By Alan M. Field

Canada stands at a crossroads in its approach to international trade. The country’s long-term economic prospects could be significantly improved by its participation in two major free-trade pacts: Its bilateral pact with South Korea, and the Canada-EU Comprehensive Economic and Trade Agreement (CETA), which opens opportunities for Canada in the 28-nation European Union. What kinds of benefits can Canadian exporters expect from the Harper government’s recent free trade agreements with South Korea – a fast-growing dynamic ‘emerging nation’ – and Europe, with its population of 507 million? Is Canada likely to derive significant benefits from the highly touted Trans-Pacific Partnership, which will bring it into a vast trade bloc with Korea and ten other nations along the Pacific Rim, including the United States, Mexico, and most of the major nations of South America and Asia?

Former Canadian diplomat Laura Dawson, President of Dawson Strategic, an Ottawa-based strategic management firm, notes that prior to the new pacts with Korea and Europe, the most groundbreaking agreement Canada had enacted was the Canada-U.S. trade agreement in 1989, which set the stage for the NAFTA, enacted in 1994. NAFTA was less groundbreaking because it was “a necessary, defensive agreement,” noted Dawson, aimed at making sure that Canada was not denied access to any further trade preferences given by the U.S. to Mexico.

Following the enactment of NAFTA, Canada’s free-trade pacts were limited to such small-scale agreements as its 2009 pact with the tiny European Free Trade Association – comprising Iceland, Liechtenstein, Norway and Switzerland – and Canada’s bilateral pacts with Peru (2009), Colombia (2011), Jordan (2012), and Panama (2013). In addition, as of April 2014, Canada and the Caribbean Community (CARICOM) had held six rounds of negotiations towards a possible Canada-CARICOM Trade Agreement. However, none of these other pacts will have a lot of impact on Canadian trade “because of the low volume of bilateral trade” between Canada and these small countries and trade associations, noted Dawson.

These earlier pacts are dwarfed by the potential impact of the Canada-Korea Free Trade Agreement, on which negotiations were completed in March 2014, following years of delays prompted by opposition from the Canadian automotive sector. “That was clearly an agreement of importance for Canada, because we [now] have market access to meet the growing economy of South Korea,” said Dawson. The world’s 15th-largest economy, with a GDP of $1.1 trillion, Korea is also the fourth-largest economy in Asia, with a population of 50 million. In 2012, Canada and Korea exchanged approximately $10.1 billion in bilateral merchandise trade. Canadian government sources have touted tariff agreements in the pact as particularly advantageous for Canadian businesses, given that average Korean tariffs are three times higher than those of Canada. Since 1980, Korea’s GDP has grown more than six-fold and enjoyed an average annual growth rate of 6.5 per cent.

Once enacted, CETA will not only reduce tariffs, but make it easier for Canadians to invest in the EU, and vice versa. CETA will also give Canadian suppliers access to the huge EU government procurement market ($2.7 trillion in 2012), another significant source of new export opportunities. According to a joint Canada-EU study, a trade agreement with the EU could boost bilateral trade by 20 per cent and add $12 billion annually to Canada’s GDP; the economic equivalent of adding $1,000 to the average Canadian family’s income. Remarkably, Canada will become the only member-nation of the G-8 bloc to have preferential access both of the world’s two largest markets, the European Union and the United States.

Both CETA and the Trans-Pacific Partnership represent a significant change in direction for Canada, according to Dawson. Now, “What we seem to be doing, with the TPP and the other agreements, is a policy of enacting agreements with countries for which there are some real potential advantages” on a major scale. These pacts provide Canadian exporters with a market presence in territories “that we haven’t traditionally operated in.”

For Canadian policy makers, the common novelty is “not just who we are doing the agreements with; but how we are doing them. Canada is being more strategic in its trading partners” and in its approach to negotiations. In negotiating these pacts, Canada has at least one fundamental advantage not shared by its much larger neighbour, the United States. Taking advantage of its smaller size, Dawson added, “Canada is a nimble negotiator; we can get into negotiating faster than the U.S. or South Korea can; we got in faster than the U.S. did on [negotiations for a] EU agreement. And we can get in and put Canada’s interests on the table and make them a priority in a way that a trilateral agreement would not reflect.”

What will this mean for Canadian interests? “If the governments of Canada, the U.S. and Mexico were at the TPP table negotiating as a bloc, then you can be sure that Canada shippers’ interests would not be in the top-three of the NAFTA bloc interests. We would be in the shadow about that. However, by negotiating on our own [with Korea, and then with Europe in CETA], we are negotiating smaller agreements. What the U.S. gets out of [its eventual free-trade agreement with] the EU will be a lot bigger [in terms of dollars] than what we get out of CETA, but we will get benefits tailored specifically to our needs; it reflects our specific interests in things like labour mobility and government procurement, and market access.” For example, Canada’s Atlantic fisheries/seafood sector will get significantly improved market access to Europe as a benefit from the CETA pact with Europe. “They will export their seafood products to the EU duty-free; they [Canada seafood exporters] are pretty darn happy with it. Until now, they have not been shipping a heck of a lot to Europe because the tariffs have been so high.”

Another new milestone in these new pacts is a stronger emphasis on the deregulation of international services. Dawson noted that “trade agreements are very different now from what they were 20 to 25 years ago. The service industry is very important in trade now for Canada; and not just for its manufacturers.” These benefits will be increasingly enjoyed by Canadian-based providers of logistics services, including third-party logistics providers (3PLs). “When we negotiated the 1989 trade agreement with U.S. and 1994 NAFTA agreement, the mechanisms in those agreements for services were very minimal; we had just started to negotiate about provisions for making sure that a service provider could move from one jurisdiction to the next; that a guy would get paid from one jurisdiction to the next.”

The multilateral TPP and the bilateral CETA will both be much more attentive to non-tariff issues such as the deregulation of services, enhanced labour mobility, and customs facilitation. “These things make it easier to trade by making it easier for all forms of cross-border commerce and payments to take place.” In the past, only those services that were specifically listed in such an agreement – such as logistics, financial services, etc. — were actually covered. Specific categories of services had to be spelled out, or they were presumed not to be covered by the agreement. In CETA, however, “all services are covered unless they make a specific exception. Unless they say you can’t participate in, say, military and defense services, then you can participate in them. Rather than guessing what may happen in the future, this allows for opening up the possibility of the evolution of services” that have a fundamentally innovative nature, such as cloud computer services, noted Dawson.

Dawson continued, “I don’t want to give too much credit to the Harper government, but they have been taking this more pragmatic approach. The Canadian negotiators tend to be very good and very experienced; and Canada has always been very good at grabbing hold of the pen and writing the kind of rules that are most favorable for Canada. Even though we are not a big economy, in terms of negotiating from strength, we have that kind of knowledge and capacity on trade rule issues that we can usually develop a pretty good trade rule for us.” For example, Dawson cited Canada’s development of the concept of ‘cumulation’ in its provisions concerning the rules of origin. In the case of NAFTA, for example, because Canada and Mexico and the U.S. are in a free-trade agreement, “Canada can ship a bicycle wheel to the U.S. duty-free, and if the wheel has a Canadian rim and a Mexican tube, the whole thing [shipment] still counts as duty-free because of the NAFTA provision [which allows ‘cumulation’].” Canada is accumulating the value added not only of the part of the wheel that comes from Canada, but the part that comes from Mexico as well. “Canada’s negotiators have really developed and promoted the concept of cumulation in international trade negotiations.”

Canada is also pioneering in the development of labour mobility provisions in CETA. CETA’s “much more forward-looking provisions will allow European service providers to come to Canada, and Canadians service providers to go to the EU; recognizing particular Canadian skills and professions.” The Canadian companies will be able to do contract work that can be vital for the completion of an export contract that involves high-value professionals from Canada. Thus, “an architect from Canada can go to France without too much difficulty. This is not residency migration; it is just temporary contract work. It will be much easier for physicians, nurses, architects, engineers, optometrists and so forth, to work in Europe; to move back and forth and do work.”

This is important because Canadian companies that have workers with specific skills want to make sure that they can deploy them on Canadian-designed projects in Europe that require these specialized skills. CETA will enable Canadian firms that provide such high-value services to play a major role in the entire value chain of production, marketing and servicing of their products to their customers in Europe. If, for example, a Canadian company bids on the building of ski resort in France, “we also want to be able to bring over the technicians that are needed to install and operate those products in Europe; to make that equipment work effectively.” In the absence of such a labour mobility provision, a project developer in the EU might be persuaded to opt for purchasing the equipment – and related professional services – of a European-based firm, because of that firm’s ability to move skilled labour across European borders with ease. “It is one thing to have market access for your product or your services. But unless people can go back and forth easily, and unless equipment and money can move back and forth easily, you don’t have the connective tissue that makes a trade agreement work,” added Dawson. According to Dawson, approximately 30 per cent of an average finished good is derived from high-value services such as product design, marketing, accounting, shipping and logistics.

Likewise, Alexander Moens, a political scientist at Simon Fraser University, agreed that it was a significant achievement for Canada to achieve a seat at the negotiating table for the TPP, given the huge potential of the TPP to enhance the role of Canadian firms in the entire value chain. “In Canada, we spent quite a bit of time to actually be admitted to TPP talks because behind the scenes, there was quite a bit of maneuvering to keep us out. So getting into the talks was a big hurdle for us.” Why was this so important? Otherwise, “you would have the risk that both Canada and Mexico would both be hubs and spokes of a free trade network, rather than being a full partner [in that TPP network]. We are not very interested in the U.S. making [another] free-trade agreement and we [Canadians] get second pickings.”

Although Moens described the new Canadian pact with South Korea as “one of the biggest advances for us in recent times,” he cautioned Canadians not to expect too much from the Trans-Pacific Partnership. “The biggest question is whether President Obama will get trade promotion authority (known popularly as ‘fast track authority’) and right now, it doesn’t look like it will happen.” In the absence of ‘fast track authority,’ the TPP could be delayed indefinitely; at least, beyond the end of the Obama administration in December 2016.

CETA also tackles regulatory harmonization, another major issue to be negotiated in a multilateral fashion during the TPP talks. Said Moens, “It is the most difficult issue about free trade talks. Regulatory harmonization, which includes provisions about how to remove agricultural subsidies, harmonize pharmaceutical trade, and other tricky non-tariff issue; these are incredibly difficult things to do.”

Another barrier to the speedy implementation of the TPP is the current quagmire in the American political system. Moens noted, “I am a very strong proponent of TPP. I hope we [Canadians] will get the most out of it, but I am also very cautious about how difficult it will be for the U.S. to agree on regulatory changes with foreign governments. There are so many interests in Congress that will potentially block that. It will not wise for us Canadians to think too highly for the prospects of the TPP. You have to be very cautious.”

The good news for Canada, however, is that “Having gone through the CETA [negotiation] experience, we are better prepared to handle regulatory issues than the U.S. is,” when such provisions are hammered out in the TPP talks. The bad news is that “given the most powerful role of Congress in the U.S., I think it will be very difficult for the U.S. to do that [soon], so I don’t see much immediate prospects for the TPP.” Longer term, Moens hopes that the next U.S. President, whether Democrat or Republican, is going to look at the TPP with the same interest as Obama. He or she is going to say, ‘Wow, I might want to invest some political capital in this.’”

Free-traders like Moens would be frustrated if the TPP ended in failure. Unlike the TPP, “NAFTA is an old-fashioned free trade agreement; it is mainly about tariff barriers,” he said. “It has been frustrating for us Canadians and Mexicans who have been trying to get the U.S. government interested in regulatory harmonization. But if the TPP is successful, it can spill back into NAFTA and give its impetus to NAFTA to do the same. You have to think about the TPP in terms of global supply chains. One of the key issues is economies of scale, which are greatly strengthened by a single regulatory framework, where you end artificial barriers on labeling, packaging, and so forth. If you can reduce that, you can increase your margins – and increase competitiveness” for Canadian manufacturers and exporters.