The United States would sustain more economic damage than Canada, while Mexico would suffer most, a study by the C.D. Howe institute concludes.Ronnie Chua/Getty Images/iStockphoto
The termination of NAFTA would deal sharp blows to the auto industry and agriculture – two key sectors of the U.S. economy – setting off a battle between the Trump administration and the two industries and Congress, which will try to save the deal.
That's one of the conclusions of a forthcoming study done by the C.D. Howe Institute on the effect of the end of the North American free-trade agreement on the economies of the three NAFTA partners.
The United States would sustain more economic damage than Canada, while Mexico would suffer most, the study concludes. If the pact were allowed to lapse, 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 per cent by 2023, the study says.
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Negotiators from the three countries are meeting in Mexico City in the fifth round of talks on the future of the 23-year-old deal amid widespread concerns that U.S. demands in key areas are so onerous on Canada and Mexico that the Americans are effectively forcing termination.
U.S. President Donald Trump has criticized the deal as one of the worst his country has ever signed.
The C.D. Howe study ran economic models to assess the impact of three possible outcomes from the negotiations: the pact lapsing and the relationships among the three countries reverting to World Trade Organization rules; an end to the tripartite deal but the prior Canada-U.S. free-trade agreement remaining in place; and a Canada-U.S. free-trade deal supplemented by a separate Canada-Mexico agreement.
Although the effect on the U.S. economy would not be particularly heavy, the damage would be acute in agriculture and autos, the study says, causing the auto industry, the farm lobby and Congress to unite to try to save the deal.
"This battle will be fought within the United States, between U.S. stakeholders, Congress and the White House, not between Canada and Mexico and the Trump administration," says the study, titled Nafta Requiem: What if the U.S. walks away?
The effects on agriculture and autos amount to "poison pills" that Congress would be unable to swallow, said Dan Ciuriak, lead author of the study and a former chief economist with the Department of Foreign Affairs and International Trade who now heads his own consulting firm.
"How would the Trump administration roll over the agriculture lobby plus the auto lobby to withdraw from NAFTA?" Mr. Ciuriak asked in an interview. "I just don't see the politics working for the administration on that."
Terminating the agreement would cost Mexico $25-billion in economic welfare, or 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 models in the study show.
"Mexico is by far the most exposed economy to NAFTA lapsing. Mexico put its economic eggs in the NAFTA basket and thus faces outsized risks from losing its gamble," the study says.
Mexico has been the target of much of Mr. Trump's rhetoric denouncing the deal, based on his perception and that of his supporters that millions of jobs have shifted to Mexico from the United States because of the elimination of tariffs on most goods and services when NAFTA came into force almost 25 years ago.
The impact on Canada from termination would be less drastic in part because 75 per cent of Canada's tariffs are at zero under the Most Favoured Nation (MFN) regime that would apply if there were no free-trade agreement.
But some sectors in Canada would take billion-dollar hits, the study notes, including business services, autos, and chemicals, rubber and plastics, whose 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, the study finds, in part because of the so-called chicken tariff of 25 per cent that the United States levies on pickup trucks imported from non-NAFTA countries.
Pickup assembly "would likely immediately pack up and move into the United States to avoid the 25 per cent if NAFTA lapses," the study says.
There is a debate among auto industry officials about what would happen to production of General Motors Co. pickup trucks in Oshawa, Ont. – scheduled to begin in January – if there is no NAFTA and the tariff regime reverts back to MFN status and the 25-per-cent chicken levy.
The study says the Trump administration would achieve its goal of reducing its trade deficit "but not because of improved trade balances with its NAFTA partners, but because the negative impact on its economy drives down overall imports from all sources compared to exports."
The U.S. Chamber of Commerce issued a report on Friday that said the 12 U.S. states most 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 auto makers, topped the list.