The termination of the North American Free Trade Agreement (NAFTA) would have a negative, but manageable impact on the Canadian and US economy, says a new report from BMO Economics released Nov. 27.
Policymakers, businesses, and markets would adjust in relatively short order, says the report entitled The Day After NAFTA.
Mitigating economic damage
"It is critical to note that policy would not stand still in the event of a negative outcome for NAFTA," says Doug Porter, chief economist, BMO Financial Group. "Monetary policy would be looser than it would otherwise be, the Canadian dollar would adjust lower, and even fiscal policy would potentially adjust. We expect that Canadian trade policy would be aggressively aimed at diversifying Canada's interests by securing new arrangements with faster growing economies like the TPP and Mercosur nations, India and China, while seeking to achieve full benefit of the recently enacted Canada-European Union Comprehensive Economic & Trade Agreement. All of these factors would work to mitigate the economic damage," he says.
If NAFTA were to end, the report forecasts that Canada would see a net decline of between 0.7 and 1 per cent over five years in real GDP, and consumer prices would rise by 0.8 per cent.
Strengths and benefits of NAFTA
"As a financial institution with a strong global trade banking capability with offices across the world, we understand the benefits of close international trading relationships," says David Jacobson, BMO vice-chair and former U.S. ambassador to Canada. "I witnessed first-hand the strength and benefits of North American trade and the millions of interconnections that exist between Canada and the United States. No matter what happens in the end with the NAFTA renegotiation, we need to make sure the benefits of trade are maintained as much as possible. It's encouraging to hear that our economists see that businesses on both sides of the border will be able to adjust."