Life after NAFTA: Canadian businesses start to plan for bleak new trade reality

What a year. It was this week last year that Donald Trump'sinsurgent campaign won the U.S. presidency. Back then, officials and businesses seemed to shrug off Trump's very clear promise to tear up NAFTA.

Now, major Canadian manufacturers are running the numbers, trying to figure out what life would be like if Trump makes good on his threat and scraps the deal altogether.

Linamar, the second-largest auto parts manufacturer in the country, released weaker-than-expected quarterly results this week, although the lower profits were blamed on the string of hurricanes in August and September and not weaker demand or trade-related concerns.

Linamar CEO Linda Hassenfratz says they've run the numbers and considered what would happen if NAFTA was scrapped.

"And we feel pretty comfortable that from a personal company perspective, we're going to be OK either way," she told CBC's On The Money.

That's all well and good for Linamar. It's looking past the United States already. About 80 per centof the world's automotive market is outside North America. And more than half Linamar'snew deals signed last year were in Europe. But there's a bigger issue at play and Hassenfratz knows it.

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She runs one of the biggest manufacturing companies in Canada. She's one of the 13 members of the council advising the Canadian government on what to do with NAFTA. She has met with Trump in the Oval Office. Soif anyone understands the broader stakes at play, it's she.

And whether Linamar would be OK or not, she says there would be incremental effects across a whole bunch of companies that would be negative for everyone. What's worse, Hassenfratz says this isn't being discussed in the U.S.

"We're talking about it a lot here in Canada," she says."But typically in the U.S. [there is] very little media coverage for something that could fundamentally change their economy and that just doesn't make sense."

Preparing for the worst

7 years ago

Duration 7:00

Linamar CEO Linda Hasenfratz on Trump's tough talk on trade

Add to the confusion some misdirection and misinformation from the Trump administration. Trump has repeatedly said NAFTAhas been a terrible deal for U.S. workers but millions of U.S. jobs actually rely on the trade deal and that the U.S. has a trade deficit withCanada.The U.S. Trade Representative's own website says the U.S. goods and services trade surplus with Canada was $12.5 billion in 2016)

Last year, as the world was digesting the reality of a Trump presidency, Hassenfratz said: "Mr. Trump is a businessman, he will make fact-based decisions."

Today, she admits it's "troubling" that his administration is making statements that are not factually correct.

Chugging right along

"The question is are they doing so from a position of negotiating perspective and they really do understand the facts and they're planning on making fact-based decisions or are they buying into that rhetoric and I think that's a little unclear," saysHassenfratz.

But unclear is kind of the order of the day.

Finally the Canadian economy is chugging right along. Economic data is now consistently coming in stronger than expected. Jobs are being added in droves.The International Monetary Fundexpects Canada's economic growth rate to be best among G7 countries at three per cent in 2017.

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And yet, Stephen Poloz, governor of the Bank of Canada, says NAFTA uncertainty is weighing down on growth prospects.

"We know from our survey that even though investment intentions are higher, they're not as high as they would be without the uncertainty due to NAFTA," he said this week.

Bad NAFTA result 'increasingly likely'

It's not just Hassenfratz who's gaming out the demise of the trade deal.

RBC Economics Researchreleased a report this week entitled"Life after NAFTA?" and the short answer to that rhetorical question is grim.

A "bad" result either a renegotiated deal that delivers less trade or the deal being torn up entirely is now "increasingly likely," the report said.

"Our estimates suggest that a roughly four per centacross-the-board increase in tariffs between Canada and the U.S. would reduce Canadian GDP growth by about one per centover five to 10 years. "

The report says that may not sound like much, but added up would mean "about $20 billion (in today's dollars) of annual output over time."

Sothat lack of certainty becomes more and more concerning.

NAFTAhas led to a three-fold increase in the amount of trade between Canada the U.S. and Mexico. Total trade now surpasses $1 trillion every year, according to figures from Global Affairs Canada.

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More than that, businesses and industries have now spent decades integrating their supply chains, weaving a complex, interdependent economy that touches the lives of nearly half a billion people. Hassenfratz points out the average car crosses theborderseven times during the manufacturingprocess.

That lack of certainty and disinterest in the U.S. matters a great deal, ascompanies and central banks can't get a clear sense of how to proceed.

Tariffs and taxes are one thing, but a suddenly fractious trade relationshipand more headaches crossing the border are quite another and nobody really knows how to put a number on what that will mean or where this is all headed.

"The impact," as Royal Bank bluntly put it, "is hard to quantify."