'Long term risk from destroying a trade deal is lower productivity and lower investment'

By Aerin Einstein-Curtis

- Last updated on GMT

© GettyImages/God4ather
© GettyImages/God4ather

Related tags International trade

Ending NAFTA could bring industry-wide uncertainty for feed crop producers and members of the livestock industry in Canada and the US, says economist.

The BMO Financial Group released a report​, focused on what could happen if the North American Free Trade Agreement (NAFTA) dissolves.

Aaron Goertzen, corresponding author and senior economist with the Bank of Montreal (BMO), said the trade agreement and the potential influence its termination would have on the economies involved remain of interest, a trigger for the analysis termed The Day After NAFTA​.

“Overall, the story offers the diversity of experience you would expect,” ​he told us. “It would be a negative from a broad macroeconomic perspective, but depending on the industry you operate in – depending on the way that trade is falling out, [businesses] could have different experiences. There is no one size fits all prediction that we could make – it’s very diverse.”

The analysis looked at industry-wide potential reactions.

Crop production would bear brunt of dissolution...

Broadly, the feed crop production industry, both the US and Canada, would be expected to see more impact from the dissolution of the trade agreement than those in the livestock industry, said Goertzen.  

“In the US, the crop segment, by our analysis is more vulnerable than the livestock [sector],” ​he said. “US crop producers rely on exports for about 7% [of volumes] and in livestock it’s about 0.5% of sales that are going to Canada and Mexico – a big part is the trading activity there.”

US oilseeds and grains provide the largest dollar amount, but other crops might be more exposed to hikes in tariffs or imports expenses if NAFTA ends, he said.

However, the overall macroeconomic influence would be smaller, with about a 0.2% net reduction in GDP. “On a regional basis, we view some of the border states and those with heavy agriculture exposure as the most vulnerable."

US producers would see about 4% in tariffs to Canada and almost 11% on exports to Mexico, found the report.

Canadian feed crop production would only have moderate exposure to NAFTA dissolution. However, livestock production would have less negative impact, forecast the authors.

Tariffs would be higher, reaching almost 4%, they said. However, only about 20% of the crop is sold to the US.

The Canadian dollar would be expected to depreciate about 5%, and consumers could see an increase in consumer prices of about 0.8 percentage points, based on weaker exchange rate and an increase in tariffs, they said. Imports and export trade would also likely weaken.

Return to WTO trade rules?

There were some assumptions made in generating the analysis, he said. These include that once NAFTA was terminated, there would be a return to trade rules outlined by the World Trade Organization (WTO), not the former Canada-US Free Trade Agreement (CUFTA), which preceded NAFTA.

“We make the assumption that we’ll go back to WTO, these are assumptions as we look at that [considered] as a reasonable expectation,” ​said Goertzen. “You can’t rule out that if the trade deal were to go, you could get a trade war.”

Such an outcome potentially could see the imposition of much higher tariffs, he said. However, that outcome is not considered likely.

“We wanted to stick a little closer to probabilities,”​ he added.

Change to the trade agreement would be considered to bring both immediate and long-term alterations, said Goertzen. “Tariffs would come in to effect day one, but the longer-term risk with destroying a trade deal is productivity is lower, investment is lower,”​ he added.

There also could be wider implications across sectors, he said. If, for example the US were able to reduce its trade balance with Mexico there could be an expansion of the trade imbalance with China as domestic products become more expensive.

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