A NAIT instructor considers consumer costs, oil and the need for new friends
Renegotiation of the North American Free Trade Agreement threatened to become more complicated this February, thanks to a proposed 25% tariff on steel and 10% on aluminum imports into the United States. Then it got strange, with a Twitter post from President Donald Trump that read like a ransom note:
Happily, the president ultimately granted Canada and Mexico exemptions in an executive order he signed on March 8. Canada is the largest exporter of both metals to the U.S., which accounts for almost one-third of our steel exports and about 88% of our aluminum.
Billions of dollars in export revenues and tens of thousands of jobs may have been saved but economic uncertainty continues to loom, as conditions appear to be changing daily, says Cave. Sure, Canada dodged the potential negative effects of massive taxes on trade, but the impacts of a revised NAFTA remain to be seen.
Recently, we asked Dr. Adam Cave, a NAIT JR Shaw School of Business instructor specializing in international business, what Alberta could expect from a new version of “fair.”
We might make new friends
Alberta remains a resource-based economy (oil, mining, forestry and the like account for nearly 30% of the provincial gross domestic product). From Cave’s perspective, that’s an advantage.
“If NAFTA fails, we’ll just go elsewhere,” he says. “When we talk about natural resources, there are buyers everywhere.
“We should be doing that anyway,” he adds, pointing to unrealized opportunities with Asian trading partners. In 2014, more than 90% of our exports were U.S. bound. “A lot of people argue: should we trade with an unreliable partner?” says Cave in reference to our southern neighbour.
“A lot of people argue: should we trade with an unreliable partner?”
After spending 15 years teaching at a university in South Korea before NAIT, Cave knows branching out means a change in mindset. “One of the reasons our trade works fairly well with the U.S. is that it’s based on contracts.” Contracts, he says, tend to be less common in Asia, or at least secondary to strong, trust-based relationships between businesses and organizations.
“It would take time [to develop],” says Cave. “It’s a very different way of doing business.” But it could help lead the province to greater diversification in trading partners.
Things might cost more
“Our dollar would go down because we’ve now lost an open partner with whom the vast majority of our trade originates,” says Cave. “It would go down based on uncertainty.”
On the other end of the see-saw, “consumer prices will go up.”
A benefit of NAFTA was its elimination of tariffs on goods originating in its partner countries. With the agreement broken, those tariffs, which countries impose to make their domestically produced stuff competitive with cheaper imports, could be re-introduced.
“All of a sudden, there is tax on goods,” says Cave. What’s more, there’s the threat of a trade war, in which countries retaliate to those taxes with taxes of their own.
Oil probably wouldn’t change much
The U.S. imports more oil from Canada than any other nation – more, even, than from all of OPEC combined. In 2014, Alberta oil exports to the U.S. were worth $76 billion.
Cave doesn’t feel that number will be greatly affected. “Realistically, I'm sure we would come to an agreement on an oil price between Canada and the U.S.” After all, the latter consumes nearly 20 million barrels of petroleum products per day – the most of any country.
We have to take the long view
Fundamentally, trade is good for countries, says Cave. Revenue is one reason. Another, he points out, is a kind of natural selection that hones economies. If someone else does something better than you, why not let them do it and focus on your own strengths? Cave knows this might mean certain sectors sheds jobs – but it also means others will grow to need them.
“You lift up, you help people move,” he says.
That’s why, in the long term, the current commotion (all tweets aside) could have a positive outcome. It forces leaders and businesses alike to look at who their friends are, today and tomorrow, and plan appropriately for the future.
“NAFTA is much bigger than just Trump.”
“NAFTA is much bigger than just Trump,” says Cave. “We need to keep that in mind. We need to look past Trump.”