Much like his fact-averse boss, since taking office, U.S. Commerce Secretary Wilbur Ross has often wildly missed the mark with his erroneous assertions about the basic dynamics of the economy and international trade, but he was indisputably correct when he recently stated that for Mexico and Canada, terminating NAFTA “would be far more damaging to them than to us.”
During a high-level business conference last week hosted by The Wall Street Journal, Ross suggested the Trump administration has the economic leverage to pressure Mexico and Canada into making major concessions on a range of contentious hot-button issues in the increasingly troubled negotiations because they have far more to lose if the pact collapses.
If the U.S. pulled out of NAFTA, it “would be devastating to the Mexican economy,” Ross said in reference to the extraordinary dependence of that country’s exports on the U.S. market, which currently accounts for roughly 80% of Mexico’s outbound trade. This situation also applies to Canada, although to a somewhat lesser extent, with 65% of its exports destined for the U.S. The likely result of this lopsided orientation, Ross said, was that the two countries will “come to their senses and make a sensible deal.”
Regarding the economic impact terminating NAFTA would have on Canada, a new report from BMO Capital Markets titled The Day After NAFTA, found that the country would see a net reduction of between 0.7% and 1% over a five-year period in real GDP, than otherwise would be the case. Consumer prices in Canada would be expected to rise roughly 0.8% points, due to the weaker exchange rate and modestly higher tariffs.
Meanwhile, the macroeconomic impact in the United States would be considerably more modest, the report finds, estimating it to be in the vicinity of a 0.2% net reduction in real GDP over the next five years. “The U.S. is better positioned than Canada or Mexico,” noted Doug Porter, Chief Economist, BMO Financial Group.
Despite the fact that North America’s economies would ultimately adjust and adapt to a world without NAFTA, the report also concludes that the agreement has been a net positive for all three economies. “It is deeply unfortunate that we are even considering this possibility,” said Porter.
Many U.S. business leaders have expressed concern about the impact a collapse of NAFTA would have on their operations – trade groups that Ross wearily complained were needlessly complicating the talks by “screaming and yelling” in public – and take issue with the administration’s claim of having significant leverage over Mexico and Canada. They observe that those countries are not only the leading export markets for the United States, but in recent months have been stepping up their efforts to seek new trade opportunities with other nations such as China in ways that could soften the blow from diminished free tariff access to the U.S. market.
Michael Froman, U.S. Trade Representative under the Obama administration, also questioned Ross’s confidence in the economic clout America wielded. “While it’s true that Mexico and Canada are more dependent on us than we are on them, it turns out they have trade politics too,” said Froman, who was in attendance at last week’s business event. “And there are limits to the degree to which you can push them and still reach an agreement,” he added.