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We can handle the risks if NAFTA terminates: BMO

Bank report estimates a net reduction of between 0.7% and 1% over a five-year period in real GDP.


TORONTO — Ending NAFTA would be a net negative for the Canadian economy and a mild negative for the US, it’s a manageable risk, according to a BMO Economics report.

The Day After NAFTA says policymakers, businesses, and markets would adjust to it in relatively short order.

“It is critical to note that policy would not stand still in the event of a negative outcome for NAFTA,” said Doug Porter, BMO Financial Group’s chief economist.

He said monetary policy would be looser than it would otherwise be, the Canadian dollar would adjust lower, and even fiscal policy would potentially adjust.

“But 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,” he said.

The report foresees a net reduction in real GDP of between 0.7% and 1% over a five-year period, than otherwise would be the case. Consumer prices in Canada would rise roughly 0.8 percentage points, due to the weaker exchange rate and modestly higher tariffs.

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Consumer in the three partner countries would take the biggest hit if the trade deal is terminated.

“Business capital spending would also be lower than otherwise would be the case, partly due to the uncertain trade climate as well as the weakened growth outlook generally,” said Porter. “In the meantime, we would expect both exports and imports to weaken notably, but net trade to be broadly unchanged — with the Canadian dollar depreciation acting as a partial buffer for Canada.”

The macroeconomic impact in the US would be a more modest 0.2% reduction.

“The US is better positioned than Canada or Mexico,” noted Porter. “Even so, we still believe it would be worse off without NAFTA, and the transportation equipment and textile industries in particular would be significantly vulnerable. On a regional basis, we view some of the border states and those with heavy agriculture exposure as the most vulnerable.”

Download the report here.

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