Why NAFTA impasse is so damaging

Industry expert feels many are underestimating negative impact of NAFTA uncertainty

Why NAFTA impasse is so damaging

Prolonged NAFTA negotiations could do a lot of damage to the Canadian economy, according to Ian Russell.

The Investment Industry Association of Canada president and CEO believes Prime Minister Justin Trudeau’s Government are going to be left hanging by hardball US tactics and suspects it will be the end of the year before any semblance of an agreement is reached.

He also predicts Canada will have to make concessions in areas like supply management and the automobile sector, meaning investors will look south for value.

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Russell said: “It can do a lot of damage. Canadian capital is going to be more inclined to move south of the border because that’s where you are seeing a real recovery in growth, opportunity and growing markets.

“With the uncertainty around NAFTA, the best way to tap the US market is to increase the amount of capital formation in the US. That’s point one, particularly in the manufacturing and services industry, so there’s going to be a huge risk here that you are going to have a lot of southbound capital flow.

“The other thing is that Canada has been able to crack foreign capital because it does provide unfettered access to the US market place. So if you were a US company you could set up an affiliate in the US and there were advantages about lower labour costs, and we have a healthcare system.

“There are certain advantages to Canada and without talking to those advantages, the fact is there was an opportunity for US companies, and European and Asian ones, who may have preferred to set up their operations in Canada for various reasons to serve the US market.

“With the uncertain overhang of NAFTA, again that capital will flow to the US and not Canada, so we are going to be losers on two counts.”

In calling on federal and provincial governments to do more to boost Canada capital formation to help drive job creation and economic growth, Russell highlights eroding corporate tax competitiveness, as well as the NAFTA impasse, as dampening the outlook.

He believes the Government will eventually, and reluctantly, start to reduce corporate tax and fall “somewhat in lockstep with the US” as concerns over NAFTA and investment numbers increase.

However, the likely lag period before that happens means things will get worse before they get better.

“There will be a reluctant positive response,” he said. “The other way of saying it is that things will get worse before they get better.”

He added: “Inevitably, they are going to have to do it because I am not optimistic that the current levels of growth are sustainable. We are going to see a downturn in the Canadian economy, certainly before the year is out. It could be significant. You are already seeing it in terms of investment numbers and they are going to get worse because of the argument around NAFTA, and the Government is going to have to respond with positive action.

“That’s what’s happened with Canada in the past. Our economic policies have to move in relative lockstep with the US and I think that will happen now but it will come with a significant lag and things will have to get worse before we see a positive turn in policy.”

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