25th January 2017

One of Donald Trump’s first actions as president was to remove the US from the Trans-Pacific Partnership, the controversial trade deal he criticized as a candidate, along with NAFTA. Some potential member nations are urging a resumption of talks and a new iteration of the deal, absent any US involvement, while others seem less sanguine about their hopes.

While the TPP’s future is highly questionable at this moment, it does seem certain that NAFTA will receive new scrutiny and very likely significant changes, as a revitalized focus on trade deals was a clear theme of Trump’s inauguration speech upon entering office.

The free trade agreement linking Canada, the US and Mexico has been at the center of much debate, and the economic priorities it represents have still not been accepted by its critics. The deal, like the proposed TPP and other trade deals over the years, aimed to boost trade between these countries to integrate their economies and allow business development to accelerate between them.

The most common criticisms are that such deals allow larger companies to prosper at the expense of smaller ones, that workers in the more developed countries lose jobs due to offshoring, and that the relative absence of workplace regulations in some countries (such as Mexico) increases pollution and other externalities.

Whatever the merits of NAFTA, clearly some kind of agreement needs to be in place for these countries as they move forward. For its part, the new US administration has signaled to Canada that, despite its frequent mentions of imposing tariffs in other contexts, it foresees no significant changes in the economic relationship between the two countries. The US posture toward Mexico, by contrast, may be up for realignment.

The Canadian economy – and indeed the US’s – relies heavily on positive trade outcomes between them. No country buys more American goods than Canada, which is the top purchaser of goods made in 35 of the 50 American states. In the other direction, 70% of Canadian exports go to the US – numbers that illustrate the close bond (and near-dependence) that develops between countries whose economies are tightly linked through free trade.

Given the economic ties binding the two nations, Canadian businesses on the whole will lose if the Trump administration leads the US into a recession the way that some analysts fear. It is also worth closely watching how America’s relationships change with other countries. If the Trump administration presides over a notable deterioration in trade relations with Mexico or other countries, Canadian companies may either suffer (if they use the US as a geographical intermediary for the transport of goods) or succeed by undercutting two countries whose tariffs are aimed at making each other’s goods less competitive domestically.