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Despite tough talk on trade—talk that’s been heating up and getting personal between Canada and the U.S.—hope for a resolution continues.

“We still believe that U.S. President Donald Trump will not seek to shred NAFTA,” says National Bank senior economist Angelo Katsoras in a report. That’s because the political blowback from states, businesses and Congress would overwhelm Trump’s administration, he says.

It would also likely result in a long legal battle about Trump’s authority to terminate the agreement without congressional approval, Katsoras notes.

Further, shredding NAFTA would risk one of Trump’s main talking points, says Katsoras: “the strong performance of the economy and the financial markets under his watch.”

Still, the longer trade negotiations drag on, “the riskier investing in Canada and Mexico could become for companies looking for guaranteed access to the U.S. market,” he cautions. In fact, Katsoras says that the business uncertainty created by ongoing negotiations, along with the threat of tariffs, could have a greater long-term impact than the imposition of protectionist measures.

For example, Canada is feeling “the wrath of uncertainty,” says Katsoras, citing Bombardier as an example of how tariffs upend business plans. When the U.S. imposed as 300% duty on Bombardier’s C Series, Bombardier entered into an alliance with Airbus that included transferring part of the C series assembly from Canada to the U.S. in a bid to ward of further tariffs.

Though the duty was ultimately reversed, the alliance is going ahead.

The example shows that the longer NAFTA negotiations continue, the weaker Canada’s negotiating position could become, says Katsoras.

“Given the prospect of never-ending negotiations, we can expect more and more people to challenge Canadian Prime Minister Justin Trudeau’s declaration that a bad deal would be worse than no deal,” he says.

BlackRock’s 2018 global investment outlook says the firm views NAFTA negotiations as “a barometer for the new ‘America first’ stance.” Further, BlackRock says that “any breakdown in NAFTA talks would be an ominous sign for global trade.”

When it comes to markets, a NAFTA withdrawal would hit emerging market equities in the short term, on fears of worsening trade frictions, says the report. And potential supply-chain disruptions could hurt global automakers and suppliers.

For full details on BlackRock’s outlook, see the full report.

Read the full National Bank report, which includes a map indicating Canada-U.S. trade as a percentage of GDP for each province and state.

Also read:

Geopolitical risk indicators rising: BlackRock

China’s trade gap with U.S. widens, as global gap narrows

Originally published on Advisor.ca
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