ECONOMIC NEWS

François Dupuis, Vice-President and Chief Economist • Mathieu D’Anjou, Senior Economist Benoit P. Durocher, Senior Economist • Francis Généreux, Senior Economist • Jimmy Jean, Senior Economist • Hendrix Vachon, Senior Economist

Desjardins, Economic Studies: 514-281-2336 or 1 866-866-7000, ext. 5552336 • desjardins.economics@desjardins.com • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2017, Desjardins Group. All rights reserved.

Canada: What Would Happen If They Abolished NAFTA?Canada, the United States and Mexico are starting the fifth round of negotiations on the North American Free Trade Agreement (NAFTA) on Friday. Judging by what went on in the previous rounds, there are serious obstacles in those negotiations and concerns are growing that NAFTA may eventually be abolished.

However, Canada would still have several options if the talks fail. First, the bilateral Canada–U.S. agreement that preceded NAFTA seems never to have been cancelled. Unless amended, the clauses of that previous free trade agreement could take the place of a defunct NAFTA. Second, since the most serious U.S. complaints are aimed at Mexico, it might be possible for the U.S. and Canada to conclude a new, updated bilateral agreement that does not include Mexico.

Third, international standards would protect Canada if it lost any type of free trade relationship with the United States. According to the rules of the World Trade Organization (WTO), countries have to apply the same customs tariffs to all WTO member partners. That is known as the “most favoured nation” clause. With the globalization of trade, those tariffs have decreased considerably in recent decades.

The table on page 2 shows the customs tariffs for the ten most significant categories of goods exported by Canada to the United States that would be in effect if free trade disappeared. They represent 68% of all Canada–U.S. exports. As a general rule, non-ad valorem tariffs (those that apply to quantities of imported goods) are quite limited, except for energy products. For example, a tariff of US$0.52.5 per barrel is imposed on U.S. imports of light fuel. Average ad valorem tariffs (those that apply to the value of imports) are quite low in most cases. Those figures do not include exceptional measures like the countervailing duties on softwood lumber.

Bottom line: with relatively low average tariffs, the direct impact on Canada–U.S. exports would be fairly limited. For example,

ECONOMIC STUDIES | NOVEMBER 15, 2017

a hypothetical 2% tariff would lead to a price increase for U.S. buyers similar to the impact of a 1.6-cent increase in the value of the Canadian dollar. To match a hypothetical 5% tariff, the loonie would have to increase in value by about 4 cents. Since the Canadian dollar is so volatile these days, we often see fluctuations of a few cents at a time. The impact of a possible low customs tariff would not be insurmountable for most goods exported to the United States. The loonie might even depreciate if free trade between Canada and the United States is abolished completely. That could partially offset the impact of low customs tariffs south of the border.

IMPLICATIONS

That said, there could be more significant indirect consequences. The presence of tariffs could increase some administrative costs for businesses. The uncertainty that would arise if NAFTA were abolished could prompt businesses to be more cautious and slow down their investments considerably. As the Bank of Canada has observed, that could have significant negative consequences on Canada’s economic growth.

Customs tariffs could further erode Canada’s competitive edge for exports to the United States compared with other exporting countries. Our Canadian exporters could lose market share in the United States. Lastly, the abolition of NAFTA could lead to many new non-tariff trade barriers, with serious negative consequences for some Canadian exports. To sum up, the consequences of losing NAFTA would not be limited to the impact of tariffs alone.

Benoit P. Durocher, Senior Economist

#1 BEST OVERALLFORECASTER - CANADA

ECONOMIC STUDIES

2NOVEMBER 15, 2017 | ECONOMIC NEWS

CATEGORIES OF GOODS EXPORT SHARE*

Average ad valorem tariffs

Number of non-ad valorem tariffs

1HS 27 – Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes

23.9% 0.5% 30

2HS 87 – Vehicles other than railway or tramway rolling-stock, and parts and accessories thereof

18.4% 3.1% 0

3HS 84 – Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof

7.6% 1.2% 1

4 HS 39 – Plastics and articles thereof 3.6% 4.3% 0

5 HS 44 – Wood and articles of wood; wood charcoal 3.3% 1.1% 9

6HS 85 – Electrical machinery and equipment and parts thereof

3.0% 1.5% 0

7 HS 76 – Aluminum and articles thereof 2.7% 3.5% 0

8HS 48 – Paper and paperboard; articles of paper pulp, of paper or of paperboard

1.9% 0.0% 0

9 HS 72 – Iron and steel 1.7% 0.3% 0

10HS 94 – Furniture and bedding; lamps and lighting fittings; prefabricated buildings

1.7% 1.6% 0

TABLECanadian exports of goods to the United States and U.S. customs tariffs

TOP 10

U.S. TARIFFS

* Relative significance among Canadian exports to the United States.Sources: Industry Canada, World Trade Organization and Desjardins, Economic Studies