The termination of the North American Free Trade Agreement will definitely hurt the economies of both the United States and Canada, and will reduce competitiveness with Asia and Europe.
Not being able to complete the FTA negotiations between the United States, Canada and Mexico is likely to result in a 0.2% reduction in the USD GDP for the next 5 years. In addition, this may cause a 1% drop in the Canadian economy.
US President Donald Trump has stated that he would back away from the North American Free Trade Agreement (NAFTA) if it cannot be reformulated in a way that would benefit the United States. The current agreement with Mexico has reportedly caused the United States a trade deficit of more than $60 billion.
The United States, Mexico and Canada have finished their fifth round of negotiations last week, meant to update the NAFTA clauses, but however, many major differences have remained unresolved, raising even further doubts about the possibility of reaching an agreement by the end of March 2018.
If a decision to split the NAFTA into three different economies is taken, it might make them less competitive, said the chief economist at BMO Financial Group. Ultimately, these economies would lose out against other economies and trade areas such as Asia, which in itself would be too costly and unnecessary for the US economy.
Provided that the US administration moves toward this goal – ending the FTA – it will come at the expense of a larger deficit, especially against the Asian economies. If the NAFTA negotiations fail, the trade between the three countries will be subject to tariffs set by the World Trade Organization (WTO). Therefore, US industries would be most affected if the tariff is adopted – especially in the automotive and textile industries – with Canada and Mexico accounting for 15% of sales by US companies in these sectors.
Despite the voices opposed to the termination of the NAFTA agreement from within the US Congress, there are serious doubts and uncertainties among North American companies.