Ending NAFTA Could Cost Billions for Retailers in Canada

CHICAGO, Nov. 27, 2017 /PRNewswire/ --

1% = $1 billion.

That's the increase in costs for retailers in Canada if tariffs on US-originating retail goods imported into this country rise by 1%, according to a deep-dive analysis by global management consultancy firm A.T. Kearney, in collaboration with the Retail Council of Canada. And the tariff increase could be much greater than 1%.

"Retailers in Canada import over CAD$100 billion of goods from the United States each year. We are heavily engaged on the NAFTA file because it could have a very significant impact on retailers in this country—domestic and multinationals, large and small," says Karl Littler, VP Public Affairs for the Retail Council of Canada.

Three scenarios are likely should NAFTA negotiations break down to the point where the trade agreement is dissolved:

1. Return of Canada–US free trade – Canada and the US return to the bilateral free trade agreement in force before NAFTA
2. End of North American free trade – Tariffs on US imports into Canada change to rates applied on other nations' exports to Canada under World Trade Organization (WTO) rules
3. Protectionism returns – Rising nationalism and protectionism has the US raise tariffs beyond its WTO commitments, prompting Canada to set retaliatory tariffs

"Scenarios 2 and 3 are becoming increasingly possible as we reflect on the recent NAFTA negotiations and the posturing from the Trump administration," says Dean Hillier, lead partner behind the study. "Scenario 2 would see a $4 billion increase in costs for retailers in Canada, primarily in automotive and food segments," according to Hillier, "and if we assume a 20% tariff across the board on key retail import categories under scenario 3, the impact is a devastating $21 billion cost increase for retailers, across automotive, household goods, electronics, food, and appliances. The whole retail sector is hit hard."

But there's more. With NAFTA gone, the macroeconomic impact of rising costs and a slowing Canadian GDP on household spending changes further adds to the pain for retailers in Canada. "Scenario 2 also sees a drop in Canadian household spending on retail items by $170 per household, and a $2.6 billion overall drop in 2019 Canadian retail sales," warns Hillier. "Scenario 3 is much worse: a $1,000 drop in household retail spending and a whopping $17 billion drop in 2019 Canadian retail sales. Retailers get hit on the top and bottom lines."

"We've integrated numerous, credible sources of information and analysis into our study," adds Toronto A.T. Kearney consultant and lead analyst Raj Mukherjee. "By bringing together data from Statistics Canada, the World Bank, Euromonitor, Scotiabank, the USDA, Canada Border Services Agency, and US foreign trade statistics, we tried to establish the most comprehensive view on the impact of NAFTA termination on the retail sector in Canada. We believe we've accomplished that," says Mukherjee.

"The rules of what happens after NAFTA are not very clear," states Johan Gott, principal with A.T. Kearney and a trade specialist. "President Trump can take the US out of NAFTA with the stroke of a pen, but rules of trade are set and governed by Congress in the United States. If NAFTA were dissolved, the White House and Congress would have to agree to new rules, and that has proven a very difficult and long process on other important issues."

"We remain hopeful that cooler heads will prevail and that NAFTA will be successfully renegotiated," adds Littler from the RCC. "That said, the magnitude of trade at risk and the potential impact on merchants' profitability, supply chains, and vendor relationships are matters that all retailers need to take into consideration. For negotiators and policymakers, it needs to be understood that with rising costs and a slowing, more uncertain economy, jobs could be impacted too."

The full study is now available from A.T. Kearney.

About A.T. Kearney
A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission critical issues. For more information, visit www.atkearney.com.

SOURCE A.T. Kearney

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