Close-up view of Canada and USA flags pin on to a childs plastic map.

The Canada West Foundation, a non-partisan public policy think tank, produced an in-depth analysis on how small businesses can prepare for the potential end of NAFTA, should the U.S. withdraw. Its “Just in Case” plan details four possible outcomes. (FotografiaBasica/Getty Images)

Canada | Economy

The great unknown: NAFTA negotiations and tariffs show that companies should prepare for multiple outcomes now rather than waiting

Canadian businesses may need to consider worst-case scenarios as future of free trade with U.S. remains unpredictable

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Last summer, U.S. President Donald Trump declared a goal of having a new NAFTA deal in place by the end of the year. The Canadian government said they would not commit to a bad deal just to meet a deadline.

Nearly a year later, outcomes remain uncertain. NAFTA talks are ongoing. The Trump administration blindsided Canada with tariffs on steel (25 per cent) and aluminum (10 per cent) at the beginning of June. The Trudeau government responded with a laundry list of tariffs on U.S. goods totaling C$16.6 billion, “representing the value of 2017 Canadian exports affected by the U.S. tariffs,” according to the Department of Finance. And all the while, Canadian companies are left to react in the moment when the latest shoe falls.

With the U.S. being Canada’s largest export market for steel and aluminum, the federal government is offering an approximate $2-billion aid package to offset the tariffs but it remains to be seen how much this will level the playing field.

At a press conference announcing the retaliatory tariffs, Canadian Foreign Affairs Minister Chrystia Freeland offered comments last month that were less than comforting.

“It is absolutely imperative that common sense should prevail,” she said. “Having said that, our approach from day one of the NAFTA negotiations has been to hope for the best but prepare for the worst.”

Trump has also threatened to impose tariffs on the automotive industry, a move that industry representatives warned would result in “carmageddon” for one of Canada’s most important sectors.

So how can businesses prepare for so many unknowns? Will relations default to WTO rules? Will Canadian companies attempt to shift course and make up lost revenue from U.S. markets by utilizing Canada’s free trade agreements with the EU (CETA) and Asia (CPTPP)?

One strategy might be to lock in long-term rates on certain products in anticipation of rising costs down the line. Another, as Minister Freeland alluded to, would be to prepare for the worst while hoping it doesn’t come to that.

The Canada West Foundation, a non-partisan public policy think tank, produced an in-depth analysis on how small businesses can prepare for the potential end of NAFTA, should the U.S. withdraw. Its “Just in Case” plan details four possible outcomes and suggests, “Now is not the time to panic—it is the time to prepare.”

NAFTA remains: The U.S. Congress and business community could create roadblocks if Trump attempts to completely withdraw from having any free trade agreement with Canada, so the status quo could remain for quite some time regardless of ongoing tensions.

Canada-U.S. default to former FTA rules: Bringing back Canada’s previous free trade agreement with the U.S. seems the least likely option, as it would still require much of the same negotiation that NAFTA talks are bogged down in now. It would also call into question Canada’s trade agreement with Mexico.

World Trade Organization tariff rules take over: The WTO most-favoured-nation (MFN) rules might be the most likely default if NAFTA no longer exists because the guidelines are already in place. However, it would mean tariffs being introduced on a wide range of products that previously crossed the Canada-U.S. border without charge.

Higher than WTO tariffs: The steel and aluminum tariffs imposed on Canada fall under this scenario, with the Trump administration claiming national security reasons as legal grounds for the higher tariffs. As stated in the analysis from Canada West Foundation: “If the U.S. takes this route, it is more than likely that tariff raises would not be across the board but rather would be targeted to specific commodities and products to achieve bargaining and political leverage.”

FOR MORE ON NAFTA

Check out CPA Canada’s summary on the negotiations, Renegotiating NAFTA: What’s the Canadian impact? And for those whose business or practice is impacted by NAFTA, we welcome your thoughts to help us better understand the implications of these negotiations on professional service providers.