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Ending NAFTA could cost billions for retailers in Canada

The retail sector in Canada would be hit hard if the North American Free Trade Agreement is terminated.

If tariffs on U.S.-originating retail goods imported into Canada rise by 1%, retailers' costs would increase by $1 billion, according to analysis by global management consultancy firm  A.T. Kearney, in collaboration with the Retail Council of Canada. And the tariff increase could be much greater than 1%.

"Retailers in Canada import over CAD$100 billion of goods from the United States each year," said Karl Littler, VP public affairs for the Retail Council of Canada. " We are heavily engaged on the NAFTA file because it could have a very significant impact on retailers in this country—domestic and multinationals, large and small ."

Three scenarios are likely should NAFTA negotiations break down to the point where the trade agreement is dissolved according to the report:
Return of Canada – U.S. free trade – Canada and the U.S. return to the bilateral free trade agreement in force before NAFTA.
End of North American free trade – Tariffs on U.S. imports into Canada change to rates applied on other nations' exports to Canada under World Trade Organization (WTO) rules.
Protectionism returns – Rising nationalism and protectionism has the U.S. raise tariffs beyond its WTO commitments, prompting Canada to set retaliatory tariffs.

"Scenarios two and three are becoming increasingly possible as we reflect on the recent NAFTA negotiations and the posturing from the Trump administration," said Dean Hiller, lead partner behind the study. "Scenario two would see a $4 billion increase in costs for retailers in Canada, primarily in automotive and food segments, and if we assume a 20% tariff across the board on key retail import categories under scenario three, the impact is a devastating $21 billion cost increase for retailers, across automotive, household goods, electronics, food, and appliances. "

What's more, with NAFTA gone, the macroeconomic impact of rising costs and a slowing Canadian GDP on household spending changes further adds to the pain for retailers in Canada.

"Scenario two also sees a drop in Canadian household spending on retail items by $170 per household, and a $2.6 billion overall drop in 2019 Canadian retail sales," warned Hillier. "Scenario 3 is much worse: a $1,000 drop in household retail spending and a whopping $17 billion drop in 2019 Canadian retail sales. Retailers get hit on the top and bottom lines."

The rules of what happens after NAFTA are not very clear, according to Johan Gott, principal with A.T. Kearney and a trade specialist.

"President Trump can take the U.S. out of NAFTA with the stroke of a pen, but rules of trade are set and governed by Congress in the United States," he explained. "If NAFTA were dissolved, the White House and Congress would have to agree to new rules, and that has proven a very difficult and long process on other important issues."

The full study is now available from A.T. Kearney.

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