Termination of the North American Free Trade Agreement would hurt the Canadian economy, but it is a "manageable risk" that businesses, markets and policymakers would adjust to fairly quickly, BMO says in recently released report.

BMO's study, entitled "The Day after NAFTA," also suggests that consumers would be the biggest net losers from the termination of NAFTA in all three partner countries, and not any one industry or sector.

The report comes following the conclusion last week in Mexico City of the fifth round of negotiations on a reworked NAFTA. Canadian Foreign Affairs Minister Chrystia Freeland said at the time that several stumbling blocks remain in the talks, including U.S. demands for changes to the rules of origin and a push for a five-year sunset clause in the deal.

BMO says a NAFTA termination means growth in Canada's real gross domestic product would be between 0.7 per cent and 1.0 per cent lower than would otherwise be expected over a five-year period. Additionally, consumer prices in Canada would be expected to rise roughly 0.8 percentage points, due to a weaker exchange rate and modestly higher tariffs. 

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Foreign Affairs Minister Chrystia Freeland said last week that Canada is preparing 'for every eventuality' amid NAFTA talks. (Fred Chartrand/Canadian Press)

BMO said it based its report on a "bad-but-not-worst-case scenario" where all the NAFTA parties revert to WTO-level tariffs. In that situation, BMO said it expects Canada would reject U.S. demands for the NAFTA dispute resolution mechanism to be scrapped or weakened.The bank said other "sticking points' in the renegotiations could be U.S. demands for a sunset clause and the termination of supply management in Canada's agricultural sector.

Mitigating the damage

In the event of a negative outcome for NAFTA, Canadian policy would be adjusted to adapt, said BMO chief economist Doug Porter.

"Monetary policy would be looser than it would otherwise be, the Canadian dollar would adjust lower, and even fiscal policy would potentially adjust," he said.

BMO expects Canadian trade policy would seek to diversify the country's interests by landing new deals with faster growing economies like India, China, and the nations in the Trans-Pacific Partnership and South America's Mercosur bloc, while trying to benefit from the new Canada-European Union Comprehensive Economic & Trade Agreement.

"All of these factors would work to mitigate the economic damage," concluded Porter.

Job losses

Dan Ciuriak, who is fellow-in-residence with the C.D. Howe Institute, says in a pending study that the end of NAFTA would see Canadian household income drop by $15 billion and real GDP growth be trimmed by 0.55 per cent.

Ciuriak said 25,000 to 50,000 jobs would be lost due to long-term worker exit from the labour force, and Canadian exports would drop by about $20 billion US, or 2.8 per cent, after accounting for the redirection of some exports to other countries.

He also said that walking away from NAFTA does not resolve U.S. concerns about bilateral trade deficits.

"The United States suffers about as large a drop in its bilateral exports to NAFTA partners as it reduces imports from them," he said.

Ciuriak said Canada's economy could remain essentially unharmed if NAFTA is terminated but the Canada-U.S. Free Trade Agreement is preserved, adding that Canada could even make marginal gains in trade, real GDP and economic welfare if liberalized trade relations are retained with Mexico.

​NAFTA has been a net positive for the economies of Canada, the United States and Mexico, BMO's report says. "It is deeply unfortunate that we are even considering this possibility [of NAFTA's end],"  said Porter.