series jets already announced by the U.S. Commerce Department," the RBC economists said.

"Given the preoccupation of the president with trade deficits, tariffs under this type of scenario could be focused on areas in which Canada has a trade surplus with the U.S. Of course, it would also expose the U.S. to possible retaliation."

Which we commonly refer to as a trade war.

The energy patch would be most exposed to this, but such an outcome would deprive the Americans of what they want most from us.

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Talk, little action

And on that note, trade is the talk of the town at the APEC summit in Vietnam. But it's all talk, and little action.

First off, the countries still in the Trans Pacific Partnership had planned to meet while at the summit, but that fell apart. Prime Minister Justin Trudeau was a no-show.

Then there was President Donald Trump, who warned at the summit, again, that trade needs to work better for the U.S.

Chinese President Xi Jinping, in turn, pushed the benefits of trade, saying that more nations should "ride the fast train of Chinese development."

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The rally had been looking increasingly precarious

Chris Beauchamp, chief market analyst, IG

Markets at a glance

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