NAFTA and the Provincial Landscape

A Publication of BMO Capital Markets Economic Research

By: Robert Kavcic, Senior Economist, BMO Capital Markets

Ongoing NAFTA talks point to a heightened risk that the Canadian economy could face a meaningful disruption on the trade front, but the shock wouldn’t be absorbed equally among the provinces. Rather, because economic structure varies so greatly across the country, the provincial impact would vary as well. To be sure, there are many moving parts when considering the impact (i.e., currency, price changes, trade substitution with other countries or interprovincially), but the following is a rough assessment of who would be hit hardest, and who’s relatively sheltered.

The simplest way to assess the potential impact is to look at each province’s reliance on, and exposure to, U.S. exports. Chart 1 shows the reliance of each province’s export sector on the U.S. (i.e., share of exports that are destined for that market), as well as the economic exposure to U.S. exports (share of GDP). New Brunswick, Alberta and Ontario each send more than 80% of their exports to the U.S., leaving them with trade sectors most reliant on the U.S. market. As a share of their respective economies, New Brunswick and Ontario carry the most direct economic exposure to the U.S. market. At the other end of the spectrum, British Columbia looks the least exposed with more than 30% of exports now destined for Asian markets. While convenient, the shortfall of this approach is that the industry makeup of each province’s exports is vastly different across the country, and each industry faces varying levels of vulnerability to trade negotiations. Table 1 breaks down each province’s U.S. exports by industry which, along with an assessment of industry vulnerability, gives a better look at where the biggest threats lie.


Ontario still looks like the province most at risk from a disruption to NAFTA, since its economy is arguably the most integrated with the U.S. through well-established supply chains. Indeed, Ontario’s export sector is one of the most highly-levered to the U.S., with nearly 83% of shipments going south of the border in 2016. Because the province is relatively export-intensive to begin with, that leaves 26% of GDP tied to U.S. exports. And, the bulk of those exports (80% of the U.S. total) are in industries that we deem vulnerable to trade negotiations, including a whopping $79 bln of transportation equipment exports. Indeed, the tightly-integrated auto sector is probably the key area of concern for province, especially when considering activity in other areas that feed off the sector. All told, U.S. exports in vulnerable sectors account for roughly 20% of Ontario GDP, the highest share in Canada by a wide margin. If there is a silver lining, it is that manufacturing has faded to 13% of Ontario GDP from more than 20% in 2000, so the impact of sweeping changes now would be less than a decade or two ago—but that’s only a small consolation.

New Brunswick’s high headline exposure gets softened when accounting for industry exposure, with more than half of U.S. exports in the lower-risk refined petroleum industry. Similarly, Alberta’s high U.S. trade share comes as the result of nearly $50 bln in crude oil exports. If that industry is indeed considered low risk (post-NAFTA tariffs on oil would be a surprise), it leaves Alberta as one of the least exposed provinces in Canada. Newfoundland & Labrador would be similarly sheltered, and Saskatchewan would not be far behind—the latter boasts large agriculture and potash exports, but much of that output, especially for the latter, is destined for China and India.

Quebec looks less vulnerable than Ontario. Indeed, while roughly 81% of the province’s U.S. exports are deemed high risk (similar to Ontario), that weighs in at only around 12% of GDP (little more than half of Ontario), largely because of a more diverse export-market to regions like Europe. That said, Quebec would certainly feel an impact. Aerospace and other non-auto transportation goods account for 15% of total exports (we’ve already witnessed a tariff spat on this front), while Quebec boasts the largest number of dairy farms in Canada and $8.5 bln of food-product exports (also largest in Canada)—supply management is another area targeted by the U.S. Administration, but could be unaffected in a full NAFTA breakdown. Manitoba looks similar, helped by a diverse export base, but facing risk in large transportation (non-auto) and agriculture/food sectors.

British Columbia’s overall economic exposure is limited by its increased export ties to Asian markets, but a still-significant 73% of U.S. shipments are in mid- or highrisk industries. The lumber industry accounts for most of this but, given recently announced softwood tariffs, the impact from NAFTA itself could be limited.

The rest of Atlantic Canada looks to have relatively low vulnerability overall from an economic perspective. But, certain industries such as food products (significant export share for all in the region) and tires (Nova Scotia) could be hurt.

NAFTA Provincial Landscape


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NAFTA Provincial Landscape

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