The spectre of NAFTA being canceled is on most people’s minds since the election of President Donald Trump. Washington has pulled out of the TPP and needs a better deal for the U.S. in the NAFTA agreement. The new potential tariffs coming from the Trump government is also heightening commerce concerns. Is canceling NAFTA a bad thing for Canada? There are 2 methods to analyze this question.
The Current State
The first strategy is considering how things now are and what’s very likely to occur using this assumption. Canada is the U.S.’s second biggest trading partner and the U.S. is Canada’s largest trading partner by a massive margin. The U.S. is Canada’s closest trading partner by physical location. Much of the infrastructure that’s already in place caters to transport products across the Canada-U.S. border seamlessly – bridges, railways, seaports, shared production facilities etc.. The civilization of the U.S. is similar enough to Canada that performing transaction is rather straightforward. There are no language barriers, religion obstacles, or culture barriers relative to other nations. Our monies are closely aligned, making trade easier when it comes to funding, terms of payment and currency exchange. It’s fairly simple to get U.S. dollars anywhere in Canada. Comparing this to the Japanese Yen reveals the comparison. Last, the premise is that the U.S. will protect Canada militarily so Canada can concentrate on producing other products.
Using this premise, if NAFTA is canceled, Canada might be a big loser concerning trade. The fears are that Canada’s products won’t be exported and economic activity will endure. We don’t have any other trading partners as big or close by as the U.S. The infrastructure and funding advantages also don’t exist with any nations. Even Mexico who’s a part of NAFTA includes a different currency, language, culture and priorities than the U.S. with respect to commerce. Cancelling NAFTA resembles a tragedy.
What are the downsides of NAFTA or trade prices generally? First, trade deals promote specialization of businesses at the lowest cost / highest benefit production of goods and services. The other production is reduced and or stopped. If you wish to develop a new business, you’ll have a small prospect of succeeding because your trading partners may dominate the business or restrict you from competing. If this isn’t the case, you might develop the industry on somebody else’s terms. Starting a business without free reign to experiment typically doesn’t succeed because experimentation is critical to maximize the market demand, efficiency and demand for any particular product. These constraints create a volatile market based on a couple of sectors.
In Canada, this means commodities, energy, banking, and property. The next problem is negotiating power. Trade deals restrict what you can negotiate after the deal is made unless the whole deal is re-negotiated, which is what’s happening now with NAFTA. This restricts diversification of trading partners and new opportunities which might be present. Sometimes even within a recognized business, different market conditions that would usually be taken advantage of wouldn’t be accessible due to the details of the transaction in a deal. For instance, the cost of oil is fixed at $50 per barrel between two nations. The purchase price of oil climbs to $100 per barrel on world markets, but the seller won’t benefit from this because they’re selling the oil at $50. If the price drops to $20, the vendor would benefit, but the question of”how often does this happen and is it worthwhile?” Will come up.
The final disadvantage is that the negotiation itself. If you’re negotiating with a much larger, more powerful trading partner, you will probably want them more than they want you. This means that they can argue for better terms of trade and if you would like to earn the deal, you’ll need to forfeit more than you might realize. In the case of Canada and the U.S., the U.S. has a more developed market than Canada and much more influence on the world stage. If the U.S. would like to ditch Canada and trade with somebody else, they could do it more easily than Canada can for the U.S. This offers the U.S. more negotiating choices than Canada – at least at the current time. The U.S. can offer more products for sale, more choices for trade and more personalized provisions. Let us say that Canada went into a trade discussion and said: “I’ll offer technology experience.” Could that be possible? Not likely, but Canada can offer mining experience. The U.S. can provide both.
The second strategy is supposing that canceling NAFTA may be a chance, and changes could be made to gain Canada more in relation to the present agreement. Why? Trade could be opened up to each country in the world and with open conditions. Since the competition is a lot greater if all countries are available for trade, the chances may be greater. The flip side is that more competition may make it more difficult to trade to get an advantage because of cheaper labor or greater quality that might be available in different countries.
Cancelling NAFTA would make Canada more independent since we can’t rely on a particular trading partner to purchase our goods. This will produce more resourcefulness and entrepreneurialism among Canadians. When people have to discover a way to survive, there’s more effort expended. This effort will make more diversification among industries since we no longer can afford to concentrate in certain sectors.
This scenario has begun to play out with Canada negotiating more bargains with Europe and Asia. Canadian companies have global experience in certain sectors which gives them an edge when producing terms of trade.