Evolving US Trade Policy: What's at Stake for the NAFTA Zone?

Scotiabank Economics recently released the second of its North American Free Trade Agreement (NAFTA) report series. In this report, Scotiabank Economics looks at some likely areas of vulnerability in the event of a substantial revision of US trade policy and provides simulation results from possible scenarios that are broadly consistent with recent statements by US officials.

"Canada and Mexico are highly exposed to any changes in US trade policy, as both countries send over three-quarters of their exports to the US, while only about one-quarter of global US exports are sent to its NAFTA partners," said Jean-François Perrault, Chief Economist at Scotiabank. "But the US isn't immune to negative shocks from changes in its trade policies. If negotiations to revise NAFTA fail, any move by the US to impose tariffs on trade with Canada and Mexico would have a material macroeconomic impact on all three countries and potentially serious effects on individual states, provinces and industrial sectors."

Additional highlights of Scotiabank's NAFTA Report:

• Three 'What if' scenarios from Scotiabank Economics on the effects of failed negotiations—featuring progressively higher tariffs and greater trade disruption.
• Canadian and Mexican exports to the US account for roughly 20% and 26% of their GDPs, respectively.
• The US is less dependent on trade with its NAFTA neighbours, but its supply chains are highly integrated with Canada and Mexico and would face relatively higher tariffs than its NAFTA partners if all three were to revert to trade on a Most-Favoured Nation (MFN) basis.
• A recent, unofficial draft of the US administration's possible NAFTA negotiating objectives indicates that taxation, intellectual property rights, e-commerce and cross-border business practices may be key areas of US concern.
• The US administration has also identified sectors including softwood lumber, agricultural goods and finished food products as potential areas for review outside of NAFTA.
• Revisions to NAFTA's rules of origin and dispute settlement mechanisms hold potential pitfalls, but could also make NAFTA function more equitably and efficiently for all three countries.

Scotiabank provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

(Source: Scotiabank)