Unwarranted Gloom and Doom: The IMF on Canada and NAFTA

To read the media today, one would think that NAFTA is a keystone of Canadian prosperity and that renegotiation could lead to a national economic disaster.

That view has already been rebutted in a report by Scott Sinclair for the Canadian Centre for Policy Alternatives. He finds that a reversion to WTO tariffs and trade rules would have only a modest impact, albeit that some auto and agricultural exports would suffer. The key take-away is that we can afford to walk away from a bad deal if necessary.

The International Monetary Fund also do not see an economic disaster in the making in their latest country report on Canada.

In the first place, NAFTA has ultimately been quite disappointing in terms of the performance of the all important manufacturing export sector.

“Staff research has suggested that years of low labor productivity growth has eroded Canada’s external competitiveness in the manufacturing sector and caused a permanent loss of manufacturing capacity. The entry of China into the U.S. market following its accession to the WTO and the appreciation of the Canadian dollar during the oil boom in the mid-2000s made the problem worse. Canada’s early gains in NAFTA have been diminished. Today, Canada’s export share in the U.S. market for non-resource goods is about 11 percent, half of what it used to be in the mid-1990s.” P8.

Second, reversion to WTO tariffs would have only a modest short term impact and the economy as measured by GDP would soon recover.

“Scenario analysis of a tariff increase.

If the U.S. raises the average tariff on imports from Canada by 2.1 percentage points to the WTO most favored nation level, and there is no retaliation from Canada, simulations based on the IMF Global Integrated Monetary and Fiscal Model suggest a negative short-term impact on Canada real GDP of about 0.4 percent. The lower external demand weighs on exports, profits and disposable income, leading to permanently lower investment and private consumption. The Canadian dollar depreciates, softening the effect of the tariffs on exports, but increases the price of foreign goods. The trade balance deteriorates, then recovers as the exchange rate remains depreciated.”

One could add that the end of NAFTA would restore some significant policy space to Canadian governments. In short, we do not need to panic.