Stainless steel coils wait to be pressed into sheets at a plant in Montreal. The Canadian GDP would drop below baseline by about 1.8 per cent within a year of the collapse of USMCA, according to a recent Oxford Economics report.Christopher Katsarov/The Canadian Press
Canadians will soon find out what can be salvaged of North American free trade.
The renegotiation process for the United States-Mexico-Canada Agreement, or USMCA, is already effectively under way, which could reshape Canada’s economic fortunes for years to come.
We know what a good outcome looks like: The USMCA survives largely intact, with Canada forced to make key concessions while retaining preferential access to the U.S. market with minimal tariffs.
But what if it all falls apart? How bad would that be for the Canadian economy, employment and the stock market? After all, exports to the U.S. drive nearly one-quarter of Canada’s gross domestic product.
To be clear, many economists believe the odds of such a rupture are low. But it’s not hard to imagine the process going off the rails.
Over the past few weeks, U.S. President Donald Trump has gone on the attack once again, threatening Canada with devastating tariffs, calling Prime Minister Mark Carney “governor” and toying with the idea of scrapping the “irrelevant” trade deal altogether.
“It’s no longer fear mongering to say that Trump could rip it up,” said Drew Fagan, a professor at the University of Toronto and a member of the Expert Group on Canada-U.S. Relations.
“I don’t think it would take very much for him to get support from Republicans with regard to hard treatment against Canada.”
The undoing of such a deeply integrated trading relationship has few precedents. The closest comparison is Brexit. A decade after the United Kingdom voted to leave the European Union, the costs of that split have recently come into focus.
The economic toll has accumulated over the years, leaving the British economy 6 per cent to 8 per cent smaller than it otherwise would have been by 2025, according to a recent study by the National Bureau of Economic Research.
The hit to private investment was on the order of 12 per cent to 18 per cent, while employment and productivity were reduced by 3 per cent to 4 per cent.
Forecasts at the time failed to foresee that level of economic fallout.
U.S. trade policy toward Canada is far more restrictive than tariff rates suggest
Judging by simple economic models, the worst-case scenario in Canada looks surprisingly manageable. Within a year of the collapse of USMCA, Canadian GDP would drop below baseline by about 1.8 per cent, according to a recent Oxford Economics report.
That translates to a milder recession than during the global financial crisis. Private non-residential investment and non-fuel exports could undershoot by 6 per cent to 7 per cent. And the Toronto Stock Exchange would likely dip by around 4 per cent, the report said.
Not good. But not catastrophic either.
“While it is tempting to conclude that the damage might be far greater than a simple model would suggest, the counterpoint is that it took a fairly long time for Brexit damage to become visible,” said Eric Lascelles, chief economist at RBC Global Asset Management.
“It might be a lengthy period of murkiness like that.”
Brexit can only go so far as a signpost for Canada’s path forward. A decade ago, exports of goods and services to other EU countries represented 13 per cent of the British economy. Exports to the U.S., on the other hand, account for 23 per cent of Canadian GDP.
The intensity of cross-border trade in North America would likely make its unravelling even more painful than the Brexit experience.
Opinion: An old idea for North American trade would be bad for Canada
Plus, the USMCA has served as a shield protecting Canada from Mr. Trump’s tariff salvos over the past year. Because USMCA-compliant goods are exempt, the effective tariff rate on Canadian exports sits at about 6.3 per cent, less than half the average on U.S. imports from all countries.
Should the agreement collapse, Canada could be levelled with a blanket 35-per-cent tariff – the duty currently applied to non-USMCA Canadian goods.
Two important factors are working in Canada’s favour, however. The first is time. At the time of the Brexit vote, very little thought had been given to how to reorient the economy and reconfigure supply chains. Canada has been doing so for nearly a year now.
The second is untapped potential in natural resources. “The U.K. was not underutilizing their greatest asset for over a decade, but Canada was,” said Beata Caranci, chief economist at Toronto-Dominion Bank.
Chances are, the USMCA will survive in some form. The practical reasons for its continuation are too extensive to list here. But the end of North American free trade would risk aggravating inflation and job losses in the U.S. in a midterm election year, when the Trump administration is already facing declining approval ratings.
“At the end of the day, Trump’s a deal maker, and he’s going to get a deal,” Ms. Caranci said. “It will be favourable to the U.S., but that doesn’t mean Canada is going to be the sacrificial lamb.”
Rational self-interest should guide both sides to an agreement that retains what has worked so well over the past few decades. Which would be comforting, if these were rational times.