By Alan M. Field
Canada’s ruling Conservative Party boasts that under its control, the country has enacted six free-trade agreements with nine different foreign countries. But its critics point out that over 36 of the last 48 months, the Canadian economy has been running a merchandise trade deficit; not a surplus. Could Canada’s prospects for boosting its exports worldwide improve as a result of an upcoming trade and investment of epic proportions – the Trans-Pacific Partnership (TPP)? In coming months, the Harper government and the business communities of North America hope to convince the public that this is the case.
It’s been almost twenty years since Canada, the U.S. and Mexico enacted the North American Free Trade Agreement (NAFTA), both lauded and reviled for its comprehensive impact not just in matters of trade tariffs but other vital areas such as intellectual property protection and regulatory standards. Despite its historic significance, the scale of NAFTA pales in comparison with the potential of the TPP. The TPP promises to deepen ties not only among the three parties to NAFTA, but nine other countries that border on the Pacific Ocean: Australia, Brunei Darussalam, Chile, Japan, Malaysia, New Zealand, Peru, Singapore and Vietnam.
As a group, the TPP countries constitute the largest export market for goods and services of the United States. In 2012, U.S. goods exports to the broader Asia-Pacific region as a whole totaled $942 billion, representing 61 per cent of total U.S. goods exports, while U.S. exports of agricultural products to the region totaled $106 billion, representing 75 per cent of total U.S. agricultural exports.
The stakes for Canadian exporters
For its part, Canada is also becoming increasingly tied to the economies of the Asia-Pacific region. In an effort to reduce Canada’s striking dependence on the United States, Canadian policy makers have been striving to increase the role of Asian-Pacific countries as its trading partners. The annual value of total two-way merchandise trade between Canada and the 21 member economies of the Asia Pacific Economic Cooperation group (APEC) grew from $374.6 billion in 1994 to $747.7 billion in 2012, an average annual growth rate of about 3.9 per cent.
Where does Canada fit into the agreement? And what will it mean for Canada’s long-term relationships with the U.S. – and for Canada’s exports of key commodities to the U.S. and elsewhere? Will the TPP wind up providing more benefits for the U.S. – and for many of the other countries involved in the negotiations — than it provides for Canada? There are no easy answers to these questions.
A recent commitment
In 2010, Canada became an observer in the TPP talks, and expressed interest in officially joining it. But Canada did not commit to joining the TPP talks until late 2012, reportedly because the United States and New Zealand blocked its participation due to concerns about Canadian agricultural policy – specifically, in dairy products – and Canada’s regime of intellectual property rights protection. Several pro-business and internationalist media outlets in Canada raised concerns about this delay as a missed opportunity.
A key turning point occurred this year, when the U.S. agreed to include Japan, the world’s third largest economy, in the TPP talks. According to Ross Laver, Vice-President of Policy and Communications at the Canadian Council of Chief Executives (CCCE), Japan’s entry into the TPP further distinguishes TPP as the most credible pathway to broader Asia-Pacific regional economic integration. Mr. Laver said that “a huge percentage of the Canadian public” recognizes that “trade liberalization benefits our economy and supports high value jobs. “With the virtual demise of the long-anticipated Doha Round of World Trade Organization multinational negotiations in 2008, the focus among Canadian and U.S. importers, exporters, and logistics service providers has turned toward less ambitious negotiations in which the United States will play a major role. Added Mr. Laver, “In terms of trade between the economies of North America and East Asia,” which are the fastest growing economies in the world, “the TPP is pretty much the only game in town.”
Both its supporters and its detractors stress that the TPP will have a much broader impact than the older generation of free-trade pacts, which focused almost entirely on reducing tariffs among like-minded countries that signed up for membership. Wayne Easter, international trade critic for Canada’s Liberal Party, pointed out that the TPP, as well as CETA, the Canada-EU trade pact now under negotiation, “are not just about trade anymore. When we think about trade, we tend to think about commodities like wheat and barley and oil, but nowadays, such pacts are as much about capital and foreign investment and intellectual property protection,” said Mr. Easter.
Like other critics of recent Canadian trade policy, Mr. Easter criticized the Canadian government for signing only a series of minor free-trade pacts with modestly-sized countries such as Colombia, Panama and Jordan. Easter estimated that the combined annual volume of trade covered in those pacts is the equivalent of just 126 hours [less than six days] of trade between Canada and the U.S.
Will the TPP boost Canada’s competitiveness – or set it back?
What exactly will be the actual benefits of the TPP for Canada? Mr. Easter said that the Harper government’s fascination with the TPP stems largely from the fact that Japan has decided to participate in the TPP. “There have to be some benefits, but what are they?” he asked. “Without Japan, the TPP would not make a whole lot of sense for Canada. We have to be there [in the TPP] to protect our interests.”
Peter Clark, a former Canadian trade negotiator, said, “The only potential benefits for Canada come from Japan’s involvement in the TPP. Canada already has free trade agreements with both the U.S. and Mexico as members of NAFTA, and those are the two biggest players in the TPP.” More fundamentally, “The U.S. will extract from Canada what Canada will extract from the other trading partners” in the TPP, said Clark, who is currently President of Grey, Clark, Shih and Associates, Ltd., a Toronto-based trade consultancy. If Mr. Clark is correct, although Canada will derive some benefits by improving its market access in some of the TPP member states, Canada will be forced to make considerable concessions to the United States in order to join the TPP bloc. What kind of concessions? It is too early to tell.
Kevin Gallagher, professor of international relations at Boston University, is equally skeptical. “While the full details of the proposed treaty are yet to be made public, early estimates show that the economic benefits of the agreement will be relatively small and the regulatory costs could be significant, especially for the emerging market and developing countries engaged in the negotiations.” According to a study by the East-West Center, the total gains of the agreement may amount to a one-time gain of $20 billion or just over one per cent of GDP on average for the nations involved, added Mr. Gallagher. How will this play out for Canada and the other relatively small nations – in terms of population – in the TPP? According to the study, said Mr. Gallagher, “to get those small gains, nations will have to trade away the ability to use [their own] measures to protect public health and the environment.”
Mr. Gallagher anticipates that the TPP will also “rob the ability of parties to deploy regulations on the flow of cross-border capital flows to prevent and mitigate financial crises.” For example, such regulations are a cornerstone of Vietnam’s exchange rate and export policy. In the wake of the Asian financial crisis of 1997-8, the Malaysian government’s regulation of capital flows mitigated the crisis in the country, enabling Malaysia to emerge relatively unscathed, Mr. Gallagher. The TPP agreement is also expected to make it harder for the TPP nations – including Canada – to establish “the appropriate innovation policies that are necessary to diversity” their economies toward higher-value-added goods, he added.
As for Canada, the same East-West Center study forecasts that its share of global GDP will drop from 2.4 per cent in 2010 to only 1.9 per cent by 2025, several years after the implementation of the TPP. In so doing, Canada’s annual GDP growth rate over that period would be a mere 2.2 per cent, below the growth rate projected for the United States (2.5 per cent), Australia (3 per cent), Chile (4.1 per cent), Mexico (4.6 per cent), as well as New Zealand (2.7 per cent). The only country involved in the TPP that would have a lower growth rate than Canada is Japan, which would expand at 1.5 per cent annually.
When pressed to spell out the potential benefits of Japan’s participation in the TPP, even the experts are uncertain about specifics. What is clear is that Canada doesn’t want to be frozen out of any advantages that the U.S. achieves from the TPP. According to Mr. Easter, “We have to be on a level playing field with the U.S. and other countries, or will be at a disadvantage. It is important to be part of the bloc because the U.S. is our next-door neighbour.”
For his part, Peter Clark, a former Canadian trade negotiator, said that Canadian governments often oversell the benefits of its trade agreements, and the TPP will probably be no exception to this rule. Mr. Clark added, “This agreement is all smoke and mirrors.” The Harper government, like countless other administrations before it, is likely to conclude a deal that is so broad and far-reaching in its potential that it can safely claim victory, along with the other governments in the talks, he added. Longer term, the initial optimism could easily evaporate. “It will take another eight to ten years to be [fully] implemented,” said Clark, beyond when it is finalized, most likely in 2015. By then, when the results of the TPP turn out to be modest at best, “they will be blaming any number of things” for its failure to deliver on its vast initial promise.
A defensive interest for Canada
Why then is the Harper government so eager to participate in the TPP? Mr. Clark argues that Canada’s interest is a defensive one. The country, he said, is trying to prevent its trade preferences from being diluted in the event that other countries in the Asia-Pacific region join the TPP but Canada does not. “If New Zealand, Vietnam and Malaysia, which do not have free-trade pacts with the United States, opt to join the TPP,” he said, “then Canada will have to join the TPP” in order to compete on a level playing field with those other countries.
Supporters of the pact argue that Japan’s recent decision to join the TPP talks is critical for Canada. It will provide a long term opportunity to improve market access for Canadian firms in Japan – or, in some cases, prevent U.S. firms from improving their market share in Japan at the expense of Canadian firms. “Without Japan, the TPP would not make a whole lot of sense for Canada,” said Mr. Easter. Moreover, Canada’s participation in the TPP should offer fewer problems for the Japanese, than the U.S. participation, noted Mr. Easter, because (no pun intended) “there is no sticking point in such a pact for us; we Canadians don’t grow rice,” unlike the U.S., whose rice producers in Louisiana and Texas are threatening to the less efficient rice producers of Japan. Beyond that, the Japanese have also enjoyed “decades of good relationships” with Canadian producers of lumber, fish and wheat, he added.
When it comes to opening long-closed Japanese markets, Clark noted, negotiators at the TPP talks have been most optimistic about the prospects in agriculture (particularly beef and pork); services and automobiles. For decades, Canadian diplomats have been disappointed, again and again, as promising talks about improving access to Japanese markets have been followed up with few concrete measures. Recently, said Mr. Clark, “Things seem to be changing in Japan. A decade ago, the Japanese weren’t even talking about many of these issues.”
More broadly, noted Mr. Clark, policy makers in Canada view the TPP as “a bridge to Asia, since Canada currently has no free-trade agreements with any of the Asian countries” that are negotiating for the TPP, including Japan. For its part, the U.S. already has free-trade pacts with TPP participants Australia and Singapore.
Canadian protectionism: An urge to end supply management?
To qualify for acceptance in the TPP, Canada may have to alter or dismantle its highly controversial ‘supply management’ regime, which bolsters prices of its eggs, poultry and dairy products. At least, that’s what many supporters of supply management seem to fear. Mr. Laver argued that the Canadian federal government “has no intention of dismantling supply management.” But he added that the view of his organization, CCCE, is that “any time Canada goes to a set of negotiations involving trade regulations, if we want to protect any sector, then we have to give up other things in return. It is important for people to understand this. And if we protect one small sector [such as dairy], a lot of other sectors can lose.” In other words, by protecting its dairy farmers, Canada could be losing a great opportunity to benefit a much larger segment of its economy.
Although Mr. Easter professes to be a supporter of free trade, he said that if Canada were forced to drop supply management in return for entering the TPP, “our competition [in dairy products] would be the United States. And we must be careful not to undermine the supply management system, which is a model for rural development.” While admitting that supply management is a form of protectionism, he argued that “we are much more open than the United States” whose agribusinesses are also protected by price supports. “The U.S. likes to talk about being free traders, but they are not.”
Mr. Easter added, “We Liberals believe in free trade, but not just in any deal. Our concern with the Harper government is that they have sent such a strong message that the trade agenda is so important, that if they don’t get any substantive deal at all, it looks really bad for Canada.” And so, he argued, the Harper government may be willing to strike a bad deal rather than lose face by closing no deal at all. Mr. Easter worries about “what they will sell out” to the U.S. in order to remain within the TPP fold.
The great irony of Canadian agriculture, added Mr. Laver, is that “reform would help Canadian farmers by enabling them to access rapidly growing agricultural markets overseas. We are in the process of a transformative period in which the emerging middle classes of the world are in the process of doubling.” In many places around the world, Mr. Laver noted, large numbers of people who never used to buy dairy products are now buying milk and cheese. To their credit, the dairy farmers of New Zealand, which has reformed and deregulated its dairy sector, are “doing very well overseas;” that is to say, outside their own domestic market. However, the dairy farmers of Canada have “been entirely frozen out” of foreign markets because of tariffs as high as 300 per cent on imports of Canadian butter, imposed in response to protectionist measures of Canada’s dairy farmers. “It is false to say that we have to sacrifice the interests of our dairy farmers in order to get a better deal,” said Mr. Laver. Conditions have become so poor that some dairy farmers in Ontario have moved their farms to nearby New York State, from which they are permitted to export as much of their dairy output as they like. If the current system of protectionism were revoked, said Mr. Laver, Canada could be as powerful in dairy products as it is in pork and beef, where no such limitations are imposed. “In Canada, dairy consumption is shrinking, but the Chinese people are turning to milk and cheese.”
Political support for the TPP
How much political support will Canadians provide for the TPP? Mr. Laver said that the business community is confident that the TPP – like the CETA pact currently under negotiation between Canada and the E.U. – will win the support of “a strong majority” after these pacts are put to the Canadian public. The Canadian public, not just its business community, supports such pacts despite the turmoil they provoke in some circles, he argued. After all, international trade represents 33 per cent of Canada’s GDP, in contrast to the situation in the United States, where trade amounts to only 7 per cent of that country’s GDP. “About one-third of our economy depends on international trade, and many Canadians in the private sector spend their days making and selling things for other markets,” Mr. Laver insisted.
As for the New Democrats, Mr. Laver said, “The New Democrats have a long history of resisting trade liberalization but in the last federal elections, they overtook the Liberals so for the first time in the history of the party, they began to think about possibly forming a government.” Dealing from a position of comparative strength, the NDP has since gravitated to the middle, in an effort to soften some of its traditional leftist rhetoric. “They want to sound pro-trade, but they say that trade has to be done in a sensible and transparent way.” They have left some wiggle room in their positions for criticism of the TPP, arguing that unless this deal is good enough, they would be highly unlikely to support it.