Termination of NAFTA would result in modest short-term economic impact for Canada

OTTAWA, March 9, 2018 /CNW/ - Canada's economy would lose about half a percentage point of growth and about 85,000 jobs in the first year following the end of the North American Free Trade Agreement, according to a Conference Board of Canada analysis that estimates the economic and employment impact if NAFTA disappears.

Although growth would largely recover in the year following the end of NAFTA thanks to a lower exchange rate and reduced interest rates, the level of gross domestic product (GDP) would remain permanently lower, representing a loss in income across Canada.

"If NAFTA is terminated, we assume that Canada will return to most favoured nation (MFN) tariffs under World Trade Organization agreements," said Matthew Stewart, Director, National Forecast. "Overall, our analysis suggests a modest impact on the Canadian economy if NAFTA is abolished and replaced by MFN tariffs."

Highlights

• Real GDP growth would decline by 0.5 per cent in the year following the termination of NAFTA.
• Overall employment in Canada would decline about 85,000 jobs in the first year after NAFTA ends, and by 91,000 in the second year.
• In the longer term, Canada would lose the ability to attract investment related to securing access to the U.S. market. As a result, the scenario outlined in this report could be considered the best-case scenario.

"In the longer term, Canada would have a reduced ability to attract investment related to securing access to the U.S. market, which could result in an even bigger economic impact in future years."

The Conference Board estimates that employment would be 85,000 lower in the first year after the end of NAFTA, and 91,000 in the second year. Overall, real GDP growth would decline by 0.5 per cent in the year following the termination of NAFTA.

In the event of a NAFTA termination, MFN tariffs would average 2.0 per cent on Canadian exports and 2.1 per cent on U.S. imports. For some goods, such as trucks, tariffs would be significantly higher.

The resumption of tariffs on previously-exempt goods would immediately make Canadian exports more expensive in the U.S. However, a lower Canadian dollar post-NAFTA would mitigate the average increase in prices of Canadian goods in the U.S.

Overall real merchandise exports would decline by 1.8 per cent in the year following a NAFTA termination. Motor vehicle and parts exports would feel the most significant effect. There would also be significant declines in exports of consumer goods, food and beverages, chemicals, wood products, and agricultural products.

Tariffs and the weaker Canadian dollar would also boost the price of U.S. imports into Canada, leading real merchandise imports to fall by a similar 1.8 per cent.

A reduction in long-term investment due to the end of NAFTA would further limit the economy's productive capacity, resulting in a Canadian economy that is permanently weaker than under current NAFTA trading rules.

The report, The Impact of a NAFTA Dissolution on Canada's Economy, is available from the Conference Board's e-Library.

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SOURCE Conference Board of Canada