Events in recent years have shifted the geopolitical sands in significant ways.
U.S.-China relations are a case in point. The United States granted permanent normal trade relations to China and joined other World Trade Organization (WTO) members in supporting its accession to that organization 25 years ago.
But by 2018, the two countries were embroiled in a trade war and in 2022, U.S. Secretary of State Antony Blinken called China the “most serious long-term challenge to the international order.”
Relations with Russia have taken a similar trajectory. As a member of the G8 from 1997 to 2014, Russia enjoyed a co-operative though uneasy relationship with the U.S. and Europe, including as a major supplier of energy to the European Union.
But relations frayed with the 2014 annexation of Crimea. Russia’s 2022 invasion of Ukraine brought war back to Europe’s doorstep. Among the economic consequences: supply-chain disruptions, especially for food and energy; sanctions on Russia; and a possible Russia-China alliance against NATO and its allies.
The coronavirus pandemic, officially stretching from 2019-23, compounded the effects of this “geopolitical turn,” exposing a range of social and economic vulnerabilities and inequities, with consequences for trade, health and security policies.
Amid these changes, it is clear that international trade and economic priorities are also shifting. From a conceptual standpoint, one can understand these shifts through two lenses – vertical or horizontal.
A vertical shift suggests a reordering of policy goals. The rank-order hierarchy of neo-liberal policy objectives – consolidated over decades of globalization – put multilateralism and trade liberalization at the top for many countries. In a vertical shift, these priorities drop, to be replaced by security, climate change and/or human rights.
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In a horizontal shift, policy priorities do not swap positions in a rank-order list. Instead, governments work to simultaneously achieve multiple policy objectives, some of which are in tension with one another. The challenge is to define acceptable trade-offs.
The horizontal shift drives home not only the challenges of reconciling the tensions between trade liberalization and priorities such as human rights, climate change and security. It also shows the complex web that these issues form with one another. In the horizontal conceptualization, trade liberalization is one of several policy priority nodes.
Canada has yet to tip its hand on how it will navigate these shifting sands. For its part, the EU seems to be opting for a horizontal shift while the U.S. has moved toward a vertical shift. What should Canada do in the face of these moves by key allies?
The European Union’s horizontal shift
In its 2023 European economic security strategy, the European Commission explicitly committed to enhancing “the EU’s economic security while upholding the openness of trade, investment, and research for the EU’s economy.”
It vowed to focus on “minimising the risks in the context of increased geopolitical tensions and accelerated technological shifts, while preserving maximum levels of economic openness and dynamism.”
This horizontal effort to seek multiple objectives simultaneously seems also to be reflected in the EU’s open strategic autonomy policy. The EU has certainly adopted an industrial-policy approach in key sectors while a recent council report asserts the importance of ensuring that strategies for confronting geopolitical challenges do not sacrifice the benefits of openness.
The United States’ vertical shift
By contrast, the actions of former president Donald Trump and President Joe Biden suggest a vertical shift in U.S. trade-policy priorities.
Trump surprised rivals and allies alike when he imposed tariffs. In many respects, Biden continued his predecessor’s approach, including a refusal to fill vacant positions on the WTO’s appellate body. Recent U.S. trade policy amounts to what some have called a “paradigm shift,” evidenced by the focus on workers and a stated preference for resiliency over efficiency.
Biden does not have trade-promotion authority from Congress. But there is little evidence he would be negotiating new trade agreements even if he did. He and his team have expressed displeasure with the current economic world order and called for a “new Washington Consensus.”
Neo-liberal free trade has skeptics in both major U.S. political parties. Furthermore, several domestic U.S. policies suggest a reordering of priorities, including the 2022 CHIPS and Science Act, which focuses on domestic job creation, resilient supply chains and the tech rivalry with China.
What about Canada?
As a trade-dependent nation, a vertical shift does not seem possible. Trade openness remains critical to the Canadian economy. Which approaches – old and new – might then serve Canada following the geopolitical turn?
Trade diversification: The federal government has been preoccupied for decades with shifting Canadian exports away from the U.S. Yet, the proportion of exports to the U.S. has only risen, reaching more than 75 per cent in 2023.
A spate of trade agreements this century – including with Korea (CKFTA), the EU (CETA) and 10 Pacific countries (CPTPP) – sought to open new markets for Canadian business. Diversification efforts are a key component of Canada’s Indo-Pacific strategy and negotiations are under way with Indonesia and ASEAN.
While the government cannot abandon its market-opening program, it is worth noting favourable access to new markets does not guarantee that commercial actors will shift their business toward them or that even if they are inclined to do so, they will do so quickly.
Inclusive trade: Over the last decade, the Canadian government has developed its “inclusive trade” lens to guide policy, foregrounding traditionally underrepresented groups such as women, Indigenous Peoples, and small- and medium-sized enterprises. There are good socio-economic reasons for retaining a focus on inclusive trade, even if it has not delivered to the degree some hoped.
The inclusive trade approach says little about supply-chain resilience or economic security – issues that have emerged as critical with the geopolitical turn but that have yet to find their way to the top of the trade-policy agenda in Canada despite prominent calls for them to do so.
U.S. trade policy has a values-based, worker-centred component. But it is also guided by concerns about security and economic resilience.
Likewise, the EU embraced a values-based, inclusive trade policy when it introduced its “trade for all” strategy in 2016. However, by 2021, it had published a review that acknowledged the uncertainty emanating from the rise of China, climate change and the aftermath of COVID-19, among other things.
That review kept the focus on fairness from “trade for all” but added an “assertive” interest-based narrative focused on resilience, sustainability and “open strategic autonomy.” Canada would benefit from a similar trade policy review.
Friendshoring: In 2022, Deputy Prime Minister Chrystia Freeland proposed “friendshoring.” In part, this expanded on Canada’s values-based trade policy by putting human rights and democratic principles front and centre. More pragmatically, it aimed to encourage the United States to include its friends, namely Canada, in its own policy reorientation.
Friendshoring – a vertical move – has arguably already lost some of its luster, replaced by “de-risking” – a horizontal shift – as a strategy with fewer potential trade-offs. However, this is no less complex. De-risking requires deep reflection on the possible consequences of trading certain products with certain countries (or not).
The goal is to retain the benefits of openness while reducing security vulnerabilities. A key challenge will be to achieve these goals within a rules-based framework while not creating more problems than it solves.
“Marketcraft:” Previous approaches will play a part in Canada’s trade and economic policy for the 21st century, but they will not be enough, even in the aggregate.
As Canada navigates what will surely be a horizontal shift in policy priorities, there will be consequences for the role that government plays in economic life. Industrial policy is back, though not identical to the version that we have seen in previous periods.
Nonetheless, the government should play a heightened role in creating and sustaining a prosperous, green and fair economy. Likewise, calculations about de-risking, supply-chain resilience, economic productivity and economic security will benefit from government leadership.
Berkeley political scientist Steven Vogel has advocated for language that acknowledges both the ways that government action can constrain markets and enable them. In many respects, such a perspective amounts to a rethinking of the role of government in a post-pandemic world marked by the U.S.-China rivalry, the war in Ukraine and other developments.
Vogel’s “market governance” approach encourages a rethinking of how the government can expedite key objectives. To make this shift, the government might benefit from concerted help. Prominent commentators have called for a reinvigorated Economic Council – an institution the Mulroney government disbanded in 1992. Now may be the time to re-establish it.
This article is part of the Trade in an Era of Global Insecurity special feature series.
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