An End to NAFTA(?) And What Can Be Done

Late last summer, as part of my series on our local economy entitled London Inc., I outlined a series of global concerns that might negatively impact our region’s employment and production capability.

One of the biggest concerns was the current US administration’s protectionist attitude, and its desire to renegotiate and possibly withdraw from the North American Free Trade Agreement (NAFTA), our trilateral trade deal with the United States and Mexico.

Six months later, these concerns are quickly becoming a reality.

Last week, the US President signed into law massive tariff hikes on steel and aluminum imports to the United States.  These tariffs, which are effective immediately, are designed to substantially increase the cost of imported steel and aluminum from foreign countries, and thus improve the competitive position of American metal producers.

Then, in an effort to improve the US’s negotiating leverage in the NAFTA talks that are now underway between Canada, the US and Mexico, the Trump Administration gave its two NAFTA partners an exemption from these metal tariffs if and only if Canada and Mexico accept the latest the US trade demands.

Despite the exemption, this approach is a reckless strategy that could lead to a global trade war. Country after country will retaliate to the US protectionist measures by introducing their own tariffs on US-produced goods and services, which will slow the global economy.

Worse still, it forces Canada and Mexico to effectively negotiate with a gun to its head, a senseless approach that could lead to scrapping the 25-year old agreement.

In response, the Federal government has been taking some positive steps to protect our economy. They include signing the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union in 2014; and recently joining the Trans-Pacific Partnership (TPP), a trade agreement that opens Canadian goods and services to markets in Asia.

The Feds have also assembled an excellent team to re-negotiate the NAFTA deal. They have been relentless engaging public and private sector interests on both sides of the border to maintain their collective cool throughout the re-negotiations. They have been working hard to avoid the kind of knee-jerk reactions we just saw from the US President this past week.

Unfortunately, these efforts may be for naught. And while the conditional exemption is welcome, it may only delay the inevitable – an end to NAFTA, and a  material contraction in our shared economy.

This leads me to the primary purpose behind this post, namely to (i) better understand the potential impacts of these trade disruptions on London’s economy, and more importantly (ii) what London’s leaders can do to mitigate or manage them.

Economic Impacts

Currently, London exports roughly $9 billion to destinations in the US. This represents over 40% of our city’s total Gross Domestic Product (GDP). Approximately $6 billion of this export business to the US is associated with the automotive sector. Higher metal prices, which are now inevitable given the new tariffs, will likely lead to higher vehicle prices, and by extension, fewer vehicle sales on both sides of the border. That’s bad news for London.

It is also worth noting that London exports nearly $900 million in metals to the US annually, a sector that would directly impacted by these same US tariffs should the President decide to impose them on Canada.

A slowdown in both the North American automotive and metals sectors is concerning for Londoners given that approximately 30,000 of our fellow citizens are employed directly in manufacturing, and thousands of other local retail and related-service jobs depend on them for business.

Management Strategies

While London will surely benefit in the short term from the flurry of metals production that will likely result as US buyers build up inventories prior to the expiration of the tariff exemption, the longer term appears much more uncertain.

Canada’s trade agreements with the European Union and Pacific region have yet to make an impact (nor will they for years to come), and many of the participating countries will be inclined to shore up their own automotive and metals production facilities.

Therefore, Canada, and specifically London, needs to ensure that North America’s highly-integrated automotive sector remains barrier-free and cost competitive.

So what can be done?

First, London’s civic and business leaders must invest in and maintain relationships with US cities that share a common corporate interest, such as Minneapolis, Minnesota (the home of 3M), and Sterling Heights, Michigan (the corporate home of General Dynamics). It’s much more difficult for associates to willingly do harm to those with shared interests.

Second, London civic and business leaders need to establish trade channels with regions outside of North America to ensure that our community is not so dependent on a single market.

Third, London must better leverage the international reach and linkages available to us through Western and Fanshawe alumni and academic partnerships. For example, Western University, through its subsidiary WORLDiscoveries Asia, provides our city with a unique trade portal in the Asian marketplace.  WORLDiscoveries Asia, which operates business development offices in Hong Kong and mainland China, provides support services to a number of Ontario-based universities and several startup businesses.  It would not take much to extend this capability to London businesses looking to explore opportunities in the Asian-Pacific region.

Similarly, Western could help introduce London business to its shared interests in Europe and South America through, for example, its Fraunhofer Project Centre and/or the Institute for Chemical and Fuels from Alternative Resources. Both centres have developed impressive networks in Europe and South America, and have built relationships that could be easily extended to include our region’s commercial interests.

Finally, London really needs to leverage its airport and its ability to pursue markets directly, instead of routing through Toronto or Detroit. As I’ve previously discussed, London should explore the establishment of free-trade zones (FTZ) that would be impervious to tariffs and allow local companies to employ Londoners without the worry of protectionist measures. A FTZ generally permits a manufacturer to import an unfinished product duty-free so that they can add content to a product before exporting it again duty-free back to the country of origin.  An example of this might be a vehicle part from Germany, that enters Canada so that Canadian workers can add technology or materials to it for immediate shipment back to Europe. This would be good for our economy.

London’s economy is best served by being proactive, managing the situation, and mitigating as the financial and human toll of a trade war as much as we can.  The US Administration has made clear that they would take a protectionist approach to trade policy.

The only questions remaining are the extent and impact of this approach, and more importantly, how we choose to respond.