Daily Management Review

Report Warns Of Slow Growth And Loss Of Competitiveness For United States And Canada By Scrapping NAFTA


11/27/2017




Report Warns Of Slow Growth And Loss Of Competitiveness For United States And Canada By Scrapping NAFTA
In a sort of the warning to the countries associated with the North American Free Trade Agreement (NAFTA), the Bank of Montreal said on Monday that scrapping of the deal would prove costly to both the U.S. and Canadian economies as it would effectively decrease their competitiveness in comparison to the economies of Asia and Europe.
 
The report, titled “The Day After NAFTA”, which was published by the bank, warned that there would be a 0.2 percent net fall in the real U.S. gross domestic product during the period of the next five years, and a 1 percent fall for Canada’s economy if there is a negative outcome between the talks being held between United States, Canada and Mexico leading to a scrapping of the agreement.
 
U.S. President Donald Trump has argued that the NAFTA has gouged out the U.S. manufacturing sector resulting in a trade deficit of more than $60 billion with Mexico and this is the reason that he has warned of withdrawing from the pact if the pact could not be redesigned to suit the United States.
 
There were doubts cast over the possibility of ironing out of the major issues and reaching a deal within March of 2018 after the fifth round of talks between the United States, Mexico and Canada for updating NAFTA yielded no major results last week. The major differences between the countries remained unresolved.
 
Mexico had been made comparatively more competitive at the global industry platform due to the shifting of low-wage work to Mexico even though it is estimated that all of the three economies would ultimately adjust to the changed reality, said Douglas Porter, chief economist of BMO Financial Group and one of the report’s authors.
 
“If we splinter up NAFTA into three separate economies, that makes all of us less competitive and ultimately the whole region will end up losing a bit versus other trading areas like Asia,” Porter told the media. “The point here is there would be a cost to the U.S. economy and it’s a totally unnecessary cost.”
 
“Our view is even if the U.S. administration were to achieve that goal, it might come at the cost of an even wider deficit with Asia in particular,” Porter said.
 
The rules and regulations and the tariffs that are set by the World Trade Organization (WTO) would be applicable in the trade between the three countries constituting NAFTA, if the negotiations were not to succeed. 
 
Because of the fact that the supply chain of the U.S. automotive industry is spread among all of the three economies of NAFTA, and since Canada and Mexico make up about 15 percent of total outbound sale of the U.S textile manufacturing industry, therefore these are the two sectors of the U.S. economy that would be the hardest hit if there is application of the WTO tariffs, says the report.
 
While not going into the details, Porter noted in the report that in the eventuality that opposition from the U.S. Congress would stop the Trump administration from terminating NAFTA, also being termed as the “Zombie NAFTA” scenario, businesses in North America would be faced with a huge uncertainty.
 
“Arguably uncertainty would be a bigger drag on all three economies,” he said.
 
(Source:www.reuters.com)






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