By Alan M. Field
With the ascension of Justin Trudeau as the new Liberal Prime Minister of Canada, the nation’s federal government is proceeding down the path toward ratifying its membership in the Trans-Pacific Partnership, the juggernaut of a trade pact whose text was released in early November. The largest trading bloc in the world, the TPP will deepen Canada’s trading relationships with eleven of the most dynamic and fastest-growing markets in the Asia-Pacific region, as well as strengthen Canada’s traditional partnerships in the Americas, the Canadian government has asserted on numerous occasions. The Canadian government has announced confidently that “The TPP will strategically set the terms of trade in this important region. As a founding member of the concluded TPP, Canada will have a deciding voice as additional countries seek membership in the ‘open architecture’ agreement.”
From the point of view of Canadian industry, the arguments in favor of TPP participation seem overwhelming, unlike the situation in the United States, where the controversy about the TPP continues to rage. On the one hand, in Canada the annual volume of international trade is equivalent to more than 35 per cent of the nation’s Gross Domestic Product, with one in five Canadian jobs linked directly to exports. (In the United States, international trade plays a much less significant role in the economy.) Already, the twelve nations comprising the TPP represent a market of nearly 800 million people, and a combined GDP of $28.5 trillion. Moreover, some 81 per cent of Canada’s total exports already go to the other member-states of the TPP. Canada has already concluded free-trade agreements covering 51 countries, including several countries that will belong to the TPP. The twelve TPP signatories are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.
Despite some criticism that the TPP might undermine Canadian jobs in such sectors as autos and automotive parts, most TPP countries are middle-income nations that cannot compete in the low-value economic sectors where competitiveness is largely a function of low wage rates. Average per capita GDP in TPP countries is nearly $35,000, and some TPP countries are among the fastest-growing economies in the world. By 2030, the Asia-Pacific region as a whole is expected to represent two thirds of the world’s middle class. By 2050, it is expected to generate a remarkable one-half of global GDP. Overall, Canada’s new free trade agreements with the European Union, South Korea and TPP countries will give Canadian businesses preferential access to over 60 per cent of the world’s economy and more than 1.3 billion consumers.
Given such a promising landscape, what could go wrong? For one thing, there is still a reasonable chance that the TPP will be scuttled entirely if it fails to gain ratification by the United States Congress sometime in 2016. “Canadians are probably more concerned about U.S. ratification than they are about the chances of domestic rejection of an agreement that most agree will be good for Canada,” said Laura Dawson, Director of the Wilson Center’s Canada Institute. “We might expect early ratification of the TPP in Canada followed by outreach to like-minded countries such as New Zealand and Mexico to help bolster U.S. domestic support (and to figure out a Plan B if the United States fails to approve the deal).” The stakes are critical for the fate of the TPP. “If the U.S. does not ratify the TPP, the TPP won’t come into force,” said Jean-Michel Laurin,” Vice-President of Octane Strategies, and former Vice-President of global business policy for Canadian Manufacturers & Exporters.
Meanwhile, the TPP has generated considerable controversy in Canada, especially among those who argued that its text was negotiated in secret, where its defects could not be scrutinized – and addressed – by the Canadian public. “No one really understands the TPP entirely,” said Dan Brock, a former senior political advisor to the Liberal Party, shortly after the text of the TPP was published recently. “There will be more analysis and commentary on the details of the TPP in the coming days, and the allegation that this was all done in secret. There will now be a public debate about the merits of the TPP,” along the lines promised by the Liberals during the recent election campaign.
Brock added, “In the past, the traditional free-trade debate in Canada has been at least in part about what happens to Canada’s sovereign and autonomy as a result [of participating in free trade agreements]; and what happens to Canada’s ability to make its own social policies and our resource development and investment and taxation nationally” as a result of its participation in such pacts. In that debate, the voice of the largest bloc of opponents to free trade – the New Democrats – has been quieted by the latest election results. Brock noted, “The NDP got basically decimated; they went from being the official opposition to having only 30 seats. They became the third party in the House, so there is not a strong political constituency in Parliament that can wage an effective campaign against the TPP. And the two leading parties – the Liberals and the opposition Conservatives – are supportive of the TPP. The Liberals, with caveats; they want to take a closer look at the TPP. But the implication is that they want to be a pro-free trading party.”
Brock expects the Trudeau government to be supportive of the TPP. While they may offer suggestions about making changes in the TPP text, after the public review process of its full text, the government will not suggest scuttling the TPP because of its imperfections. “The goal of any changes wouldn’t be a change in the overall approach. If the TPP can [be shown to] deliver on the goal of improved trade, then the [Canadian] government is going to be supportive of that. It will want to examine the extent to which the TPP creates binding agreements on the Canadian government which will inhibit its ability to make domestic social policy decisions. Or impede its sovereignty to do what it wants… That could be among a number of different areas,” said Brock, now a Toronto-based attorney.
‘No one is taking to the barricades with pitchforks’
Canadian business associations do not seem worried about the TPP posing any threat to Canada’s sovereignty. As Laurin pointed out, the Canadian government “has been able to get a lot of business groups and think tanks to support the TPP, so that it looks like there is overwhelming, unanimous support from every sector of Canadian business.” The roster of groups issuing supportive statements for the TPP reads like an almanac of Canadian business and industry: The Canadian Agri-Food Trade Alliance, the Canadian Council of Chief Executives, the Canadian Chamber of Commerce, Canadian Manufacturers and Exporters, and the Canadian Intellectual Property Council. Noted Jayson Myers, CEO of Canadian Manufacturers and Exporters, “The TPP is a modern trade agreement that reflects the new realities of cross-border supply chains and the longstanding integration of Canada’s North American market. It strengthens the competitiveness of Canadian business, our suppliers and our customers.” For her part, Joy Nott, President and CEO of I. E. Canada, The Canadian Association of Importers & Exporters, was equally enthusiastic: “Alongside the Comprehensive Economic and Trade Agreement (CETA) with Europe, TPP strengthens Canada’s position within North America and will give Canadian businesses a competitive advantage in the global marketplace. We have a unique opportunity right now to play a key role in the founding of the Trans-Pacific Partnership, and in negotiating access to markets that are critical to the long-term success of our economy.” Others have pointed out that the TPP and Canada’s trade agreements with the European Union and South Korea make Canada the only G-7 nation with free trade access to the United States and the Americas, Europe and the Asia-Pacific region.
To counter potential criticism that the TPP showers its benefits exclusively on large global corporations, the TPP will be the first Canadian free trade agreement to provide a dedicated chapter with specific measures to assist small and medium-sized enterprises (SMEs) in order to help them take full advantage of the opportunities the TPP will create. This reflects the Government of Canada’s commitment to significantly increasing the number of Canadian SMEs exporting to emerging markets, supporters of the pact agree.
Laurin argued that, “Although some people will say the TPP is a ‘game changer’ [for Canada], the real reason Canada is in this deal is that it supersedes NAFTA. This is sort of NAFTA-plus. The reason it was important for Canada to be in the TPP is that these are the rules that are being negotiated – not just by Canada and the U.S., but by countries like Japan, and the other TPP partners. Part of the reason we’ve been successful for the past twenty-something years is that we [in Canada] have had privileged, open access to U.S. markets. Canadian exports have grown and this has led to the integrated North American supply chain. Now the economic growth is in Asia, and we need the TPP to open up markets in Asia. … We had to make sure that we were in the TPP; we didn’t want to be in a position where Mexico or Japan or other countries were in the TPP, but Canada was not – and those other countries had better access to the U.S. market than Canada had… . That said, I don’t think that the potential benefits [for Canada] are as huge as when we signed the first free-trade agreement with the U.S. back in 1988 or NAFTA in the 1990s.” Beyond all that, the TPP is also a work in progress, and other countries in the region also have an intention to join the TPP, trade analysts have noted, including possibly even China. “So in a context when the global deals [like the abortive Doha Round of the WTO] are not going anywhere, regional deals like the TPP are the best” approach for Canada, Laurin concluded. However, “It will take time to digest the text” of the TPP, said Clifford Sosnow, a partner at the Fasken Martineau law firm in Ottawa. “We are still reviewing the text to understand it.” He added that the response of the Canadian public has been “surprisingly muted. No one is taking to the barricades, carrying pitchforks” in protest to the TPP. “Canada will watch what the U.S. Congress does,” he added. “This is very much a U.S.-led effort.” If the U.S. Congress does not approve the TPP, it is not at all clear that the TPP will survive beyond 2016.
Nevertheless, there is a stronger consensus in favor of free trade pacts in Canada than there is in the United States, argues Laurin. “In Canada, the consensus view is that ‘we need more open trade’ and that open trade provides a level playing field for Canada, which has a small internal market. In the U.S., the view is that ‘we have a large internal market so there is a greater need to make the case for trade.’ In the U.S., there is much more suspicion about open trade,” and public attitudes are “always more defensive.”
Objections to the TPP text
In recent months, as negotiations proceeded, the TPP generated growing controversy especially among those who argue that its text was negotiated in secret, where its defects could not be scrutinized until it was released this fall. Stuart Trew and Scott Sinclair from the Canadian Centre for Policy Alternatives have written, “Obviously, a public review is badly needed. The TPP was concluded in the dying days of a ‘caretaker’ government desperate to shake up a faltering campaign….Constitutional experts held that this maneuvering could only pass muster if a new federal government was genuinely able to reverse the Conservatives’ death-bed commitments. But history, and U.S. insistence that the deal must be accepted ‘as negotiated,’ force us to temper our expectations about whether a meaningful process is likely.”
For its part, the Council of Canadians is also opposed to the TPP because of its investor-state dispute settlement provision, which allows corporations to sue governments for public interest legislation that affects future profits. “We have also raised concerns about the impact of the TPP on dairy farmers, auto parts workers and its extended patent provision that profits transnational bio-pharmaceutical corporations. We are concerned about reports that the TPP would mean more foreign workers, exploitation and suppressed wages in Canada.”
“While publicly very supportive, privately, many Canadians are not so excited,” said Laurin. While there have been continued rumblings that the agreement was negotiated in secret, “companies would be stupid” to announce their negotiating positions in public, he retorted, “just as when an employer is engaged in labour negotiations, its bargaining position won’t be announced in public. The actual negotiation will [always] be behind closed doors.”
Shortly after the text was published, Scott Sinclair, senior trade policy researcher at the Canadian Centre for Policy Alternatives, said that “the Liberals back the idea of free trade in principle and support the TPP in principle. But I still think they may choke on some of the details,” once the public review process matures. “This agreement was negotiated by the previous government right on the eve of the election. Now, with the release of the TPP text, Canada will be able to see what concessions were made to seal this agreement.” Sinclair added, “The fact that the TPP was negotiated on the eve of the election by a caretaker government casts a shadow over it, at least from the Canadian perspective.”
Areas of particular concern in the text involve its impact on the automotive and automotive parts sector, and on Canada’s “supply management” regime. There had been talk that Canada would open up 10 per cent of its dairy market to buyers from TPP countries, but the Canadian negotiating team managed to reach a deal offering additional dairy access of only 3.25 per cent. For poultry and eggs, the market share sacrificed was even less. In addition, the Canadian government is preparing to roll out $4.3 billion over the next 15 years to help dairy and poultry farmers adjust to the TPP. “We obviously would have preferred that no additional market access be conceded in the dairy sector,” said Wally Smith, President of Dairy Farmers of Canada. “However, we recognize that our government fought hard against other countries’ demands, and have lessened the burden by announcing mitigation measures and what seems to be a fair compensation package.”
In the auto manufacturing sector, NAFTA’s rules on content country of origin have been diluted significantly. Canada’s content rules for the automotive sector were diluted to 35 or 40 per cent, down from 62.5 per cent under NAFTA. As a result, any auto manufacturer in any country that is a party to the TPP, such as Japan — would be able to use more non-Canadian content (measured by dollar value), and yet quality for TPP duty preferences when shipping those vehicles to Canada. In a disturbing development for some Canadians, the U.S. secured far longer phase-out periods for its auto tariffs than Canada did. Thus, Canada agreed to phase out its 6.1 per cent tariff on imports of Japanese vehicles over a five-year period, a much shorter time period than the 25 years the U.S. was able to negotiate. Flavio Volpe, President of Canada’s Automotive Parts Manufacturing Association, complained that, as a result, Canadian dealers of Ford, Chrysler and GM will face strong competition from some brands of Japanese cars and trucks years before their U.S. counterparts face such competition from Japan.
This may work out to the advantage of some Canadian automakers because they may be able to use more parts produced in lower-cost Asian countries that belong to the TPP. Tier One and Tier Two auto parts makers are also expected to do well because their Canadian-made parts could wind up being used in vehicles in other nations of the TPP. Smaller, less efficient Canadian parts makers may not be able to compete well, under the TPP rules, which boost access for the world’s most productive exporters.
Canada’s Automotive Parts Manufacturing Association (APM) supports the TPP. Canada’s automotive supply sector, directly employs over 80,000 people in Canada with shipments of $24 billion in 2014. In a further sign that Canadian parts makers are aiming to remain globally competitive, Ontario plans to become the first province to allow self-driving vehicles to be tested on public roads. Testing of autonomous or self-driving vehicles may begin as early as Jan. 1, 2016, as Ontario seeks to grab a share of the billions of dollars that automakers, parts companies and technology providers are spending to develop cars that drive themselves. Under Ontario guidelines set up last year, there must be a driver trained in how to operate an autonomous vehicle present in the driver’s seat at all times. The vehicles that are being tested must have a mechanism to disable the autonomous technology so that the driver can take control of the vehicle, and a system to alert the driver if the technology fails or unexpectedly shuts down. Over 100 companies in Ontario are working on such vehicle parts, and much of the research and development will be carried out in Ontario.
If Canada’s automakers, parts makers and technology firms can collaborate to produce competitive products, the TPP’s new rules of the game may make it significantly easier for those products to find markets throughout the Asia-Pacific region.