By Alan M. Field

To date, Canada has signed free trade agreements with the following countries: the United States and Mexico (the North American Free Trade Agreement), Costa Rica, Chile, Israel, Colombia, Peru and the European Free Trade Association (EFTA). It has also concluded talks with Jordan. Beyond that, the Canadian government has also signed an Economic Framework Agreement with Japan and some two-dozen bilateral investment treaties.

In 2012, the Canadian government will also be engaged in negotiating several additional trade pacts that should boost the outlook for Canadian exporters over the next few years. The upcoming Canada–European Comprehensive Economic and Trade Agreement (CETA) will be Canada’s most important trade agreement since NAFTA. Ed Fast, Canada’s International Trade Minister, has called CETA “by far Canada’s most ambitious trade agreement,” because it covers not only trade goods, but also deregulation of services, foreign government procurement, and foreign investment. “We expect it will also include provisions on the environment and on labour. This may become the gold standard agreement if we do this right,” said Mr. Fast. Although Mr. Fast has not committed the government to any deadline for completing the negotiation process, most observers expect negotiations to be done by mid-2012 now that the talks have moved into specific, sector-by-sector talks. If all goes according to plan, CETA could be ratified by 2013, providing “huge opportunities” for Canadian exporters in Europe.

While no one doubts the ambitious scope of the agreement, opinions vary about how important trade with Europe will be in 2013 and beyond, given the continent’s ongoing fiscal weakness, and the wealth of other opportunities for Canadian exporters in the faster-growing emerging nations of Asia and Latin America. However, Mr. Fast said that Canada still views Europe as the world’s largest trading bloc, with some 500 million consumers including 100 million people living in the faster-growing Eastern European countries. Currently, the 27 member states of the EU are Canada’s second-largest trading partner in goods and services, and the second-largest source of foreign direct investment in Canada. 

For his part, Jason Langrish, Executive Director of the Canada Europe Roundtable for Business, said that both the economic and political stakes involved in CETA are high. “This is a generational trade development. Basically, every 25 years you do a really big deal and it eats up a lot of political capital, and this is the deal that’s going to eat up the Harper government’s capital.” Mr. Langrish added that the challenges of negotiating CETA are formidable because the proposed pact involves negotiations with the Canadian provinces as well as with the federal government. In addition, the pact will address the very complex rules that govern intellectual property, rules of origin, and public procurement in both Canada and the EU. Mr. Langrish rejected the notion that the EU’s current fiscal crisis makes the region less-than-essential to the future of Canada’s global trade. He noted that most Canadian trade with the EU takes place with Europe’s stronger economies, such as Germany, Sweden, the Netherlands and Belgium.

Others have diverging views, and see any Canadian trade pact with Europe as relatively insignificant, over the long run, compared with any further efforts to improve market access for Canadian goods in the faster-growing Asia-Pacific region. Michael Hart, a professor of trade policy at Carleton University, said that CETA was the “last gasp of the past” for those hoping to promote Canada’s relationship with the EU. “Europe is not where the future lies. The future is more likely to lie across the Pacific than across the Atlantic,” said Mr. Hart. “To now negotiate a comprehensive agreement which may very well conflict with our interests in North America and the Pacific is of questionable benefit.”

The new trade pact with Europe could be profitable for Canada’s vast community of small and medium-sized companies, according to the SME Advisory Board, which comprises business owners and executives from across Canada representing key sectors of the economy. In a report last fall, the Board expressed strong support for the ongoing talks with the EU, noting that a comprehensive economic and trade agreement with the EU would lessen the complexities of doing business there and create new trade opportunities and jobs. According to the Board’s latest report, the EU is anything but marginal to most Canadian companies. In a survey, 55 per cent of Canadian businesses said they planned to increase their trade with the EU within the next three years. Approximately 8,350 Canadian SMEs were exporting nearly $16.1 billion in goods and services to the EU in 2008, which amounted to 52.7 per cent of Canadian exports by value to that market.

When it comes to faster-growing Asia, the Canadian government will continue to pursue major new initiatives aimed at improving market access for Canadian goods and commodities. In October, International Trade Minister Fast announced that Canada and China are moving closer to completing an agreement that will establish new foreign investment rules and provide dispute resolution for Canadian investors in Canada. In November, the Canadian government expressed interest in joining the ambitious new Trans-Pacific Partnership, which would create a vast free-trade zone that comprises not just the U.S., but Australia, Brunei, Chile, Malaysia, Peru, Singapore, Vietnam and New Zealand. Like Canada, Japan and Mexico have signaled their interest in joining the TPP, but have yet to formally sign up for it.

Weeks later, Mr. Fast also announced that Canada plans to take advantage of the Indian government’s ambitious plans to invest US$1 trillion in infrastructure development over a five-year period beginning in April 2012. The opportunities for Canadian exporters are especially huge, noted Canadian officials, because India’s notoriously weak infrastructure ranks 89th in a survey of 133 countries conducted recently by the World Economic Forum. “India has a very ambitious infrastructure plan going forward,” said Mr. Fast. “Of course, Canada wants to be a part of it because we are a world leader in infrastructure development.”

Canadian trade negotiators also hope to make progress toward completing the long-delayed bilateral trade pact between Canada and South Korea. Largely forgotten by the business community – until last fall’s enactment of a free-trade pact between the U.S. and South Korea – the Canada-South Korea pact began to take shape in 2004, when the first round of negotiations took place. South Korea, with a GDP that exceeded $1.5 trillion in 2011, is the world’s twelfth-largest economy, as well as Canada’s seventh-largest trading partner. Although Canada runs a trade deficit with South Korea, Canada exports more goods to South Korea than it exports to India, Brazil, Italy or France, and nearly as much as it exports to Germany. 

However, Canada’s auto industry and its unionized work force have voiced strong opposition to the idea of a free-trade pact with South Korea.  Canada currently imposes a 6.1 per cent tariff on all imported cars. If a pact with Korea is enacted, Canadian import duties on South Korean cars would eventually be eliminated, strengthening their competitiveness against cars built in Canada and the U.S., as well as those imported from Japan, which would still face the tariff. But a Canada-South Korea free-trade pact would do much to boost Canadian exports of manufactured goods to South Korea, a large consumer market where foreign goods producers have long struggled to gain market access on a ‘level playing field.’

Any further delay in completing such a pact would put Canadian exporters to Korea at a competitive disadvantage against exporters from other nations that have already signed their own trade pacts with Korea – including the U.S., Chile, Singapore, EFTA, and the nations of the ASEAN bloc. In 2010, Korea signed its own free-trade pact with the European Union, which will eliminate or phase out tariffs on almost all European imports by 2014.  Until Canada signs its own pact with Korea, Korean importers of Canadian products won’t enjoy those tariff reductions, tempting them to look for other sources of supply.