If Trump Rips Up NAFTA as Promised, Canada May Shrug, Not Shudder

OTTAWA, Ontario — Nothing has reshaped Canada’s modern economy more than free trade with the United States.

But that doesn’t mean the country is staring at economic ruin if the current negotiations over the future of the North American Free Trade Agreement collapse, and the agreement is scrapped.

Prime Minister Justin Trudeau is just one among many Canadians who have suggested that the trade deal is far from critical to the country’s economic survival.

“We will not be pushed into accepting any old deal, and no deal might very well be better for Canada than a bad deal,” Trudeau said in Chicago this month. His government supports NAFTA, but it has rejected many of the demands put forth by the Trump administration as conditions for keeping the three-country trade pact, to which Mexico also belongs.

The prime minister’s remarks may have been a negotiating tactic. But many trade experts say the changes to the world’s trading system that have come about since Canada and the United States opened their mutual border in 1989 mean that an end to NAFTA would not be a devastating blow to the world’s 10th largest economy.

In fact, President Donald Trump’s threats to tear up the trade agreement, and his administration’s aggressive use of trade laws, may actually help prod export-dependent industries in Canada to finally look beyond the United States market to do business.

“Canadian industries have tended to have a pretty comfortable ride with the largest economy in the world sitting on their doorstep,” said Laura Dawson, the director of the Canada Institute at the Wilson Center, a research organization in Washington. “So Canada has not been very aggressive about going after new markets. The current situation is certainly accelerating decisions about this.”

Canada’s original decision to join the free trade pact with the United States divided the country.

Trade policies dating back almost to Canada’s founding meant that aside from automobile and car part plants — which had been under a limited free trade agreement since 1965 — many Canadian factories were relatively small and inefficient. They largely owed their existence to the high tariffs that kept out imports from the United States and elsewhere.

At the same time, tariffs in the United States made Canadian exports a tough sell for many industries.

As those tariffs disappeared under NAFTA, so did many Canadian businesses, and the jobs that went with them. Memories of those closings still rankle many Canadians, even though many economists say that automation and other factors would have doomed many of the jobs regardless of new trade rules.

While much is unclear about exactly what would happen if NAFTA comes to an end, there is universal agreement that the factories that closed — such as a Hershey chocolate plant that moved from Smiths Falls, Ontario, to Mexico after that country joined NAFTA in 1994 — are not coming back.

Also not returning are the high tariffs that created and sustained many factories, both in the United States and Canada.

The agreement that created the World Trade Organization in 1995 means that, in the worst-case scenarios, Canadian companies would be facing duties of about 5 percent on shipments to U.S. customers, and closer to 3 percent on many auto parts.

While those duties are not exactly negligible, Canadian companies have successfully dealt for years with much larger percentage swings in the exchange rate between the U.S. and Canadian dollars. “There would be difficulties adjusting to the disappearance of NAFTA, but it would not be a catastrophe,” said Lawrence L. Herman, a trade lawyer in Toronto and a former Canadian diplomat. “Canada would continue to do business with the United States — maybe just not as efficiently.”

Gus Van Harten, a professor of international investment law at the Osgoode Hall Law School at York University in Toronto, has long criticized NAFTA for allowing U.S. and Mexican companies to sue if they feel they have been treated unfairly by Canadian laws and regulations. These complaints (which can also be filed by Canadian companies over practices in the other two NAFTA countries) are heard by arbitrators, not courts, and the decisions cannot be reversed.

The system was originally introduced, Van Harten said, to protect Canadian and U.S. investments in Mexico. But based on his research, Canada has been sued twice as much as Mexico and has lost several prominent cases, including one in which the Canadian government had rejected, for “significant adverse environmental effects,” a quarry in Nova Scotia proposed by a U.S. company. Because these complaints allow retroactive damages, including compensation for lost profits, the amounts involved could be billions of dollars, creating what Van Harten called “potentially catastrophic risk.”

With or without NAFTA, geography means that the United States will continue to be Canada’s largest customer.

But the recently concluded Trans-Pacific Partnership trade agreement — which was initially to include the United States, until Trump pulled out — and a Canada-European Union trade deal reached in late 2016 could significantly expand business opportunities for Canadian companies across oceans.

Such entry into new global markets will not be possible for every industry. Philip Cross, the former chief economic analyst at Statistics Canada, a government agency, said that, for example, it is unlikely that Canadian auto parts will make their way to Japan or Europe. “So we’d better stay on good terms with the U.S.,” said Cross, now a senior fellow at the Macdonald-Laurier Institute, a research group in Ottawa.

But some major Canadian industries have weaned themselves off a near-total reliance on NAFTA markets for their exports.

British Columbia once sent nearly all of its softwood lumber exports to the United States. Now, the United States accounts for about 49 percent of that industry’s 5 billion Canadian dollar export business, with 26 percent of sales going to China and 16 percent to Japan.

Even if NAFTA disappears, Susan Yurkovich, the president of the B.C. Lumber Trade Council, an industry group, said she doesn’t anticipate that access to the United States would be significantly affected, even if what would succeed it is not clear.

“I’m very curious to see how you put the genie back in the bottle,” she said. Several Canadian agricultural groups have followed the lumber industry to Asia with success.

Richard Davies, the senior vice president of sales and marketing at Olymel, a pork and poultry producer in Montreal, said that some of the growth in overseas sales was driven by making more efficient use of animals. Parts such as pigs’ feet, which have a relatively small market in North America, can fetch premium prices in Asia.

But, Davies added, the search for new markets also came out of concerns about relying too heavily on a single customer. During the early 1990s, the United States took more than three-quarters of Canada’s pork exports. Today, Davies said, it accounts for less than 30 percent at Olymel.

Given all the uncertainty surrounding NAFTA, Davies said it is not practical to try to plan for its demise. But he added: “I would have had a lot more anxiety in 1992 than I have today about potential trade disruptions.”