To date Canadians know little of the trade policy of the Harper government beyond the settlement on softwood lumber it has secured with the United States. Trade policy is not among the government’s top five priorities and it received no mention in the April Throne Speech. The Conservative Party Policy Declaration is simi- larly uninformative, stating:
A Conservative Government will bring more security to existing trade related jobs. To create new employment opportunities, our trade agenda will focus on diversify- ing both the products we sell abroad and the markets into which we sell those products. A Conservative Government will secure access to international markets through a rules based trading system. A Conservative Government will strive to maximize the benefits we have as a free trading nation, emphasizing the need to establish trading relationships beyond North America.
Such a statement is no more than a placeholder and falls squarely within Canadian trade policy orthodoxy. Trade Minister David Emerson’s speeches ”œGateways, Trade and Competitive Success” in April and ”œShaping a Global Commerce Agenda for Canada” in June similarly covered some safe bases: the World Trade Organization (WTO) is a priority; NAFTA is important; Canada is developing strategic partner- ships with China, India and Japan and negotiating a free trade agreement with Korea. In fact, there is not much to distinguish these positions from those set out in the 2005 International Policy Statement of the Martin government, a document now happily consigned to the government’s archives.
In short, Canadians have few clues to date whether the Harper government will:
favour multilateral or regional/bilateral trade and investment negotiations;
if the former, invest in a major effort to revive the WTO’s defunct Doha Round of multilateral trade negotiations; or,
if the latter, pursue an ambitious agenda by overcoming thedomestic opposition to the outstanding agreements with the remaining members of the European Free Trade Associ- ation (EFTA) and Central America, continuing with Korea and finding new bilateral partners with which to negotiate comprehensive bilateral trade agreements; and/or
seek a NAFTA-plus agreement with the United States up to and including a customs union.
One point is clear: asking whether the Harper government should favour multilateralism or regional- ism/bilateralism as the central theme of Canadian trade policy is to ask the wrong question. We should take heed of Robert Reich’s warning: ”œIn the life of a nation few ideas are more danger- ous than good solutions to the wrong problems.”
To be sure, the global trade policy environment is not propi- tious. The Doha negotiations are in a deep stall. On trade, the G8 Summit’s St. Petersburg declara- tion essentially repackaged the WTO Ministerial Declaration adopted at Hong Kong in December 2005. The frenetic activity in Geneva in July was inversely proportional to the prospects of substantive results emerging in the foreseeable future. It has now dawned on the players that this negotiation does not matter that much. Most governments seemed happy to let the round stumble along indefinitely without having to take any tough domestic deci- sions. Ministers were prepared to let their officials continue to go through the motions, but were at pains to avoid becoming asso- ciated with failure.
WTO Director General Pascal Lamy has now accepted this reality and suspended negotiations until such time as the major players signal a willingness to engage the difficult issues. For reasons outlined below, the prospects of that happening in the foreseeable future are slim.
The proposal for a Free Trade Agreement for the Americas (FTAA) has run aground on the incompatibility of Brazilian interests and US political reali- ties. It was already clear five years ago that Brazilian ambitions for regional hegemo- ny clashed with a US-dominated hemi- spheric free trade agreement. At the same time, US political realities assigned high political costs and low political or eco- nomic gain to an FTAA that opened the US market further to competitive Latin American agriculture and other products. While some countries ”” Venezuela, Bolivia and, potentially, Ecuador and Peru ”” are veering off into nationalist adven- tures uncongenial to trade liberalization, others are seeking and obtaining bilateral free trade agreements with the United States. In these circumstances, the prospects of breathing life into the FTAA are virtually non-existent.
Asia-Pacific free trade negotiations effectively died with the Asian financial crisis in 1997. Major countries in the region ”” Australia, China, Malaysia and Korea ”” are placing their negotiat- ing priorities on either interregional trade arrangements or free trade agree- ments with the United States. Inertia maintains the habit of regular meetings among officials, but ministers are no longer politically engaged. Whatever broader purposes Asia-Pacific Economic Cooperation (APEC) continues to serve, free trade is not among them.
Interest remains high in the con- clusion of bilateral free trade agree- ments. The United States, China, Korea and Australia, among others, have been launching and concluding such agree- ments at a rapid pace. Trade Minister Emerson acknowledges that Canada has fallen far behind others, as the only major trading country not to conclude a bilateral free trade agreement within the last five years. But as the EFTA,
Central American and now Korean negotiations demon- strate, it is easier to initiate than to conclude such minor agree- ments. In the absence of strong support from a business com- munity with a commercial stake in their outcome, such initia- tives are too easily hijacked by dug-in protectionist interests, from shipbuilders to clothing and auto manufacturers.
Initial interest in the 1990s in concluding a transatlantic free trade agreement involving Canada and the European Union (EU) gradually morphed into the nebulous pursuit of a Canada- Europe Trade and Investment Enhancement Agreement. In effect, this initiative dusted off a project of now 40 years’ standing of finding some way to interest European traders and investors in Canada. Like its various pred- ecessors, it generates little inter- est in either the Canadian or European business community and has become little more than a mandate for officials and ministers to make periodic pilgrimages to Brussels and other European capitals to learn that the global trade regime offers the only reliable base upon which to pursue improvements in transatlantic trade and investment conditions.
The unpleasant reality is that the Harper government inherited a Canadian trade policy that has effective- ly ran out of steam: there is no economic or commercial market in Canada for multilateral or regional trade agree- ments, and no political market for addressing pressing matters in the rela- tionship with the United States. The voice of the business community on trade policy is muffled, dominated more by sectoral ”œblockers” than by more broadly based promoters of trade liberal- ization. For most of Canadian business, only the US market is relevant; the rest of the world may be interesting but residual, and the government’s touting of the opportunities in emerging mar- kets, notably China and India, evokes little more than polite interest.
The Liberal government abandoned a long-standing and reasonably effective consultative mechanism with the busi- ness community in favour of a politically correct but ineffective consultative mechanism with civil society groups. No replacement has been created for effective dialogue with the business community as a whole. The conse- quence is a trade policy that is short- term and responsive to narrow interests rather than longer-term and creative.
There is clearly a need for some new thinking about the direction and con- tent of Canadian trade policy. The best evidence of the need for new thinking consists not of what Canadians can see and hear but of what they cannot see or hear ”” rather like Sherlock Holmes’s dog that didn’t bark.
Exhibit 1 is Canada’s absence from the inner group at the Doha Round. In the not-too-distant past, Canada was a player, a member of the directoire of the US, the EU, Japan and Canada that ran the WTO. India, Brazil and Australia have now displaced Canada from the inner core. One could blame this sad state of affairs on Canada’s implacable defence of supply management for the dairy and poultry sectors, a stance unanimously endorsed by the Conservatives, the Liberals, the NDP and the Bloc. In truth, Canada is no longer a player because it has little to contribute to ”” or to gain from ”” multilateral trade negotiations.
Individual Canadian ministers and officials may still play a December 2005 Hong Kong Ministerial Conference was by wire stories and stringers, if at all. Canada is participating out of habit rather than in pursuit of important political or economic objec- tives. In this it is not alone. The mature global trade regime has made a signifi- cant contribution to the prosperity of those members who have taken advan- tage of its rights and obligations. For those members who have not, the option to take up those rights and obligations remains, whether or not there are negoti- ations. The prospects for additional eco- nomic benefits from negotiations for both groups, however, are now marginal. For Canada, the best that can be obtained from the Doha negotiations ”” should they be restarted ”” is modest improve- ments in market access for a limited range of products and services, assuming that they are achievable without under- mining supply management.
Exhibit 2 is the failure to complete the negotiation of free trade agreements with the rump of EFTA (Norway, Iceland, Switzerland and Liechtenstein) and the Central American four (Guatemala, El Salvador, Nicaragua and Honduras) in the face of small pockets of politically significant opposition ”” shipbuilding in the former and clothing in the latter ”” and indifference from the broader busi- ness community. The current bilateral negotiations with Korea, facing well- organized opposition from the auto sector, are already in trouble and face a dif- ficult uphill struggle if they are to con- clude. The discussions with Europe have reached an impasse in the face of mas- sive business indifference on both sides of the Atlantic. Embarking on an ambi- tious program of new bilateral negotia- tions with other minor trading partners, while keeping trade officials busy, would create still more such hostages to fortune and bring few benefits to Canadian eco- nomic performance.
Exhibit 3 is the failure of the Canada-US/North American Free Trade Agreement to advance beyond a tradi- tional free trade agreement, notwith- standing publicly stated ambitions that it should evolve with the times. The FTA/NAFTA Ministerial Commission, in which high hopes were invested, has been little more than a technical body from its beginnings in 1989. The bitter bilateral softwood lumber dispute has done considerable damage not only to broader Canada-US relations but to the reputation and credibility of NAFTA.
Exhibit 4 is the Canada-US Smart Border Declaration adopted in the after- math of the tragedy of 9/11. Here the two governments grasped hold of the trade/security nexus and adopted a plan of action to address a set of old and new challenges. The declaration states the obvious point: ”œPublic security and eco- nomic security are mutually reinforc- ing.” It then sets out four areas for intensive cooperation: the secure flow of people, the secure flow of goods, security infrastructure and coordina- tion, and information sharing. What the declaration does not do is propose NAFTA or the WTO as a suit- able vehicle for addressing these issues.
Exhibit 5 is the treat- ment of economic issues in the Security and Prosperity Partnership of North America, adopted by the Martin government in 2005 and renewed by the Harper government in 2006. Negotiating a NAFTA-plus or any other form of trade agreement is nowhere to be found among the consider- able number of initiatives endorsed by Canada, the United States and Mexico. Instead, the three governments maintained their interest in finding solutions to a range of border- related trade and security problems without invoking the instrument of a trade agreement.
Exhibit 6 is the fact that the Canadian business community, hitherto strong supporters of the FTA and NAFTA, is also looking for new answers that make little mention of new bilater- al trade agreements. As regards the United States, transportation and border infrastructure, regulatory cooperation, energy and environmental strategy and development of continental approaches to managing shared risks, including ter- rorism and pandemics, top the priorities of the Canadian Council of Chief Executives and are echoed by the Canadian Chamber of Commerce and the Alliance of Manufacturers and Exporters.
Exhibit 7 is that the Canada-US bor- der has become dysfunctional to the deeply integrated bilateral trade and investment relationship. US preoccupa- tion with security against terrorism has steadily thickened the border, adding costs to doing business and creating dis- incentives to investment in Canada. There is no comprehensive bilateral useful role on the margins of meetings, but Canada is not engaged because it has no serious stake in the negotiations. The Canadian business community is massively uninterested. The Canadian media coverage of the mechanism for cross-border cooperation on security issues, no clear rules for defin- ing the boundaries between cooperation and unilateral action, no procedures other than ad hoc responses to resolving security issues such as the impending US requirement for cross-border travellers to have passports or alternative identity documents.
The first thing to do is to understand the problem. Elements emerge from an examination of the governance of Canada-US trade and economic relations. The
original Canada-US Free Trade Agreement responded to a mixture of the classic trade policy issues of tariff and non-tariff barriers to merchandise trade and the new issues of services, investment and temporary movements of skilled per- sonnel. Its successor, NAFTA, similarly comprised a mixture of old and new issues and brought intellectual property disciplines within the ambit of trade agreement rights and obligations. These agreements, like the multilateral WTO, assume that international trade consists of exchanges between unrelated parties operating in two separate markets. Their focus is largely static rule-making cen- tred on the cross-border movement of goods and, latterly, services. Today, the importance of intrafirm trade ”” some two-thirds or more of the total between Canada and the United States ”” and trade in intermediate products as part of integrated supply chains creates a set of issues that need to be addressed but are beyond the scope of conventional trade agreements.
Further elements of the problem emerge from common themes in the Canada-US Smart Border Declaration, the North American Security and Prosperity Partnership and the priori- ties of Canadian business. Although these address North American trade and investment issues, they may be taken as proxies for the trade policy challenges facing the Harper govern- ment. One common theme is border management. With 45 million trucks and 200 million individuals crossing the Canada-US border annually, a dys- functional border poses serious long- term risks to the Canadian economy.
The second is regulatory conver- gence. As between Canada and the United States, regulatory differences are more matters of detail and implementa- tion than of fundamental design, but they nevertheless affect trade and invest- ment decisions. Whatever the merits of separate regulatory regimes, the econom- ic costs of such differences are rising. It is evident that traditional trade negotia- tions, whether pursued through the WTO, regionally or bilaterally, provide a way to address these kinds of issues.
A third source illustrating elements of the problem arises from the signifi- cance of global supply chains as drivers of trade and investment. In his April speech, Minister Emerson observed that ”œwe’re into a world where trade patterns and trade performance are going to be very closely related to the operation of global supply chains, and those are going to be deeply integrated chains, and they’re going to be globally distributed.” The most critical supply chains in which Canadian companies participate are North American, from autos and infor- mation technology to steel, energy and food processing. It follows that preoccu- pations with regional or bilateral trade relationships beyond North America or, as the Conservatives put it, ”œnew prod- ucts and new markets” are obviously misplaced. Developing strategic partner- ships with China and India, pursuing free trade agreements with Korea and others or concluding a Canada-Europe Trade and Investment Enhancement Agreement has little economic value unless it contributes to Canadian partici- pation in North American supply chains. And that participation depends critically on configuring the North American rela- tionship to 21st century trade and invest- ment realities.
The Canadian economy has per- formed well over the past two decades as entrepreneurs in every sector have adapted to new North American and global realities. Canada has been a leader in the OECD in creating net new jobs. The Bank of Canada has succeeded in keeping inflation under control, even as the economy has performed at close to full capacity. Exports as a share of pro- duction peaked at 45 percent of GDP in 2000. Since then, domestic growth has outpaced growth in trade, bringing exports down to about 36 percent. Most of these exports have gone to the United States, as Canadian firms have become more integrated into North American supply chains and see their participation in these networks as critical to their future. Imports, on the other hand, have become more diversified as Canadians ”” both as producers and consumers ”” look to global sources to satisfy their needs. There is little evidence that govern- ment direction has been critical to determining these patterns. They reflect market judgments by Canadians both as consumers and as producers. Government’s role has been to facilitate these judgments by removing artificial barriers and concluding agreements underwriting market access. Policy ”” as opposed to political rhetoric ”” has fol- lowed the market, not the other way around, and Canadians have benefited from this approach.
There remain barriers to realizing the full potential of the Canadian econ- omy. Some of them lie in foreign mar- kets. More of them reside in Canada. For those Canadians who worry about the productivity gap between Canada and the United States or who complain that Canada is not getting its ”œfair” share of North America’s foreign direct investment, the solution lies in chang- ing Canadian policy choices. Limiting foreign participation in the financial services, communications and energy sectors, for example, both lowers Canadian productivity and reduces for- eign participation in the Canadian economy. Mollycoddling the dairy and poultry sectors costs Canadian con- sumers millions of dollars. Federal and provincial labour-market and income- support policies reduce the pace of adjustment to changing comparative advantage and global competitive con- ditions. There may be good social and political reasons for these policy choic- es, but their negative economic effects cannot be ameliorated through trade and investment negotiations with for- eign partners unless Canada is prepared to accept new rules disciplining these choices.
The politics of trade in a Canadian context, all the more with a minor- ity government, necessarily informs any policy direction. Since before Confederation, trade issues, especially with the United States, have had the potential to rise to the top of the politi- cal agenda. In the elections of 1891, 1911 and 1988 and, more recently, with beef and softwood lumber, trade issues have become proxies for assessing the overall relationship with the United States. Trade initiatives, which boldly challenge the uncertain and colonial view that Canadians have of themselves vis-aÌ€-vis the Americans, are unlikely to emanate from a minority government, which in any case has yet to demon- strate that it has firmly held convictions on Canadian trade policy and for which the settlement of the softwood lumber dispute may be the limit of ambition.
Against this background, there are a number of serious questions that those interested in the future course of Canadian trade and investment policy and their impact on economic perform- ance need to ask:
What kind of an economy do Cana- dians want? Trade policy is an instrument of domestic economy policy. Where serious trade and investment barriers remain ”” agri- culture, automobiles, shipbuilding, culture, telecommunications and financial services, to name a few ”” they are part of the domestic reg- ulatory framework intended to pamper and protect some sectors of the Canadian industry.
Much Canadian debate on such issues is driven by rhetoric rather than serious analysis. The internal government capacity to undertake such analysis is weak. Has the time come for a royal commission to inform public debate by delineating the options much the same way as the Macdonald Commission (the Royal Commission on the Econom- ic Union and Development Propects for Canada) did in the 1980s?
Are Canadians ready for a Schen- gen-like border solution with the United States, similar to the agree- ment governing most intra-Euro- pean movement of people, goods and services? That is, accelerating and completing the transfer of enforcement of public policy func- tions from the border to behind the border, as we do for air traffic and many other areas? Or do they think that Canadian sovereignty and security require uniformed officers at border points interro- gating every person who crosses the Canada-US border?
Can Canadians agree to a proce- dure on regulatory convergence whereby Canadian regulators would be required to consult with US regulators prior to implement- ing new regulations and declare publicly why Canada needs to have different rules? Should this be done on an incremental basis or is a more comprehensive approach the best option? Or do they think that Canadian sovereignty requires that Canadian regulations be different?
Can Canadians agree to create a comprehensive Canada-US mech- anism for cross-border coopera- tion to convey structure and form to the vast network of formal and informal networks of collabora- tion which officials and some- times ministers have devised to meet specific needs? Should the two governments develop a new institution, modelled perhaps on the International Joint Commis- sion, as a permanent source of advice and recommendation to both governments on all cross- border trade and economic issues?
Answers to these questions should inform the design and pursuit of Canadian trade policy in the immediate future and would provide any govern- ment with sufficient challenge to keep its trade and allied officials busy for years to come, making the kind of difference that earlier officials made in negotiating GATT, the Autopact, the FTA, NAFTA and the WTO. In the absence of answers, officials will continue in the default posi- tion of incremental resolution of the most pressing Canada-US trade and bor- der problems and the pursuit of margin- al but resource-hungry global, regional and bilateral negotiations with minor trade and investment partners. As in the past, major initiatives have the potential for major impact, while minor ones will have, at most, a marginal effect.
Canadians cannot, of course, end- lessly debate the question of the rela- tionship with the United States. One day, the US government will be entitled to ask Canadians some pointed ques- tions about how they see the evolution of the relationship. Finding an answer big enough to interest American politi- cians and not so big as to frighten Canadian politicians will tax the imag- ination of officials and others interest- ed in Canadian public policy. The Harper government has abandoned distance and animosity as a default position for the management of the relationship with the United States and brought maturity and perspective in its place. We see this as a hopeful sign.