Outlook 2018: cloud of NAFTA uncertainty looms over B.C.’s horizon

The coming year promises to be an eventful one for the B.C. business community. While our economy continues to grow at a decent pace, business leaders need to brace themselves for the bumpy road that lies ahead.

Perhaps the biggest unknown concerns the North American Free Trade Agreement (NAFTA) – and what happens in Canada’s relationship with our principal ally and trading partner, now under the erratic stewardship of President Donald Trump.

With three-quarters of Canada exports (and more than half of B.C.’s) destined for the United States, the future of NAFTA obviously matters. Trump seems to relish creating uncertainty in every domain of public policy, including international trade. He continues to drop hints that he is keen to trigger NAFTA’s withdrawal clause. It is hard to imagine why a U.S. president who likes to boast of his business savvy would seek to undo an agreement that commands overwhelming support across the American private sector. But then Trump is remaking the book on how a sitting president defines the national interest.

At this point, the odds of NAFTA surviving in its present form look no better than 25-75. If it disappears, the 1987 Canada-U.S. trade agreement might come back to life, thereby preserving many of the benefits of free trade between the two countries. Even if Trump decides to kill that earlier agreement along with NAFTA, the world won’t suddenly end for Canadian business. Under this scenario, the U.S. would revert to levying duties on imports from Canada based on World Trade Organization tariff schedules. The average tariff rate on Canadian goods shipped stateside would be less than 3% (although higher tariffs would apply in some industry sectors). However, Canada would be subject to more non-tariff restrictions and lose access to NAFTA’s dispute settlement system. Economists estimate that all of this would trim at least 1% from Canada’s GDP. But in the longer term, the damage would be greater as more businesses invest in the U.S. rather than Canada to avoid the costs and uncertainty associated with a thickening border.

B.C. business decision-makers also need to pay attention to developments in Ottawa. On the economy, Prime Minister Justin Trudeau and his colleagues have struggled to fashion a coherent narrative. In the last two years, they have delivered big budget deficits, higher taxes on entrepreneurs and skilled workers, a badly bungled package of small-business tax reforms and a promise of ever-escalating carbon taxes along with a deluge of costly new energy and environmental regulations. On the positive side of the economic policy ledger, there is the new Child Tax Benefit program, a Global Skills Strategy that aims to make Canada a preferred destination for talent and a commitment to refresh the country’s stale innovation agenda.

With the global landscape in flux and Canada continuing to lose market share around the world, federal policy-makers appear flat-footed. And that is before one considers the implications of the sweeping tax reductions and aggressive regulatory reforms being implemented south of the border. The reality is that Canada is becoming a more costly and cumbersome place to do business relative to the United States. 

Finally, closer to home we have the unfolding policy agenda of B.C.’s NDP government. While the initial signs are mixed, there is a growing risk that the new government will pursue investment-inhibiting policy changes. For the B.C. business community, there is a lot to worry about as 2018 approaches.

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer.