Canada needs a plan B for trade. On the one hand, Donald Trump’s election in the United States means a rocky road ahead for trade in Canada’s largest export market. On the other hand, the manner in which Canada acquitted itself in the recent struggle to conclude the European Union agreement has created a perception of Canada as a reliable negotiating partner.
While Trump’s election will directly challenge key elements of Canada’s existing trade environment, there are also new opportunities. The combination of these two factors makes a compelling argument for a new policy to mitigate new risks and to seize new opportunities.
Trump’s threats to renegotiate or even pull out of the North American Free Trade Agreement (NAFTA) are of concern, given that over 76 percent of Canada’s exports, or 90 percent of Alberta’s and more than 50 percent of BC’s, go south.
Possibly as soon as his first day in office, Trump is also likely to tear up Canada’s only other card on the table to diversify its trade — the Trans-Pacific Partnership (TPP) agreement. The TPP is the only active trade negotiation Canada currently has with Asia.
To come into force, the TPP requires ratification by six of the bloc members, which must represent 85 percent of the membership’s GDP. In other words, Japan and the United States must ratify the agreement. That has gone from a long shot in the United States to having no chance, with Trump’s election. Trump has repeatedly criticized the deal, calling it a “death blow to American manufacturing” and a “disaster.” Given Trump’s long history of decrying trade agreements and his ability as president to operate unilaterally on trade, expect him to carry out his threats on the TPP and NAFTA.
Canada’s federal government now needs to think about a post-TPP “plan B” and take control of Canada’s trade fate.
Canada currently has 11 full foreign trade agreements. Of these, only 5 are with countries that rank among the world’s 50 largest economies and just 1 is with an Asian economy. Effectively, the TPP would have given Canada 7 new trade relationships in Asia.
Losing the TPP will put Canadian firms at a competitive disadvantage in Asia. The Americans have 14 trade agreements, including 3 in Asia. Japan has 15, Australia has 11, Singapore has 14, Malaysia has 8, New Zealand has 11, and Chile has 21 trade agreements, with 6 covering Asia.
The Trudeau government may have the beginning of a process to start something with China. It took Australia nearly a decade to conclude a shallow agreement with the Chinese. Good trade agreements take years, even a decade, to complete.
An effective, clear-eyed and focused trade strategy is no longer a luxury. We think this plan B should include five key components.
First, any near-term plan must start with China. Prime Minister Justin Trudeau and Premier Li Keqiang recently have both made statements about the desire to launch negotiations for a free trade agreement (FTA). These talks ought to begin as soon as possible, since a completed deal would, based on Australia’s experience, likely be as much as a decade away.
Second, Canada should build on the TPP negotiations and sign bilateral trade agreements with TPP signatories wherever possible, starting with Singapore. Since bilateral negotiations with Singapore were well advanced before they were put on hold for TPP talks, a new two-party agreement could be possible in relatively short order. Singapore is also the world’s 35th largest economy and a major centre for trade in services, which is vital if Canada is to balance its reliance on trade in commodities.
Canada should also consider bilateral agreements with other TPP parties in ASEAN, including Vietnam and Malaysia. These are likely to be easier to negotiate and conclude than deals with other states in Southeast Asia, since many of the key issues have been addressed in the context of the TPP. Each completed agreement gives Canadian companies a foothold in Asia and access to opportunities and preferences that firms from countries without a free trade agreement do not have.
This strategy of building up agreements with individual ASEAN countries before proceeding to a possible ASEAN-wide trade deal is one that has been followed by others, including the European Union. Negotiations with a 10-member bloc are going to be more time-consuming and difficult, especially as the level of interest among ASEAN members in negotiating with Canada is likely to vary. Getting good, strong agreements with key ASEAN economies would facilitate and improve negotiations with the entire bloc.
Australia and New Zealand are both TPP parties, but negotiating bilateral agreements with them could present some challenges. Australia is a competitor of Canada’s in many goods areas, but a modern, second-generation agreement with Australia that focuses on investment and trade in services might open the door to greater business cooperation, joint-ventures and partnerships in Asia. A similar agreement with New Zealand could prove even more beneficial, but would probably not be possible until Canada changes its dairy-subsidy regime.
A third element of Canada’s strategy — this would not be a quick win — would be to re-open negotiations with Japan, which were also put on hold during the TPP negotiations. Bilateral talks with Japan were long and difficult and will probably continue to be so. Many of the concessions that Japan made to Canada in critical areas such as agriculture and autos in the context of the TPP might not be on the table this time around.
Without the prospect of gaining better access to the US market, Japan might not have many incentives to make these concessions to Canada. Japan already has access to the North American market through its decades-old agreement with Mexico, and Japan’s post-TPP focus may be on negotiating with the United States.
But now, with Donald Trump in the White House and the possibility of Japan negotiating a trade agreement with the US now dubious at best, negotiating with Canada should be more appealing to Japan.
Fourth, Canada’s plan B should not invest its limited resources in negotiating with countries where a payoff is not likely in the medium term, or where the returns on investment will be too small to be worth the effort for now.
One trade negotiation that does not appear to make sense for current investment of resources is longer-term negotiation with India. While it may be worth the time to hold negotiations on specific sectors, it is not worth the time to engage on a broader agreement. In the area of tariff reduction, India’s standing opening offer is poor. It also appears that India lacks the interest and political will to negotiate and sell an agreement with Canada at home. Canada has seen this movie before, in the failed attempts to negotiate a trade agreement with Brazil, a country that had no real interest in Canada, even after the Canadian government showed a clear desire to reach out to that country. Canada needs to focus its resources and efforts on negotiations that will provide real benefits for Canadian companies.
Fifth, in all this attention to Asia, Canada should not forget the importance of this side of the Pacific, and especially the American market. With Donald Trump in the White House and the rising anti-trade, “rip up NAFTA” sentiment in the US, Canada will have to spend more time and resources retaining its market share and fighting off trade irritants with the Americans. The resources, at the federal and provincial level, will have to increase and should roughly equal what is put into opening markets in Asia.
Finally, serious resources and attention need to be devoted to trade education and promotion in Canada. While recent polling shows that the majority of Canadians have generally favourable views toward trade and trade agreements, the surest way to lose that majority is to do what the Americans have done: not proactively make the case for trade, and allow misinformation to go unchallenged.
It is important that we have a balanced discussion on the benefits and costs of trade agreements. That means acknowledging their potential negative impacts and proposing realistic, believable policy responses.
Our trade policy cannot be aspirational or progressive; for engagement around the Pacific it must first and foremost be realistic.
As Canada crafts a smart, sensible plan B strategy on trade, it will need to think about its priorities and consider what is desirable as much what is feasible, and what is needed as much as what is politically expedient.
The clock is ticking.
Photo: Pete Spiro / Shutterstock.com
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