Can-Am trade will persist—with or without NAFTA
Given recent headlines around the fate of the North American Free Trade Agreement (NAFTA), it’s understandable why some observers might believe the sky will be falling quite imminently.
Threats of Canada being excluded from what has essentially been a bilateral pact concluded in principle between the United States and Mexico could lead one to conclude that historically viable, cost-effective, continental supply chains are now at risk of obsolescence. Factories and distribution centers will be mothballed and billions in past investments will be vanquished with the stroke of a pen.
This doomsday picture presumes the worst-case scenario, namely that members of Congress will passively rubberstamp a bilateral US-Mexico agreement without regard for the protestations of the business community, labor groups and their very constituents. While such a scenario isn’t impossible it is highly improbable.
But let’s assume for a moment that such a scenario were to be realized; that Washington would exclude Canada from its long list of free trade partners. What would the outcome be and who would suffer most?
Certainly, the impact would be felt on both sides of the 49th parallel. US businesses that had previously enjoyed the liberty of being able to transport goods across the Canadian border without tariffs or duties would then face increased landed costs. In some cases, this might negate the value proposition associated with sourcing goods from Canada and/or selling wares in the Canadian market.
For many businesses, however, the most likely outcome of Canada being excluded from free trade with the US would be simply business as usual.
The reality is that Canada and the US are each other’s most valuable trade partners and abolition of free trade between them won’t change that.
That’s not just cheerful optimism. It is borne out in the latest trade data between the two nations. Despite Washington’s attempt to shrink the trade gap between the US and Canada, Canadian merchandise exports to the US rose 3.3 percent in July to $38.4 billion, bringing its monthly trade surplus ($5.3 billion) with the US to its highest level in a decade. US exports to Canada declined a negligible 0.1 percent.
Conversely, Canada maintains a trade deficit with the rest of the world of $5.5 billion, up from $4.8 billion in June. These are telling numbers given that Canadian businesses have had a free trade agreement in place with the European Union – a market of 500 million – for a full year now, and is on the cusp of implementing a free trade deal with 10 other Pacific Rim nations. International free trade options for Canadian businesses abound, but it’s their trade with the US that continues to grow.
But what about those steel and aluminum tariffs? It seems they’re having the opposite of their intended effect. Washington’s goal in imposing the tariffs was to reduce American businesses’ reliance on foreign metals. As it turns out, Canadian steel exports subject to US tariffs grew by 16.4 percent in July while aluminum exports declined only two per cent. Conversely, US steel exports to Canada fell 40 percent and aluminum exports to Canada fell 5.2 percent.
Collectively, this trade data would suggest that trade between the nations will persist even in the event it’s expensive to do so. That’s mainly because the advantages trade offers to businesses on both sides of the border go beyond the cost savings associated with NAFTA. Those “other advantages” relate to a wide range of factors, including proximity to market, market share, cost of labor, labor access and availability, tax environment, exchange rates, and a wide range of other considerations.
Perhaps the only exception to this rule lies in the fate of the ongoing possibility the US could impose tariffs of 25 percent on Canadian auto imports. This would be devastating to Canada’s auto sector where US automakers host numerous production facilities and from which they source auto parts. However, such tariffs would be equally detrimental to the US as it would disrupt automakers’ production processes and increase their landed costs, leading to reduced competition and potential loss of sales.
Even without such tariffs, it’s fair to say the exclusion of Canada from free trade with the US is likely to have some long-term negative impact on trade between the nations, particularly as it pertains to small and medium-sized enterprises that are unable to absorb the cost impact of tariffs. But trade will persist between the two nations.
This is a critical point to remember as Canadian and US negotiators enter the home stretch of the NAFTA talks. The sky isn’t falling and won’t fall for those truly invested in North American trade.
However, as most stakeholders of trade know all too well, businesses across the continent will all be better off if cooler heads prevail and allow NAFTA to continue its legacy of providing North American businesses with the opportunity to be internationally competitive, rather than burdening them with expensive supply chain reconfigurations.
Cora Di Pietro is vice president of Global Trade Consulting at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations.
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