U.S. President Donald Trump just might pull the plug on the North American Free Trade Agreement, leaving the entire continent’s state of trade in flux – while possibly driving up costs for Canadian consumers on a slew of goods from cars to groceries.
“Trade is so intertwined between the three countries, there will be higher costs on a wide range of goods,” said Milos Barutciski, who co-heads international trade and investment at Toronto’s Bennett Jones LLP.
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“There is so much integration, that if you take away the lubricant that made the smoothness possible, consumers will feel the effects.”
Trump has said he might consider a bilateral pact with Canada in lieu of NAFTA.
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Considering Canada and the U.S. have been operating under a trade agreement including Mexico for nearly a quarter century, however, many of the goods crossing between Canada and the U.S. include parts from Mexico.
The fact that goods can travel duty-free between the U.S. and Mexico during the manufacturing process helps keep the costs of many goods down, Barutciski explained. In other words, Canadian consumers benefit from U.S.-Mexico trade, even if Canada’s direct trading relationship with Mexico doesn’t boast a high dollar figure.
Take away the trade advantages between the U.S. and Mexico, however, and consumers will feel it in their wallets.
Will Trump really tear up NAFTA?
Canada’s former prime minister, Stephen Harper, said he believes it’s a real possibility the president might pull out of the agreement, as do a growing number of international trade observers.
While Trump has said a number of times that he stands ready to terminate the longstanding trade deal between Canada, the U.S. and Mexico, recent negotiating tactics are grabbing attention.
“I’ve been opposed to NAFTA a long time in terms of the fairness of NAFTA. I said we’ll renegotiate it,” he said this week from the Oval Office with visiting Prime Minister Justin Trudeau sitting alongside him.
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“We’re negotiating … And we’ll see what happens. It’s possible we won’t be able to make a deal and it’s possible that we will.”
A number of observers, including the former World Bank president, a Canadian international trade specialist involved in the original NAFTA negotiations, the head of Canadian union Unifor and a U.S. international trade lawyer have little good to say about Trump’s proposals.
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Offers on the table, such as the Buy American one that would limit access for Canada and Mexico to American procurement projects while seeking greater access for American firms to Mexican and Canadian government projects, has been called “poison pills” and “ridiculous.”
The overall sense is there’s a very real possibility of losing NAFTA.
In the words of Robert Zoellick, the former World Bank president who was also a U.S. Trade Representative under George W. Bush, there’s a “serious risk” Trump’s tactics will end the North American Free Trade Agreement.
The bilateral fallback
In the event negotiations fall apart and fail to achieve what Trump is looking for, the president said he’s open to the idea of a two-way trade pact between Canada and the U.S., leaving Mexico out of the picture.
The U.S. is Canada’s largest trading partner; in 2016, Canada exported $3.9 billion in goods to the U.S., while importing $3.6 billion in goods, according to Statistics Canada.
On the flip side, Canada represents the largest goods export market for the U.S., according to the Office of the U.S. Trade Representative. In short, trade between the two countries is vital to both economies.
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“I think Justin [Trudeau] understands this. If we can’t make a deal, it’ll be terminated, and that’ll be fine,” Trump said as Trudeau looked on during a brief media appearance at the Oval Office Wednesday afternoon.
“[Canada is] going to do well and we’re going to do well.”
There are so many balls in the air – in a forum experts are calling uncharted waters, led by a president often considered unpredictable – it’s near impossible to game out what a NAFTA-free North America might look like.
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“We have to wait and see how Canada and Mexico will react, how the president reacts, what Congress does,” said Barry Campbell, a government-relations adviser, trade counsel and former Liberal MP.
Trudeau, meanwhile, avoided speculating on a bilateral deal.
“I continue to believe in NAFTA. I continue to believe that as a continent, working together in complementary ways is better for our citizens, better for economic growth and allows us to compete on stronger footing with the global economy,” he said, admitting the circumstances of the negotiations have been, at times, “challenging.”
The old deal between Canada and the U.S.
Before NAFTA was negotiated, signed and enacted, the U.S. and Canada regulated trade based on an agreement exclusive to the two countries.
Despite NAFTA, that bilateral agreement was never terminated; it’s been on the back burner, available should the trilateral agreement that also includes Mexico ever break down.
In practice, any changes from the current trilateral agreement to the 1980s bilateral agreement would be negligible in terms of duties imposed on goods crossing the Canada-U.S. border, said Barutciski.
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But Canadian consumers will lose whatever benefits gained via U.S.-Mexico trade which, as he explained, could drive up the costs of goods for consumers.
On top of that, the Reagan-era bilateral agreement has been idling for almost 25 years; many of its provisions aren’t exactly current.
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“I think if we looked at the [bilateral agreement] today, we’d probably find it pretty out of date,” Campbell said.
“If there was goodwill on the part of the U.S. to update the agreement, it’s possible it could work.”
Though it throws another layer of uncertainty over the entire thing, it is worth mentioning Trump could also decide to tear up the old bilateral agreement (though perhaps not easily or without a horde of legal battles).
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In that case, WTO regulations would govern trade between Canada and the U.S. and that, according to Barutciski, would be devastating to both economies.
“A withdrawal from NAFTA would have a net negative impact on both countries. But it wouldn’t be devastating,” he said.
“Withdrawing from both would be an unmitigated disaster.”
– With files from The Canadian Press
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