Over the past 50 years, as geography, demography, consumer choice, business judgement, policy choice and more have rendered the trade and economic ties between Canada and the United States ever more intense, a small coterie of officials, academics, parliamen- tarians, and others has tried to keep alive trans-Atlantic ties that are now based mainly on sentiment and history. Spurred on by the romantic notion that God might have erred in placing Canada next door to the leading economy of the 20th century, they have repeatedly focused on what governments can do to reverse the steady downward spiral in Canada-Europe trade and economic relations.
Some parliamentarians and officials seem fixated upon a Canada-E.U. free-trade agreement as the key to reversing this decline. In the view of Parliament’s Foreign Affairs and International Trade Committee, a free-trade agreement would be a tangible way of altering the psychology of Canadian firms and getting them to look across the Atlantic for new business opportunities (see Crossing the Atlantic: Expanding the Economic Relationship Between Canada and Europe Interim Report of the Standing Committee on Foreign Affairs and International Trade, 6 June 2001). In our view, the continued attraction of a free trade agreement is a triumph of emotion over Canadian interests. In The Work of Nations (Vintage, 1992), U.S. scholar and former Secretary of Labor Robert Reich trenchantly observes that: ”œIn the life of a nation few ideas are more dangerous than good solutions to the wrong problems.” No solution fits this description better than a free-trade agreement with Europe.
Between 1949 and 1999, Europe’s share in total Canadian merchandise exports declined from 28.4 per cent to 5.1 per cent, while the U.S. share grew from 50.9 per cent to 85.8 per cent. During the same period, Canadian imports from Europe declined from 13.1 per cent to 8.7 per cent of total imports, while imports from the United States grew from 70.4 per cent to 76.3 per cent. These shifts occurred despite an increasingly elaborate network of con- sultative arrangements aimed at fostering the growth of eco- nomic relations with the E.U. and its predecessors.
The foundations for declining Canada-Europe trade and economic relations were laid in the years immediately fol- lowing the Second World War. The reality that faced Canadians was stark: British industry and citizens alike were in a parlous state, exhausted by war and broke. By contrast, in the United States industry and consumption were both running flat out. In 1947, the United States pro- duced half the world’s manufactures, pumped 61 per cent of its oil, and generated 43 per cent of its electricity. Canada had little choice about who to trade with. Over the next decade, the unreliabili- ty of the U.K. as a customer and supplier natural- ly led Canadian buyers and sellers to conclude that they were better off concentrating their efforts on more reliable prospects, thus reinforc- ing the natural forces favouring trade with the United States.
On the other side of the channel, Canada did not fare any better. Continental European markets had never been well developed by Canadian exporters and in the late 1940s were suffering from difficulties similar to those of the U.K.: weak demand and access problems flowing from dis- criminatory balance-of-payments measures. For most of the first decade and a half after the war, Europe developed along lines that emphasized Europe first. European discrimination meant that Canada was at the bottom of the list of potential suppliers, even in situations in which Canada had the right product at the best price. Europe’s first policy option was to do without, followed by pro- ducing goods domestically, buying them from another European supplier, buying them from the sterling area, buying them from the United States, or finally buying them from Canada. Even Eastern Europe was often a preferred supplier to Canada.
It is little wonder, therefore, that Canadians developed a taste for American-style cars, refrig- erators, televisions, movies, magazines, and more. Only a small proportion of Canadians insisted that cars not suited to Canadian winters, refrigerators not designed for Canadian shopping patterns, televisions not compatible with North American technology, and magazines that told European stories were preferable to the American versions of these goods. At the same time, Canadian efforts to sell more steel, paper, flour, and other processed commodities ran into the brick wall of Europe’s determination to buy its commodities in the raw and process them in Europe, or to rely to the extent possible on domestic or colonial resources.
The composition of Canada-Europe trade has remained virtually unchanged over the last 50 years. Canada mainly exports agricultural and unfinished primary commodities to the countries of the E.U. and imports machinery and equipment and high-end luxury goods. Canadian exports are largely undifferentiated by price and quality from goods that are readily available from other suppli- ers. E.U. exports, on the other hand, fill niches not easily supplied by others. In the early postwar peri- od, manufactured goods, especially from the United Kingdom, continued to hold a modest share in the consumer retail market, but this share steadily declined as Canadian consumers devel- oped a preference for products more suited to Canadian needs, tastes, and circumstances that were available in the preferred price and quality ranges from the United States and, starting in the 1960s, from East Asian suppliers.
European standoffishness thus reinforced rational decisions by Canadian business to favour U.S. markets and suppliers over European ones. The relationships developed during the first two postwar decades established patterns that could not readily be altered. Canadian business mostly invested its future in the U.S. market. The pri- mary growth markets in the expansion of Canadian exports"automobiles, aerospace, telecommunications, forest products, petrochem- icals, and agri-food to name a few"were in the United States, not Europe. Today, cross-border Canada-US trade covers virtually the whole range of goods traded internationally. Only U.S. firms and customers have shown any sustained interest in Canadian manufactured goods and high-end services. Moreover, a high proportion of these exports and imports"by some estimates as much as two-thirds"is intra-firm trade within corpora- tions organized on an integrated North American basis.
The major part of the increase in the U.S. share in Canadian trade occurred under the non- discriminatory rules of the General Agreement on Tariffs and Trade. (The exception was automotive trade, which was governed by the 1965 Autopact.) In the 1970s, attempting to reverse the growing Canadian trade dependence upon the U.S., the Trudeau government negotiated special consulta- tive arrangements with the E.U. that were intend- ed to be a political statement of the importance of trade and economic relations. Over the last quar- ter century, this agreement has spawned an impressive structure of biannual summits, regular ministerial meetings and numerous committees of officials working on a steadily expanding agenda of issues. The results, however, proved anemic: as the structure grew, bilateral trade shares declined.
The Canada-U.S. Free Trade Agreement (FTA) accelerated but did not fundamentally alter these trends. The FTA was a response to the forces of silent, or market-led integration, not an effort to stimulate policy-led integration. The transforma- tion of the Canadian economy from an east-west orientation to the more natural north-south con- figuration strongly suggests that resource endow- ments, proximity, business judgement, and con- sumer preference, reinforced by complementary cultural attitudes and regulatory frameworks, drove growing economic links between Canada and the United States.
Beyond the statistical evidence, there can be very little doubt that Canadians, faced with a choice between Europe and the United States in their daily decisions, overwhelmingly choose U.S. products. By almost every measure, the con- sumption of consumer durables, agrifood prod- ucts, cultural products, vacation destinations, employment and investment opportunities, or marriage partners, Canadians choose American. Moreover, public opinion polling demonstrates that Canadians are confident in this choice and perceive no need to choose or have the govern- ment choose a different partner for them.
The lessons implied by these statistical and historical trends suggest that neither Canadian business nor Canadian consumers have devel- oped a strong interest in E.U. products, while E.U. business and consumers appear even less interested in trade with Canada. Low levels of trade and investment are, in and of themselves, not a problem. There are good reasons why Canadians have increasingly exercised choices that have strengthened economic ties with the United States while weakening those with Europe, just as there are good reasons why ties within Europe have waxed while trans-Atlantic ones have waned. The evidence points strongly to the conclusion that over the past 50 years the presence or absence of preferential trading arrangements has not been a determining factor in shifting the centre of gravity of Canadian trade relations from Europe to the United States.
As noted, the Foreign Affairs Committee con- cluded that a Canada-E.U. free-trade agree- ment would be a tangible way of altering the psy- chology of Canadian firms and getting them to look across the Atlantic for new business oppor- tunities. The presence of an agreement would lead business on both sides of the Atlantic to make the necessary investments, ultimately ensuring that such an agreement would pay use- ful dividends to firms, consumers and workers in the two economies. In effect, the Committee believes a ”œbusiness case” can be made for a Canada-E.U. FTA.
In our view, a Canada-E.U. FTA would need to meet three broad criteria in order to achieve this objective:
First, it would need to provide Canadian business with market access in Europe that was equivalent to or better than it enjoys in the United States by virtue of the NAFTA. The most serious tariff barriers confronting Canadian exports to Europe are those in the agricultural, fisheries, and non-ferrous metal sectors. However, Canada already enjoys free access to the U.S. market for these products, except for some in agriculture, and obtaining the same treatment in the E.U. is unlikely to produce a shift in trade flows. E.U. exporters, for their part, face a range of tariff and non-tariff barriers guard- ing the Canadian market. On tariffs, U.S. exporters have largely free access to the Canadian market and the Europeans would achieve no gain from a free trade agreement. However, in some areas"Canadian anti-dumping and countervail- ing duties, tariffs on dairy and poultry products, government procurement policies favouring Canadian suppliers"excepted from the NAFTA, the Europeans and Americans face formidable barriers to the Canadian market. If the goal of a free trade agreement is to change business psy- chology on both sides of the Atlantic, both Canada and the Europeans would have to create preferences in favour of each other and against the United States; otherwise, there would be little or no commercial gain flowing from a Canada- E.U. free trade agreement.
Second, any agreement would need to ensure that the benefits arising from improved access to the other market were sufficiently large to over- come opposition from well-entrenched interests that may feel threatened by more open trading conditions. The political economy of trade nego- tiations has become considerably more compli- cated over the past decade. More than business interests now need to addressed. A wide spectrum of societal groups now consider themselves to be affected by trade agreements and seek a voice in their negotiation. Many of these voices are scep- tical about or simply opposed to many aspects of trade agreements. As a result, the political econo- my of trade negotiations now requires a very strong business case to offset the voices of dissent that will inevitably be raised.
Third, no Canada-E.U. agreement should undermine the continued high levels of prof- itable trade and investment between Canada and the United States, or between Canada and any other trading partners. Presumably, the objective is not to shift trade from one partner to another, but to add to existing levels of trade and eco- nomic activity. At a high level of generality, most Canadian business leaders would support such an agreement or, more accurately, would not be opposed to it. Opposition would mount, howev- er, as it became clear"and it soon would"that the price of securing these opportunities was to place existing trade relationships with the United States at risk.
Agriculture is a case in point. Canadian agri- cultural exports to the E.U. are effectively prohib- ited or at least severely impeded by the customs restrictions and domestic provisions of the Common Agricultural Policy. To meet Canadian agricultural export objectives, the E.U. would need to exempt Canadian products from these restric- tions. For its part, Canada would be expected to create similar exceptions for European exports to this country. The effect of such exceptions would be to discriminate against agricultural exports from the United States, Australia, Argentina, and many developing countries. The Europeans proba- bly wouldn’t be interested in such arrangements and Canada definitely shouldn’t be.
The controversy between Canada and the United States, on one hand and the E.U. on the other over genetically modified organisms (GMOs) is another illustration of the fundamen- tal differences at play. While Canadian regulato- ry practice is to approve new products unless there is compelling evidence of a risk to public health and safety, the E.U. has moved steadily towards the precautionary principle, which requires compelling proof of an absence of risk before approval. To meet Canadian objectives, the E.U. would need to accept Canadian GMO products while refusing similar or identical U.S. products. In the event that Canada accepted the precautionary principle, the E.U. would require that we withdraw regulatory approvals from products that are banned in Europe. If Canadian producers were not to suffer serious economic harm from the lost economic opportunity of producing such products for the Canadian and wider markets, they would have to be compen- sated by significant growth of such exports to the E.U. under preferential terms of market access. In any such negotiation, Canadian envi- ronmental groups strongly opposed to GMOs would support the Europeans, while Canadian producers would likely oppose en masse any agreement that threatened bread and butter mar- kets in return for the risky prospect of doing bet- ter in the E.U. market.
Unlike free-trade negotiations with small economies such as with Central America or the non-E.U. countries of Europe (Norway, Iceland and Switzerland), negotiations with the E.U. would be a major endeavour. Given the E.U.’s economic and political weight and its complex and frequently contentious economic relations with the United States, free-trade negotiations with Europe would carry major strategic implica- tions going well beyond the possibility of enhanced commercial opportunities for Canadian exporters in E.U. markets.
The first such implication is that a Canada- E.U. FTA initiative would call into question Canada’s strategic choice to accept the reality that it is a nation of the Americas. This choice flowed from a series of policy decisions taken in the 1980s and 1990s. The most significant was the decision to negotiate a free-trade agreement with the United States. The principal drivers of that decision were: a consensus within government and the private sector that continued reliance upon the multilateral trade system to achieve Canadian negotiating objectives would not be sufficient to meet the needs of the Canadian economy; the failure of the consultative arrange- ments with the Europeans (and the Japanese) to produce tangible economic benefits; and confi- dence that Canada could successfully avoid or limit the non-economic pressures of integration. The evidence of 12 years experience with the Canada-U.S. FTA constitutes an unambiguous rejection of the claims that the agreement would constrain Canadian foreign policy independence or result in the harmonization of Canadian values and preferences with the United States.
The decision to seek a North American Free Trade Agreement reinforced the choices made in the bilateral agreement. When Mexico and the United States agreed to negotiate a free-trade agreement, Canada was faced with a difficult choice: to stand aside and allow the United States to construct a hemispheric ”œhub-and-spoke” set of agreements, with Canada as the northern spoke, or to join in the construction of NAFTA, which would mark not only a further step away from the multilateral system as Canada’s princi- pal instrument of global trade relations, but inevitably lead Canada into a hemispheric net- work of preferential trade agreements. The subse- quent launch of negotiations for a Free Trade of the Americas Agreement, the Canada-Chile and Canada-Costa Rica Free Trade Agreements, and the current negotiations for such agreements with four Central American countries is evidence of Canada’s irreversible commitment to a hemi- spheric future.
Canada’s decision to join the Organization of American States (OAS) was another step forward in acceding to geographic realities. Since the founding of the OAS, Canada had maintained observer status, giving it eyes and ears but not a voice in the affairs of the hemisphere. Having now become a member, Canada has thrown itself into the task of carving out a distinct place for itself. In a few short years Canada has succeeded in defining an identity in hemispheric affairs that provide a new and expanding ”œspace” for foreign and commercial policy.
Second, the entry into force of the Canada- U.S. FTA, and subsequently the NAFTA, amounted to a strategic Canadian decision to accept the American ”œacquis” or model in the governance of bilateral trade and related domestic economic reg- ulation. Across a broad range of commercial poli- cy"tariffs and related programs including rules of origin, product standards, trade remedies, invest- ment, intellectual property rights, and more" Canadian policies, practices, and procedures are now aligned with those of the United States. To be sure, significant differences remain in a few areas but these are less numerous and less important in commercial terms than the differences that exist between Canada and the E.U. For the most part, the negotiating challenge in dealing with the United States lies not in effecting major policy changes but in making administrative adjust- ments"for instance, harmonizing external tariffs where there are only small variations in current Canadian and U.S. MFN tariffs, which would allow the elimination of rules of origin.
The conclusion of a Canada-E.U. FTA that met Canadian objectives would to all practical purposes constitute Canada’s acceptance of the ”œacquis communautaire” in any area of commer- cial regulation where serious differences exist between E.U. and Canadian policies, practices, and procedures. The E.U. has long required that countries entering into European Economic Agreements accept the European ”œacquis,” whether or not they are seeking entry into the E.U. It is virtually certain that the Europeans would be unwilling to grant more favourable treatment to Canada. The more that Canada refused to align with the acquis, the fewer would be the commercial benefits arising from an agree- ment. The more that Canada accepted the European acquis, the greater would be the differ- ences between Canadian and U.S. policies, prac- tices, and procedures, which would bring severe consequences for Canadian access to the U.S. market. It is hard to see why any Canadian government would contemplate an agreement that would place 85 per cent of its trade at risk in order to enhance prospects for what now amounts to five per cent.
A Canada-E.U. FTA initiative would also be incompatible with the broad move towards cross- border regulatory convergence with the United States that has followed from the events of 11 September. The principal Canadian objective since the terrorist attack has been to remove obstacles to Canadian exports to the United States. While it would be premature to suggest that these efforts will lead to negotiations for a new and far-reaching commercial agreement between the two countries, this possibility should not be excluded. Any Canada-E.U. initia- tive that undermined U.S. confidence in Canada’s readiness to devise new arrangements to achieve an open border should thus be weighed with great care.
A final difficulty is that most of the major issues on an FTA negotiating agenda between Canada and the E.U. also constitute the list of commercial policy differences between the E.U. and the United States. In these issues, Canadian commercial interests with the United States exceed Canadian commercial interests with the EU by a wide margin. A decision to pursue an FTA with the E.U. would be tantamount to, and would be perceived as such by U.S. interests, as a shift away from resolving them with the United States and towards resolving them on a preferen- tial basis with the E.U. The creation of reciprocal preferences between Canada and the E.U. could thus create serious trade disputes between Canada and its major economic partner.
The value of our exports of goods and servic- es is now equivalent to more than 45 per cent of the total gross national product of the Canadian economy. The rise in this trade dependence from a level of 25 per cent just 15 years ago is primari- ly due to the restructuring of the Canadian econ- omy along north-south lines and to strong eco- nomic growth in the United States. Canadians have derived considerable benefit from econom- ic integration with the United States. These ben- efits are measured in terms of employment, income, and production. Over the last 20 years, the United States has achieved an average growth rate of 3.0 percent in its GNP. By contrast, the E.U. as a whole has recorded an average growth rate of 2.2 percent, a small difference on an annu- al basis, but one that has made a significant cumulative difference. The principal drivers of U.S. growth have been its flexible, dynamic eco- nomic structure while the principal impediment to faster E.U. growth has been and continues to be regulatory rigidity. Based on past performance and future growth prospects, Canada’s strategic economic interest clearly lies in the removal of obstacles to economic integration with the United States, which will remain Canada’s princi- pal economic partner for the foreseeable future.
The NAFTA and potential future trade agree- ments with the United States enjoy the enthusiastic support of the Canadian business community. By contrast, Canada-E.U. FTA initia- tive would draw at most lukewarm interest. The disruption to cross-border trade in the fall of 2001 reinforced the long-standing, strong preference of Canadian business that Ottawa focus its negotiat- ing priorities upon resolving a host of cross-border commercial issues with the United States. In either new bilateral or multilateral agreements, Canadian business would have an overwhelming preference for arrangements that produce improvements in their access to the United States. While Canadian business would welcome improvements in com- mercial opportunities in the EU, it would almost certainly regard such opportunities with Europe as residual and supplementary to exploiting opportu- nities in the U.S. market. Any initiative with the E.U. that threatened current and potential future commercial arrangements with the United States would therefore encounter vigorous and vocal opposition from Canadian business.
Although Canada’s relations with Europe and other regions of the world are not without importance, the long-term trend is clear: Canadian geopolitical and economic priorities are in the Americas. There is now no serious argument that the relationship with the United States is the indispensable anchor of Canadian foreign policy in all its dimensions. Only with the Americans does Canada have a relationship embracing virtually the whole range of public policy, economic development, and human con- tact. The principal foreign policy challenge for Canada is to manage the forces of silent integra- tion so as to draw maximum benefit from it. A new accommodation with the United States is essential to releasing the political energies need- ed to chart a new course for Canada’s global for- eign and commercial policy. Any efforts to initi- ate discussions with the E.U. would at best con- stitute a diversion from this important task and, at worst, confuse both Canadians and Americans about Canada’s interest in reaching a mutually beneficial accommodation.
A number of motives seem to underpin con- tinued fascination with the idea of a trans- Atlantic accord in Canadian political, official, and academic circles: unfounded fears that Canada has placed all of its eggs in the U.S. bas- ket and should diversify its trade and economic relations; a conviction that consumer preference and business judgement are wrong and need to be re-oriented with government help; romantic notions that ties of sentiment and history should count at least as much as those of geography and economic common sense; and concern that Canada is one of the few countries with which the E.U. does not have a preferential relationship. None of these motives, however, can withstand close scrutiny.
Is there then a Canadian business case for a Canada-E.U. FTA? Our analysis indicates there is not. Unfortunately, the problems in our economic relations with Europe do not appear to be readily amenable to resolution through bilateral negotia- tions. More to the point, if they could be resolved bilaterally, doing so likely would raise far graver problems in trade and economic relations with the United States, thus placing at risk the mainstay of Canadian prosperity. If anything, there is a strong business case against an FTA with Europe.