Ag Policy Blog

Canadian Report Analyzes Impact of Ending NAFTA

Jerry Hagstrom
By  Jerry Hagstrom , DTN Political Correspondent
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A report released Monday by the BMO Financial Group, a Montreal-based financial services organization, said that the Canadian food and beverage industry would be highly vulnerable if the North American Free Trade Agreement is ended, and that Canadian and U.S. crop producers would face a moderate level of vulnerability.

Looking at U.S. crop producers, the report noted, “U.S. crop producers would also be materially affected, as they would face tariffs averaging nearly 4% on exports to Canada and a lofty 11% on exports to Mexico,” BMO chief economist Douglas Porter writes about the Canadian industry in “The Day After NAFTA.”

“Although the industry is not especially reliant on NAFTA members for sales, with Canada and Mexico accounting for around 7% of industry receipts, dramatic climate differences across North America mean that import substitution is likely to be relatively limited.

“Sizeable tariffs in the downstream food industry could also pressure crop producers indirectly by leading large processors to pressure agricultural suppliers for lower prices.

“However, on the positive side of the ledger, the prevalence of agricultural trade barriers around the world would curb overseas substitution even if tariffs were to rise within North America,” the report said.

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Canadian crop producers would have “moderate exposure” to higher risks, the report said.

“Post-NAFTA U.S. tariffs would be relatively high at nearly 4%, though less than 20% of Canadian crop products are sold into the U.S. marketplace, which would limit the impact on industry costs and profitability,” the report said.

“There is also room for import substitution within the crop space, as U.S. penetration into the Canadian marketplace exceeds 25% (though some imported products would not be feasible to grow in the Canadian climate).”

Food and beverage and tobacco producers would face among the highest U.S. tariffs of all industries if North American trade were to revert to WTO rules. “In the beverage and tobacco space, exports to the U.S. account for less than 10% of industry sales, but with U.S. tariff rates likely to approach 20%, the financial impact of termination would nevertheless be considerable.“

“Moreover, relatively low tariff rates in Canada suggest that the industry would receive little offset in the way of import substitution.

“Fortunately, relatively generous profit margins suggest that beverage and tobacco firms would generally be able to weather the impact.

“In the food space, post-NAFTA U.S. tariffs would be expected to run around 4.5% — far lower than the ‘vice’ tariffs on alcohol and tobacco, but still the third-highest of all industries. The food industry also has greater reliance on the U.S. marketplace, with southbound exports accounting for 24% of sales, putting the industry’s potential tariff bill over 1% of sales.

“Upstream tariffs in the agriculture sector could put additional pressure on food processors, especially those that rely on inputs that cannot be grown in the Canadian climate.

“That said, Canadian processors selling perishable goods would be relatively well positioned to benefit from import substitution, given the challenges associated with sourcing such products overseas,” the report said.

The report also said that livestock would have “low vulnerability” to NAFTA termination but did not explain why.

The Day After NAFTA report: https://goo.gl/…

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