No more NAFTA: How Canada could thrive without the trade pact
For months now, the prospect of the United States pulling out of NAFTA has seemed like a bad dream. President Donald Trump made the menace much more real this week, warning Prime Minister Justin Trudeau at the White House that the deal may be "terminated" if the U.S. doesn't get what it wants. This is the nightmare scenario long feared by many Canadians after almost three decades of free trade with our southern neighbour. Story continues below advertisement Or is it? Obviously, the end of the North American free-trade agreement – the foundation of Canada's relationship with the U.S. and Mexico – is not this country's preferred option. 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. But it wouldn't have to be an economic catastrophe. If Canada plays its cards right, the death of NAFTA could become a catalyst for making the Canadian economy stronger, more outward-looking and less tethered to an increasingly unreliable partner. "If NAFTA were to cease, I don't think it would be a complete disaster. And in some respects, it actually has a silver lining," argues David Emerson, a former lumber executive and federal minister of both foreign affairs and trade. The troubled NAFTA talks are a "wake-up call" for Canada, says Mr. Emerson, who insists he's speaking for himself and not the numerous corporate boards and advisory groups he sits on. Among other things, he says, Canada should use this time to forge closer ties with China, Japan and other Asian nations, ease the regulatory burden at home and invest heavily in the kind of infrastructure that will make trade easier – all to hedge against the risk of an increasingly protectionist and inward-looking U.S. "If it isn't Trump, it will be somebody else," Mr. Emerson warns. "There is a strong protectionist, self-serving sentiment that runs deep through the American legislative and regulatory process. Ultimately, we're going to have to diversify our economic linkages in ways that ensure our whole economy is not dangerously vulnerable to those protectionist, Make America Great Again actions." In fact, Canada may be looking at a decade or more of "antipathy to globalization" in the U.S. that outlasts the Trump administration, according to Gary Hufbauer, a former top U.S. trade and investment official who is now a senior fellow at the Peterson Institute for International Economics in Washington. To counter that mood, he says, Canada should stay the course, open its borders wider to trade and investment and pursue free-trade deals in Asia. Story continues below advertisement "Canada could survive and even thrive [in a post-NAFTA world]," he says. The reality for companies is that tariffs aren't as important as they were when Canada and the U.S. struck their first free-trade agreement in 1989. Costs related to transportation, logistics, data flows and supply chains are far more important now than duty rates. Canada's economy would take a hit from the demise of NAFTA, but the impact would be "fairly small in the long run," according to Dan Ciuriak, a former deputy chief economist at Foreign Affairs and International Trade. The shock to Mexico would be larger, but relatively muted for the U.S., says Mr. Ciuriak, who is currently modelling the economic impact of what he calls a "NAFTA requiem" for an upcoming C.D. Howe Institute study. A lot will depend on how NAFTA comes apart and what replaces it – a reversion to the original Canada-U.S. free-trade agreement (CUSFTA), prevailing World Trade Organization rules and tariff rates or some new arrangement. Mr. Trump mused this week about forging a new bilateral Canada-U.S. deal if NAFTA fails. "I'd be surprised if teams of Canadian officials were not already gaming out these scenarios," says Roland Paris, a former foreign policy adviser to Mr. Trudeau and a professor of public and international affairs at the University of Ottawa. The CUSFTA remains on the books, and some experts argue it would automatically kick in if the U.S. terminates NAFTA, salvaging at least some preferential access to the U.S. market for Canada. Story continues below advertisement But Toronto trade lawyer Mark Warner warns that the original free-trade deal could prove to be no better than the deep concessions the Trump administration is seeking in the current NAFTA talks. It could lead to more fractious relations and more trade disputes. "People need to go back and read it," he says. Then again, Mr. Trump could terminate both agreements, leaving Canada in the same boat as most other countries. The gap between WTO tariff levels and the generally duty-free NAFTA border has narrowed substantially over the years. Under WTO rules, for example, the U.S. tariff on cars would climb to 2.5 per cent from zero and to 3.5 per cent from zero on many parts. "People would have to do a lot of number crunching," acknowledges Dennis Darby, president and chief executive of the Canadian Manufacturers and Exporters, which speaks for more than 2,500 companies. "Companies are looking at their competitive advantage on costs all the time." It's unlikely that manufacturers with substantial investments in Canada would immediately pull up stakes if NAFTA wasn't there.