The next round of NAFTA negotiations runs Jan. 23-28 in Montreal. Time and again since his election campaign, U.S President Donald Trump has signalled his intent to withdrawal from in his words, “the worst trade deal maybe ever signed anywhere.” Heading into the sixth round of NAFTA negotiations, Canadian Prime Minister Justin Trudeau is prepared for “every eventuality.” If we put aside the legal quagmire that would most surely follow a U.S. exit from NAFTA, some assumption-based economic analysis is possible.
One potential scenario is for Alberta’s U.S. exports to return to 1988 levels — 1988 being the final year before implementation of NAFTA. As we work through the model, it is worth keeping in mind that this is, by most economist’s own admission, the worst-case scenario.
In our scenario, we have taken an economic model, whereby Alberta’s U.S. exports in both 1988 and 2016 are deflated to 2014 dollar levels using Statistics Canada’s Canadian Industrial Product Price Indexes. The resulting deflation is shocking, with total merchandize exports decreasing by $54 billion, give or take a few hundred thousand. It doesn’t take an economist to figure out that returning to 1988 trade levels would be catastrophic to Alberta’s economy.
Just how bad is this worst case? Consider the case of oil and gas, Alberta’s largest industrial sector by a country mile. According to our economic model, gross output from mining and oil and gas extraction would decrease by as much as $47 billion, resulting in the loss of 46,000 direct jobs. All told, provincial GDP would decline by as much as $50.8 billion, roughly 13.5 per cent of current GDP of $376 billion. And employment would drop by almost 200,000 jobs, roughly 8.7 per cent of the provincial total.
Keep in mind, this is a worst-case scenario, and one of the “eventualities” that Mr. Trudeau has his eye on. Some economists indicate that Alberta’s oil and gas industry has low sensitivity to NAFTA termination, which would no doubt soften the blow. However, the scenario plays out, Medicine Hat would certainly feel the pinch.
Granted, detailed international export data by commodity is not available for the Medicine Hat area. However, we can compare the ratio of employment by industry to the province at large, getting a glimpse into the Gas City’s future sans NAFTA.
As would be the case for Alberta, the Medicine Hat-based mining, and oil and gas sectors would take it on the chin, losing nearly a billion dollars in gross output, coupled with the loss of up to 885 jobs. Looking at Medicine Hat in sum total, returning to pre-NAFTA U.S. exports would result in a loss of 3,400 jobs, followed by a reduction in the GDP of $890 million.
Supposing a return to a pre-NAFTA trade patterns is an extreme scenario. But the result of running this exercise nonetheless demonstrates the importance of international trade with the U.S. to Medicine Hat’s economy. It also highlights the imperative of looking beyond North America when considering export markets. Indeed, if there is anything that we can take from Mr. Trump’s threat to withdraw from NAFTA, it is that exporting businesses must continue to diversify into export markets outside of the U.S.
This column appeared in the Medicine Hat News on Jan. 17, 2018.