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The 21st-century business world is more and more a virtual enterprise that is driven by software and technology of companies like Google. (Eric Gaillard/REUTERS)
The 21st-century business world is more and more a virtual enterprise that is driven by software and technology of companies like Google. (Eric Gaillard/REUTERS)

DAVID WOLFE

Canada’s TPP negotiation strategy ignores a crucial piece of trade advice Add to ...

David Wolfe is the co-director of the Innovation Policy Lab at the Munk School of Global Affairs and author of the introduction to the second edition of Trade, Industrial Policy and International Competition.

The intensity of the debate over the Trans-Pacific Partnership has raised fundamental questions about international trade policy and Canada’s sovereignty. As several commentators have written in The Globe and Mail in recent months, the sections on intellectual property rights, foreign investment rules and trade secrets are particularly troubling.

As Canada’s negotiation strategy for TPP, the previous government adopted the traditional approach to international trade agreements: They bargained for increased access to international markets in the economic sectors where Canadian trade performance is strongest, while sacrificing some protection in the domestic market, especially in key manufacturing sectors. The trouble with this approach is that it is a 20th-century trade strategy applied to a 21st-century economy. Canada negotiated TPP in the rear-view mirror.

Our key competitors, especially the United States, did the opposite in their negotiations. They aimed to secure competitive advantage for knowledge-based, high-growth sectors with the greatest potential for expansion in the 21st century. The 21st-century business world is less and less a material enterprise that builds physical products, and more and more a virtual enterprise that is driven by software and technology – think Google, Monsanto, even Tesla. In the 21st-century economy, it is the algorithms which drive the success of the enterprise and the intellectual property that underlies companies’ business models that are most critical for economic success.

Unfortunately for Canadians, the government that negotiated this agreement did not pay attention to these considerations. These are the elements of the TPP that put our ability to control our economic destiny most at risk. Our government and trade negotiators would have done better to heed the advice offered in Richard Harris’s study Trade, Industrial Policy and International Competition, written in the 1980s. Prof. Harris’s work on the economic benefits of free trade provided much of the evidence used to justify the initial free-trade agreement with the United States in 1988. More importantly, in this study, Prof. Harris argued that adopting free trade without an innovation policy was like competing with one hand tied behind our back.

We are now faced with the biggest trade agreement in Canada’s history, attempting to compete with one hand behind our back. It is our collective misfortune that Canadian governments of the past 30 years have ignored the critical arguments set out in this perceptive study. If our new government is open to absorbing its critical lessons before they decide whether to ratify the TPP or not, the study is available in the Carleton Library Series – a stone’s throw from Parliament.

Prof. Harris’s challenge to conventional theories of international trade provides a compelling insight into why Canada’s TPP negotiating strategy was flawed. Studies of Canadian trade reinforce the fact that our exports are strongly biased in favour of raw materials and natural resources, while our imports are strongly concentrated in intellectual property-based and skill-intensive industries and products – the very industries with the greatest potential for growth in the 21st-century economy.

Canada’s problems are compounded by the bias against technology-based industries that exists in small, open economies. The barriers to entry associated with technological innovation disadvantage smaller firms to a greater extent than large ones. At the same time, the domestic market does not provide an ecosystem for them to scale up. To the extent that these economies are home to a greater proportion of small indigenous firms, the entire economy is placed at a disadvantage with respect to competition in high-technology industries. The public incentive to support those firms that compete in technologically intensive sectors is much greater for a small, open economy than for a larger one. Transforming the research-and-design base of firms in this economy and ensuring protection of their knowledge base is necessary for effective competition in the 21st century.

A trade negotiation strategy that relies on conventional theories of comparative advantage fails to recognize the ecosystem needed to scale up firms in technologically intensive industries. By contrast, trade and technology policies must be jointly designed to help indigenous firms overcome the market barriers that typify the R&D process in the domestic economy.

These critical insights have been overlooked by Canadian governments for the past 30 years, even though they were offered by Prof. Harris, one of the most esteemed trade economists of the day. Ratifying the TPP risks consigning Canada’s economy to the low-innovation model in which it has been locked for the past three decades. This will have profound effects on our prosperity.

The good news is that it is not too late to alter the course of both our trade and innovation policies. Our new federal government has a unique opportunity to set a policy course for the current century, rather than the past one. We can only hope it seizes that opportunity.

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