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Business Commentary Canada-U.S. trade relationship is back to normal, but it’s nowhere near free

The deal struck last month for the United States to lift its tariffs on Canadian steel and aluminum was hailed as a triumph for Canadian trade. It removed a high-profile trade barrier hurting Canadian producers, eliminated a major source of tension between the two countries, and cleared a path to ratification of the new North American trade agreement. Free trade between Canada and the United States was alive and well again.

Sort of.

The return to normal in the Canada-U.S. trade relationship – before U.S. President Donald Trump’s threats to tear up NAFTA, before the tariffs, before the months of tense negotiations – is certainly a step up from raging continental trade uncertainty. It’s certainly better than staring down the barrel of a tariff war with the United States, as China is. But it’s nowhere near genuinely free trade.

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While free-trade agreements have eliminated the vast bulk of tariffs and duties on Canada-U.S. trade, a study released by Statistics Canada on Wednesday finds that goods still face an average “tariff equivalent” cost of 30 per cent when crossing the border. These costs are largely what are known as “non-tariff barriers” – a catch-all category of administrative and bureaucratic hurdles that effectively disadvantage goods from another country.

These assorted cross-border “irritants,” as the Statscan report calls them, range from regulatory differences from one jurisdiction to another, to customs inspections that hold up shipments, to quotas on certain goods, to government procurement rules that favour domestic producers and limit foreign suppliers’ access to government contracts.

And, frankly, they’re a bigger deal than the tariffs and duties removed by the North American free-trade agreement ever were.

Statscan estimates that the trade advantage of NAFTA – the reduction in cross-border costs over what the two countries would experience in the absence of the deal – is about 6 per cent. That’s nothing to sneeze at; a six-percentage-point break on trade costs over other competitors, in your biggest trade market, is a big deal. But when you think of NAFTA as reducing Canada’s cross-border trade costs to 30 per cent from 36 per cent, it’s glaring how much is still on the free-trade table.

These cross-border costs are also substantially larger than the non-tariff barriers that exist between provinces – something that has become a popular target for economists when identifying the biggest trade dysfunctions holding back Canadian businesses. The Statscan study pegs the tariff-equivalent cost of provincial barriers at a comparatively modest 10 per cent.

The Statscan researchers considered what would happen if Canada-U.S. border barriers were reduced to the same level as provincial barriers. (This would entail the two countries integrating and harmonizing their regulatory frameworks across a vast array of goods.) The potential gains they calculated are, frankly, startling.

“Reduced border costs lead to an 82-per-cent increase in exports from Canada to the United States, and a 72-per-cent increase in U.S. exports to Canada,” the researchers calculated. They said those would be partly offset by declines in internal trade in Canada, as goods would gravitate to the bigger U.S. market. But over all, the lower border costs and increased cross-border goods flows would lead “to increased expenditure on domestic and imported goods, up 11.4 per cent in Canada and 0.8 per cent in the United States.”

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Those last two numbers are a reminder that for Canada, as the much smaller economy of the two, any gains from further trade liberalization at the border will have a much bigger impact than they will for the U.S. economy. The onus is on Canada to negotiate with the United States to whittle away at non-tariff barriers on both sides of the border. That will also mean that Canada will have to be willing to give further ground on some of its own non-tariff sacred cows, most notably agricultural supply management restrictions.

But this is clearly the low-hanging fruit on Canada’s trade tree. Roughly three-quarters of Canada’s exports go to the United States. China, Canada’s second-biggest export market, accounts for less than 5 per cent. The Statscan estimates suggest that even a modest reduction in Canada-U.S. non-tariff barriers could do more for Canadian exports than a doubling of Chinese exports.

Whether Canada can make any serious headway as long as the demonstrably protectionist Trump administration is running the U.S. show is another question. Still, last year’s negotiations on the new North American trade pact did show a growing interest on all sides in addressing non-tariff restrictions. And while the economic gains may be modest for the United States as a whole, the Statscan study noted that they are much bigger for states close to the Canada-U.S. border. That may provide a solid base of political support in the U.S. to come to the table – though we may have to wait for a new presidency for that to happen.

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