Moody’s Investors Service has calculated the likely impact that the demise of the North American Free Trade Agreement (NAFTA) would have across Canada and determined that the provinces of Ontario and New Brunswick would be most affected should the trade deal collapse.
In a report issued Thursday afternoon, the ratings agency said that the resource-rich provinces of Alberta, Saskatchewan and Newfoundland and Labrador would see only a modest impact from a NAFTA failure as the commodities they sell are not expected to face higher tariffs if the trade agreement is scrapped.
Moody’s determined the economic impacts on individual Canadian provinces by assessing the relative size of provincial exports to the U.S. as a share of Gross Domestic Product, as well as the type of industries most dominant in each respective province. Exports to the U.S. by New Brunswick account for 28.5% of its total GDP, the highest in the country. Ontario was next highest at 26%. The report also said that Ontario’s sizeable manufacturing sector, particularly in the automotive industry, is highly exposed to increased tariffs due to its integrated supply chain with the U.S.
“While Moody’s continues to believe a successful renegotiation of NAFTA will be the most likely outcome, risks to the baseline scenario are rising,” the report states.
After New Brunswick and Ontario, the next most impacted provinces would be Quebec, Manitoba and Prince Edward Island, whose exports to the U.S. account for between 13% and 17% of GDP respectively, the report said.
British Columbia would be the province least impacted by the implosion of NAFTA, the report found, with U.S. exports representing just 8% of its GDP. Nova Scotia’s exports to the U.S., meanwhile, accounted for 8.8% of GDP in 2016.
“British Columbia also has arguably the most diversified export market profile of all Canadian provinces, which reduces the credit impact of a potential NAFTA termination,” reads the Moody’s report, adding that “sector- and company-level impacts would vary, as certain industries would have to adjust to higher barriers to trade.”
In 2017, the U.S. made up nearly 75 per cent of Canada’s total exports. The European Union was its next largest export market at 7.9 per cent, followed by 4.5 per cent to China. The Moody’s concludes that the U.S. would be the least impacted by the absence of NAFTA due to its relatively smaller dependence on continental North American trade with Canada and Mexico.
The next round of NAFTA negotiations are planned to take place in Washington, D.C. in early April.
