Renegotiating or withdrawing altogether from the North American Free Trade Agreement (NAFTA) has been a focal point of both President Trump's presidential campaign and his administration. This threat of renegotiation or withdrawal has also been the source of immense speculation from lawyers, economists, politicians and the like regarding the expected implications for the economy, key Canadian industries and business generally. Now, with preliminary negotiations underway, these months of speculation may finally be put to the test.
NAFTA: a brief overview
In 1994, the United States, Canada and Mexico entered into NAFTA – a free-trade agreement that expanded upon an earlier free-trade agreement between Canada and the United States. In addition to facilitating trade among the three participating countries, some other objectives of the agreement included economic integration and economic growth. In fact, Canada is currently one of the largest exporters of American goods and the second largest goods trading partner of the United States. Given these relations, the significance of NAFTA and its renegotiation for Canada, and the Canadian economy more specifically, is palpable.
Renegotiating NAFTA: the impact on Canadian private equity
As mentioned above, renegotiation of this agreement may affect multiple aspects of the Canadian economy, the private investment market in particular. Data from Pitchbook, a data and technology provider, reveal reductions in private equity (PE) deals in the first two quarters of 2017 , both in terms of the size and value of deals. Pitchbook attributes this trend to the impending renegotiation of NAFTA and suggests that the spectre of renegotiation or withdrawal may have caused PE investors to take, what it calls, a "wait-and-see approach" to investing. In the long-term, Pitchbook predicts that such an approach could be detrimental to the Canadian economy. However, the data also reveals that despite the apparent waning of the PE market in response to the NAFTA renegotiation or withdrawal, the industry as a whole has evidenced some growth. A probable factor contributing to this growth is Canada's increasingly robust technology sector, which Pitchbook notes, is a rather attractive source for PE investment activity. Nonetheless, given the private investor reticence instilled by these looming negotiations, further growth is unlikely and the implications for the PE market in Canada could be consequential. As the negotiations unfold, only time will tell.
For further reading on this topic, please see this post.
The author would like to thank Samantha Sarkozi, Articling Student, for her assistance in preparing this legal update.
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