Canada’s economy could shrink by 0.4 per cent and economic welfare will decline by more than US$10 billion
U.S. President Donald Trump’s America First strategy has worked like a charm as the North American Free Trade Agreement has come at the expense of its trading partners Canada and Mexico, according to a new report.
C.D. Howe Institute notes that the U.S. will be the biggest beneficiary of the revamped tripartite North American deal, with both Canada and Mexico expected to lose revenue, exports and investments and economic welfare of citizens.
Canada’s economy could shrink by 0.4 per cent and economic welfare will decline by more than US$10 billion.
“While the net protectionist features of the CUSMA (Canada, U.S. and Mexico Agreement), result in overall negative economic welfare impacts for all parties, the United States experiences a sufficient increase in prices to generate a modest increase in the value of its GDP at post-shock prices, despite the decline in real GDP of -0.096 percent,” authors Dan Ciuriak, Ali Dadkhah and Jingliang Xiao, wrote in a report published Thursday.
Mexico stands to lose 0.79 per cent in real GDP and US$14.9 billion in economic welfare.
“…Key measures of the agreement generate net benefits for the U.S. at Canada’s expense. These include more stringent rules of origin that must be met for products to qualify for duty-free market access under the CUSMA, increased intellectual property protection, and the introduction of new rules on cross-border data flows and data localization,” according to the report.
In terms of sectoral impacts, Canada’s dairy sector will be hardest hit, “where shipments decline both due to the ceding of market share to U.S. dairy imports and to declining domestic demand from the macroeconomic consequences of the agreement.”
This translates to a decline in total shipments by 2.64 per cent, or US$771 million. It’s part of a wider decline in total shipments in the agri-food sector by 0.57 per cent, or US$1.27 billion.
Manufacturing sees the opposite result with a slender increase in total shipments by 0.02 per cent. Industrial materials exports, being the target of U.S. reindustrialization, will lose ground, but due to rule of origin changes, more than make up for it in the domestic market. Total shipments for industrial materials will actually rise by 1.02 per cent or US$2.43 billion.
The Canadian automotive sector will see a retreat of 0.63 per cent or US$781 million. This decline is due to the loss of market share in the U.S. with a simultaneous increase in imports south of the border.
Canadian services will also see a decrease of 0.54 per cent “due to the negative income effects of the agreement and the consequent decline in general domestic demand.”
The Mexican government has signed off on the new NAFTA deal, while Canada and U.S. are both working towards ratification.
Despite the challenges, the new agreement is a better alternative to NAFTA lapsing, but only marginally so, with the U.S. essentially indifferent to either outcome, the CD Howe analysts concluded. Under a NAFTA lapse the real GDP loss in the States would have been the same and they would have only suffered a further US$5 billion loss in economic welfare.
“From the standpoint of bargaining, this comparison suggests that Canada and Mexico did not roll over, but pushed as hard as the traffic would bear,” reads the report.
But the much larger impact of NAFTA would come from an increase in uncertainty for investment in Canada and Mexico aimed at serving the U.S. market.
“The major caveat to these results is the extent to which the longer-run investment climate in Canada (and Mexico) has been damaged by the weakening of the North American Free Trade Agreement (NAFTA) institutional framework through the introduction of a sunset clause; the elimination of investor state dispute settlement; the grudging way the United States accepted retention of the NAFTA Chapter 19 binational panel review of trade remedy cases; and, perhaps most importantly, the failure of the new agreement to eliminate the application of US section 232 national security tariffs on imports from its North American partners,” the analysts concluded.