What would a world without NAFTA mean for Canadians?
When President-elect Donald Trump was campaigning, he promised to withdraw the United States from the North American Trade Agreement (NAFTA). Some began to wonder if this would mean higher prices on goods, or perhaps the withdrawal of certain items. However, experts say such changes aren't likely.
Renegotiating or abdicating NAFTA was championed by Trump as a way to create more jobs in the U.S. and revitalize American manufacturing. Experts, though, say cancelling the trade pact would only raise prices on goods in all the member countries - Canada, Mexico and the U.S. As a result, and because of Canada's leading role as a trade partner with the U.S., the experts doubt the pact will be scrapped outright.
The impact on Canadian consumers
Hypothetically, if Trump were to decide to leave NAFTA, there's still the Canadian-United States Free Trade Agreement (FTA), which was superseded by NAFTA, to offer some protections.
Were both of those to somehow dissolve, however, duties and tariffs would likely revert back to the General Agreement on Tariffs and Trade (GATT).
"Basically, you'd pay the same tariffs, and you have the same treatment as everyone else in the world," says Maryscott Greenwood, senior advisor to the Canadian-American Business Council and a former appointee of the Clinton administration. "So the preferential low-to-zero trading levels with Canada go away, which means high tariffs on everything, and everything is immediately more expensive."
In addition, various products that Canadians are used to enjoying at low prices may be so prohibitively expensive that they may no longer be available, or at least become harder to find, particularly if businesses move entire supply chains to the U.S. The costs of reorienting a business entirely in America and the higher wages of those American workers will be tacked on to prices paid by Canadian and American consumers.
Andrew Schutz, an associate at Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP, a leading international trade and customs law firm in Washington, D.C., gives an example of how this would work:
"In the '80s and '90s, shrimp was a luxury item," he says. That's because it was exclusively farmed by American shrimpers in the Gulf. "Then countries like China, Vietnam and Ecuador started to export and farm shrimp, so the prices plummeted. This really hurt the Gulf shrimpers, but now we can buy shrimp for cheap."
If this were to happen, it's possible Canada's record-level debt could increase even further, as consumers fight to keep up with the sudden rise in the cost of living. Already, about half of Canadians are living paycheque to paycheque, according to the Canadian Payroll Association, and an increase in the cost of goods could mean more Canadians turn to credit to fund necessary expenses.
However, if manufacturing were relocated to America, Schutz predicts it's unlikely the U.S. alone could meet worldwide demand for certain now common items.
"The hope is that U.S. industries will fill the void, but that doesn't necessarily always happen," he says. "At the very least, there will be some lag time between U.S. tariff barriers going up and U.S. industry being able to cover the market. The source of goods would shift and likely another country that has lower tariffs than the U.S., like Korea, would start importing to the U.S. and Canada more."
Experts say it's unlikely the U.S. will
To leave NAFTA entirely is to untangle a complex web of interconnected tariffs and rules for trade, environmental protection and working conditions that would affect too many large companies and too many cross-border manufacturing processes to be plausible.
"The possibilities are wild and all over the board, so leaving NAFTA is not something I think will come to pass because the president-elect understands business, listens to business and understands a good deal when he sees it," says Greenwood.
She believes that Trump's transition team hasn't had the opportunity to look at what Canada offers yet, and when they do, they'll see that the economic relationship between the two countries is not just a good deal for Canada, but for the U.S. as well.
"Canada is in a relatively strong position not just because of its leadership in the world, but also its abundant resources and the importance of the market for foreign investment," she says.
U.S.-Canadian trade is the world's largest trading relationship. Canada is the No. 1 export customer for America in 35 states and No. 2 in all the rest. This accounts for nearly 9 million American jobs and $338 billion going into the U.S. economy as of 2015. Plus, the two countries exchange $2.4 billion in goods and services every day and $1.4 million every minute.
But in the first weeks following his election, President-elect Trump was walking back several campaign pledges. "Ripping up" NAFTA may eventually be another one that's scrapped, since leaving NAFTA is probably not the answer when asking how to give new jobs to America's former factory workers.
Besides, both Schutz and Greenwood agree that even if NAFTA were to be renegotiated, the focus of that renegotiation for America would likely be Mexico, not Canada.
"I don't think the answer is, ‘Let's go back to how things were,'" says Schutz. "Things are moving forward and the conversation should be, ‘How do we help those people who were really energized by Trump's statements move forward as well in a different type of economy?'"See related: What a looming interest rate hike could do to your debt, Do privacy laws encourage travel fraud?
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