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By Yali N'Diaye
     OTTAWA (MNI) - With the Mexican elections behind, and the president-elect
having signaled the current negotiating team will continue negotiations, the
clouds over NAFTA could have partly dissipated, as well as the uncertainty with
them, but the confusion remains.
     As U.S. President Donald Trump keeps the threat of auto tariffs, the
specter of a marked slowdown for the Canadian economy is becoming more real, as
well as risks to global growth more broadly.
     The fact that Trump followed through on steel and aluminum tariffs makes
the prospects of auto tariffs more likely, and the extent to which the
U.S.-China dispute escalates could also provide some light as to how far the
Trump administration is ready to go: withdrawing from NAFTA, with or without
bilateral deals, imposing auto tariffs, trigger a global trade war, or
combinations of such scenarios.
     Given the variety of possible outcomes and the unpredictability of Trump's
decisions, the Canadian economy could end up being mildly slower than currently
expected or plunge into a recession, under what most experts still consider as
the least likely, which would be a full blown trade war with blanket tariffs.
     --BILATERAL DEAL UNLIKELY
     Trump's push for bilateral deals has been resisted by Canada and Mexico.
The latter continues to favor a three-country agreement even with a new
president.
     While it will come down to the U.S. decision, for Laura Dawson, Director at
the Wilson Center Canada Institute in Washington, DC, a bilateral deal is
"unlikely."
     Brian Kingston, a vice president at the Business Council of Canada, in
charge of fiscal and international policy, agreed.
     Not only have Canada and Mexico been clear about their preference for a
trilateral deal, but many Republicans in the U.S. Congress also support a
modernized NAFTA rather than bilateral deals, he told MNI.
     He added that such disruptions to NAFTA would mean companies have to comply
with different regimes and rules, which is "a drag on the economy" as it would
be reducing the efficiency of the supply chain. He also pointed out that a large
majority of the auto industry is using the NAFTA rates.
     Should NAFTA fail, World Trade Organization tariffs would likely apply
under the Most Favored Nation (MFN) regime, rather than US-Canada trade
defaulting to the Free Trade Agreement that pre-dated NAFTA.
     --FURTHER NAFTA DELAY
     Despite his threat to withdraw from NAFTA, Trump has said he won't seek a
deal until after the U.S. mid-term elections, which suggests he is still
contemplating a deal and wants to know which Congress he will work with.
     However, Canada Foreign Affairs Minister Chrystia Freeland has said
negotiations will intensify during the summer.
     Kingston pointed out that there has been progress on most NAFTA chapters
and more progress can be made on technical issues without political decisions.
That would allow talks to continue over the summer.
     A U.S. withdrawal remains a possibility, but a Democratic win at the
mid-term elections would reduce such possibility, even though Republican members
of Congress also generally oppose the termination of NAFTA.
     --AUTOS, THE WEAK LINK
     Instead, tariffs on autos imported from Canada remain "a more immediate
threat, frankly, and extremely concerning" said Kingston, who believes this
outcome is more likely than not, despite overwhelming evidence it would damage
the U.S. as well.
     Trump's administration is investigating whether national security concerns
justify such auto tariffs, with the outcome expected in August.
     While the Canadian economy can weather steel and aluminum tariffs, and
business investment intentions currently remain solid, according to the BOC's
Business Outlook Survey, the investment and overall economic outlook would be
more downbeat should the U.S. determine tariffs on auto imports from Canada were
warranted.
     In 2017, the U.S. imported C$7.2 billion in steel products from Canada
-representing 1.3% of total Canadian exports - and another C$9.2 billion in
aluminum products - representing 1.7% of the value of exports. So overall, steel
and aluminum exports to the U.S. represented 3.0% of the total value of Canadian
exports, on a customs basis, according to Statistics Canada.
     The auto sector, however, is another story. Autos and parts represent about
15% of total Canadian exports, behind energy products, which represented 20% in
April.
     But the degree of integration between the U.S. and Canadian supply chains
is particularly high in the auto industry, which increases the possibility that
tariffs would backfire for the U.S.
     --RECESSION RISK
     While tariffs on auto imports would damage Canada's economic performance,
estimates currently see a more pronounced slowdown than an actual recession.
     At Scotiabank, for instance, a U.S. withdrawal without bilateral deal,
where 3.8% WTO tariffs are applied across the board, would trim Canadian growth
by 0.2 percentage points in 2019 and twice as much in 2010, while the impact on
U.S. growth would be limited.
     If NAFTA talks extend but the U.S. imposed tariffs of 25% on autos imports,
the impact on Canadian growth would be similar.
     Moody's agreed that a termination of NAFTA and the application of WTO
tariffs would lead to a "weakened" Canadian economy. But there is no talk of
recession in their commentary.
     Yet, the recession risk is here, and would materialize under a scenario
where the U.S. would impose 20% tariffs across the board for all countries,
according to Scotiabank.
     However, most experts see a full-blown global trade war as unlikely, even
as escalating tensions are adding risks to global growth, as Fitch ratings said
in a commentary.
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
[TOPICS: M$C$$$]