Don’t Assume the Death of NAFTA Would Be a Small Shock, Says Bank of Canada

Vehicles make their way through the Canadian border crossing in Niagara Falls, Ontario, Canada. (Cole Burston/Bloomberg News)

NAFTA’s about more than tariffs, Bank of Canada Governor Stephen Poloz says in a warning to avoid low-balling the impact of a potential collapse of the trade pact.

Poloz, speaking in a news conference in Ottawa on Jan. 17, said the North American Free Trade Agreement “channel” he’s most focused on is the impact on business investment. He alluded to other reports that, focusing on a change in tariff rates, have predicted the death of NAFTA would have only a modest impact.

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Tariff-based trade models alone show a death wouldn’t “be that large of a shock to the economy, and one that would be a bit gradual,” Poloz said, calling it a useful exercise but only part of the picture. “We can’t just relax and assume it would be a small shock.”

The sixth round of NAFTA negotiations between Canada, the U.S. and Mexico get underway next week in Montreal. President Donald Trump has repeatedly threatened to withdraw.

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Poloz said it’s very difficult to quantify NAFTA’s impact because it varies not only by sector, but also from firm to firm. “So we’ve chosen not to get buried in all of that,” he said. The immediate impact — already being felt — is a chill on business investment in Canada, as it’s either deferred or simply made in the U.S. instead. “That’s the sort of effect that could be bigger, in a binary sense, if an announcement is made that NAFTA is no longer to be. But again, even then, it would take time.”

The U.S. could also layer on additional trade actions that would worsen the blow, he said, citing ongoing actions in the aerospace and lumber sectors. “The analyses that you’re looking at do not consider the channel that I’m trying to emphasize the most,” he said, adding the shock of a NAFTA collapse is difficult to analyze. He contrasted it to the 2014 collapse in oil prices, whose effects were easier to predict.

“You will need the benefit of time and data to understand this as it all unfolds, and so markets should not think of it as a binary event, and I’m hopeful that they’ll appreciate the conversation we just had,” Poloz said.