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Why killing NAFTA is such a ‘scary proposition’

  • Much to lose in death of NAFTA
  • What to expect from trade report
  • Loonie at about 73-cent mark
  • European stocks gain
  • New York poised for stronger open

Canadian businesses have gained so much from the North American free-trade agreement that killing the pact would be a “scary proposition,” economists warn.

And it’s not just Canada, they say. Both the United States and Mexico have also gained.

Which is why, Royal Bank economists Laura Cooper and Nathan Janzen said, NAFTA’s demise would have such widespread ramifications.

Their report comes as the three countries prepare for renegotiating the agreement after President Donald Trump said he’d kill the deal if it’s not to America’s benefit.

A negotiating tactic, to be sure, and an obvious one at that, but Ottawa now heads into talks with that cloud over its head.

It also comes after Mr. Trump criticized Canadian dairy and energy practices, the U.S. Commerce Department hit Canada with countervailing duties on softwood lumber exports, and Boeing Co. asked the government to probe Bombardier Inc.’s C Series line with the aim of similar levies.

“Canadian goods and services exports to the U.S. have more than doubled in size since NAFTA’s inception in 1994,” Ms. Cooper, an RBC economist, and Mr. Janzen, a senior economist, said in a new study.

“The U.S. and Mexico were also beneficiaries, with trilateral trade increasing more than three-fold over the period, clocking in above $1-trillion (U.S.) in 2015,” they added.

“Over this time, businesses have benefited from lower tariffs, greater clarity on trade rules and lower technical barriers to trade, making the outright dissolution of NAFTA a scary proposition. The consequences would be significant across all three countries.”

The softwood duties may have been “a shot across the bow,” they warned.

“But President Trump has shown a willingness to reverse an earlier position. He may have a change of heart once again.”

Here’s their look at where things stand, which underscores the potential impact on Canadian businesses and just how much is at stake:

Canada boasts a goods trade surplus with the U.S., pumped up by energy exports, but has run a deficit in overall trade in goods and services.

We’ll get further details later in the morning when Statistics Canada releases its monthly trade report.

Economists expect the report to show that Canada’s trade deficit with the world narrowed somewhat in March to $800-million (Canadian) from $972-million in February.

“The Canadian dollar backed off from 18-month highs, which should provide some support to exporters,” Bank of Montreal senior economist Benjamin Reitzes said of the report.

“We look for imports to be flat to down, after three straight monthly gains,” he added.

“We’ll be watching electronic and electrical equipment import volumes, which have a strong correlation with machinery and equipment investment, and have slumped for the past two years. We’ll also be watching non-energy export volumes closely as usual, as they’ve failed to gain traction over the past two years.”

It’s not just the possibility of NAFTA’s death, noted trade lawyer Peter Kirby, a partner at Fasken Martineau. Just the threat is enough to dissuade businesses that want NAFTA-related access to the U.S. from locating or investing in Canada.

“During last year’s election campaign, much of the trade talk focused on Mexico and China,” said Ms. Cooper and Mr. Janzen.

“But the administration’s first major import duties were against Canada – the latest salvo in the long-running softwood lumber dispute between the countries,” they added.

“The trade action didn’t come as much of a surprise, and is likely to have a limited impact on the broader Canadian economy. But with the U.S. even threatening a full withdrawal from NAFTA, further signs of a breakdown in the bilateral trade relationship are significant.”