The prospect of life without NAFTA is no longer an unthinkable proposition.
U.S. President Donald Trump insists he is ready to cut Canada out of a reworked North American free-trade agreement or scrap the deal entirely unless we bow to his demands.
A friend of mine suggested recently that Ottawa should call Mr. Trump’s bluff and walk away from NAFTA. Forget making concessions on dairy, culture and anything else. No doubt, many Canadians share that sentiment as the clock ticks down to a U.S.-imposed deadline to reach a deal by the end of September.
It is a tempting response to the Trump administration’s relentless threats and trash talk. U.S. Commerce Secretary Wilbur Ross huffed recently that Canada wouldn’t “survive very well” without NAFTA. Mr. Trump likewise warned that life “would not be fine” for Canada if it was cut adrift by the United States.
That’s not true. Yes, there would be economic pain and dislocation, at least initially. Untold numbers of jobs would be lost and investments delayed or cancelled if the world no longer perceived Canada as a gateway to the vast U.S. market. Complex supply chains, particularly in the auto sector, would be disrupted or dismantled.
But it would not be a disaster for Canada. It’s worth noting that U.S. tariffs are much lower now than when NAFTA went into effect in 1994 − not just inside the zone, but beyond as well. In a post-NAFTA world, Canadian exporters would face the same “Most Favoured Nation” rates that apply to the rest of the world. In 2017, for example, the average MFN rate on U.S. imports was 4 per cent, compared with the near-zero level now. The Bank of Montreal has estimated that the average trade-weighted U.S. tariff on Canadian goods would be a manageable 1.7 per cent if NAFTA was scrapped.
The Canadian dollar acts as a shock absorber for the economy, moving lower and helping exporters remain competitive in the U.S. market.
Necessity would force Canadian companies to diversify their trading relationships. Last year, 76 per cent of Canadian exports went to the United States, down from about 82 per cent when NAFTA went into effect. Getting out of NAFTA would encourage companies to take greater advantage of the free-trade deals Canada has with partners in other parts of the world, including Europe, South Korea and the 10 Asia Pacific countries in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
It would also force Canada to forge new trade deals, including with China. Ottawa is already exploring the idea of opening free-trade negotiations with the Association of Southeast Asian Nations, which counts Indonesia, Malaysia and the Philippines among its members.
But all that would amount to an unpalatable Plan B for Canada.
The most compelling reason for staying at the negotiating table and getting a deal is that trade is a long game. At best, Mr. Trump has six more years in the White House. Depending on his political and legal fortunes, his tenure could be significantly shorter. Canada needs a framework to navigate the current wave of U.S. protectionism, but also the post-Trump era.
What’s more, the chance of getting U.S. tariffs on steel and aluminum lifted, and avoiding threatened duties on cars, is much better inside NAFTA than outside it.
The reverse is also true: Leaving the trade pact won’t free Canada of these penalties.
NAFTA is less about tariff-free trade than it is about the rules and regulations that govern commerce between the three countries. Assuming Canada manages to retain the independent dispute-resolution regime (Chapter 19), NAFTA offers a much better platform for securing reciprocity and fair treatment from the U.S. than the World Trade Organization.
There are a number of non-tariff perks of NAFTA membership, including special visas that allow Canadian professionals to work in the U.S. and vital border crossing privileges for shippers.
The challenge, of course, is to identify what reasonable concessions Canada can make to salvage all that, while also allowing Mr. Trump to claim a victory.
Perhaps finding common ground with an erratic White House and President turns out to be impossible. But we’ll never know if we walk away now.