Ontario and New Brunswick would be most exposed to a collapse of the North American Free Trade Agreement, just as looming elections in Mexico and the U.S. place new urgency on reaching a final agreement in the talks, according to Moody’s Investors Service.
A new report Thursday by the ratings agency also found that resource-rich provinces Alberta, Saskatchewan and Newfoundland and Labrador would see a muted impact from a NAFTA fallout, largely because commodities are not expected to face higher tariffs if the agreement is scrapped.
Moody’s determined the economic impacts by assessing the relative size of provincial exports to the U.S. as a share of gross domestic product, as well as the type of industries most dominant in each respective province.
Exports to the U.S. by New Brunswick account for 28.5 per cent of its total GDP, the highest in the country. Ontario was next highest at 26 per cent. The report also said that Ontario’s sizeable manufacturing sector, particularly auto, is highly exposed to increased tariffs due to its integrated supply chain with the U.S.
The report comes as election cycles in Mexico and the U.S. draw nearer, placing a potential deadline on the ongoing trade talks. It follows months of prolonged uncertainty over the agreement, as the U.S. has continued to bring new demands to the table. Officials now hope to close the talks by March 31.
The U.S. added a new wrinkle to the discussions earlier this month when it floated the idea of placing tariffs on all imports of steel and aluminum, using the proposed duties as a bargaining chip in NAFTA talks. It later said Mexico and Canada would be exempt from the tariffs.
On Tuesday, the U.S. Commerce Department leveled preliminary anti-dumping duties on Canadian imports of uncoated groundwood paper, used in the manufacture of newsprint and other paper products. The tariffs follow similar preliminary countervailing duties introduced by the U.S. on Jan. 9, which are aimed at the same products.
Analysts still expect the three countries to come to ultimately come to an agreement on NAFTA, saying moves by the U.S. where negotiating tactics.
“While Moody’s continues to believe a successful renegotiation of NAFTA will be the most likely outcome, risks to the baseline scenario are rising,” the report said.
After New Brunswick and Ontario, the next most impacted provinces would be Quebec, Manitoba, and Prince Edward Island, whose exports to the U.S. account for between 13 and 17 per cent of GDP, respectively, the report said.
British Columbia would be most insulated from the implosion of NAFTA, the report found, with U.S. exports representing just eight per cent of its GDP. Nova Scotia’s exports to the U.S., meanwhile, accounted for 8.8 per cent of GDP in 2016.
“British Columbia also has arguably the most diversified export market profile of all Canadian provinces, which reduces the credit impact of a potential NAFTA termination,” the report said, adding that “sector- and company-level impacts would vary, as certain industries would have to adjust to higher barriers to trade.”
In 2017, the U.S. made up nearly 75 per cent of Canada’s total exports. The European Union was its next largest export market at 7.9 per cent, followed by 4.5 per cent to China.
The Moody’s report found that the U.S. would be the least impacted in the absence of NAFTA due to its relatively smaller dependence on continental trade.
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