Loonie down to 74 US cents if NAFTA ends — here’s what could happen to prices

The cost of vehicles produced in North America would rise by over $1,200 on average, if NAFTA ended. Chris Young/CP

The Canadian dollar could slump to 74 US cents, down from around 79 cents currently, if U.S. President Donald Trump were to dissolve NAFTA, according to a BMO report published Monday.

That would compound the effect of higher trade tariffs to deliver a punch to Canadian wallets.

READ MORE: Expect to pay more for lots of stuff if Donald Trump dissolves NAFTA

“It is arguably the consumer that would be the biggest net loser from the termination of NAFTA,” the study warns.

Indeed, higher prices and a slowing economy could force Canadians to trim their spending on retail items by $170 per household in 2019, according to a separate study also released Monday by global management consultancy firm A.T. Kearney in collaboration with the Retail Council of Canada.

That figure and the BMO report are based on a scenario in which the U.S. and Canada switch to trade rules mandated by the World Trade Organization (WTO).

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READ MORE: NAFTA deadlock: Canada blames the U.S., the U.S. blames Canada and Mexico

The BMO analysis finds that consumer prices in Canada would rise by nearly one percentage point on average, as a number of tariffs rise from NAFTA to WTO levels and the Canadian dollar weakens.

Under the WTO regime, U.S. shipments to Canada would face a tariff of 2.5 per cent on average, BMO economists calculated.

But the end of NAFTA could have a “magnified” impact on products like autos and electronics, which tend to crisscross the border several times before final sale. According to conservative industry estimates, the average cost of vehicles produced in North America could rise by over $1,270, BMO notes.

READ MORE: Trudeau better not pull a ‘Judas’ and backstab Mexico on NAFTA: ex-president Vicente Fox

The A.T. Kearney study echoed that forecast, with predictions of a $4-billion cost increase for Canadian retailers under WTO rules. The auto and food sector would be hit especially hard, the report noted.

WATCH: Canada’s NAFTA challenge on softwood

Click to play video: 'Canada’s NAFTA challenge on softwood' Canada’s NAFTA challenge on softwood
Canada’s NAFTA challenge on softwood – Nov 15, 2017

WTO tariffs would be a ‘bad-but-not-worst-case scenario’

A future in which Canada-U.S. trade is regulated by the WTO would be a “bad-but-not-worst-case scenario” for Canada, BMO economists wrote.

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Over the span of five years, Canada’s GDP could be up to 1 per cent smaller without NAFTA than it would have been with it, according to the study. But that is “a relatively moderate impact on an economy that is expected to expand by close to 9 per cent over that period,” the authors note.

The unemployment rate, meanwhile, would likely rise by roughly half of a percentage point.

READ MORE: Stephen Harper convinced Trump not bluffing about pulling the plug on NAFTA

BMO assumes policymakers would intervene swiftly to soften the blow from the demise of NAFTA, with the Bank of Canada likely holding interest rates steady or even lowering them in 2018.

The government would also likely aggressively pursue new international trade arrangements and possibly, boost public spending.

Still, the effect of higher tariffs and slower cross-border trade would be palpable across the country and especially in Ontario, which appears to be “the most susceptible province by far to NAFTA disruption,” according to BMO.

While oil-rich provinces are also heavily reliant on exports to the U.S., the oil and gas industry appears relatively sheltered from the risk of higher trade barriers, unlike Ontario’s manufacturing sector.

READ MORE: What if NAFTA ended? These would be Canada’s hardest-hit provinces, industries

But the manageable impact that Canada would likely suffer as a result of a switch to WTO rules pales in comparison to the jolt the economy would receive if the U.S. were to pull out of the WTO and adopt punitive tariffs.

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Under that scenario, A.T. Kearney predicts a $1,000 drop in household retail spending and a $17-billion drop in Canadian retail sales in 2019.

The BMO report does not articulate the possible consequences of this scenario, which it calls “extreme” and “unlikely.”

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