Amid rising U.S. protectionism, here’s what Canadian trade leadership can look like

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Steve Verheul was Canada’s chief trade negotiator from 2017 to 2021, leading negotiations that resulted in the Canada-United States-Mexico Agreement. He is now a fellow at the Public Policy Forum and a principal with GT and Company Executive Advisors.

American leadership was critical to rebuilding the world’s economy after the Second World War. From the 1948 General Agreement on Tariffs and Trade, with 23 founding members, to the 1995 establishment of the World Trade Organization, which now has 164 member states, the U.S.-led pursuit and expansion of rules-based trade liberalization have followed a consistent trajectory: more ambition, more countries, more reach.

But things have changed. International tensions have risen, in particular between the U.S. and China, and today’s Washington holds little interest in advancing multilateral trade. Instead, it has become increasingly protectionist, and more interested in providing incentives to attract investment, as with the 2022 Inflation Reduction Act. Even under President Joe Biden, who visits Ottawa this week, the U.S. often ignores the rules it once helped create and promote, and the global buy-in to its long-standing free-trade ideology has weakened.

Although we are a much smaller player, Canada has also pressed for freer markets, playing a key role in multilateral negotiations and brokering bilateral and regional trade agreements that cover more markets than any other G7 country.

The driving force behind these trade agreements was a belief that freer and fairer trade would yield economic growth – and it did. But in recent decades, efforts to isolate trade from geopolitics – allowing China and Russia, among others, to join the WTO – have had consequences. Broadening the membership has been successful in spreading the benefits, but different values and interests have made consensus impossible.

The cracks in the foundation continue to widen. Further WTO negotiations have stalled. Dispute settlement is ineffective, and adherence to trade rules has weakened. Provisions that were set out in the 1990s no longer fit the objectives we need to pursue today. Valiant efforts to address pressing issues such as the environment and labour have been too little, too late. The COVID-19 pandemic has also accelerated an international movement away from a reliance on market forces and toward government intervention, including robust industrial strategies.

Much of this is not wrong. Tackling climate change and improving labour practices won’t be accomplished by market forces alone, and countries making real efforts to address these issues at potential economic cost should not have their competitiveness undermined by countries that are allowed to evade these same responsibilities. Some geopolitical issues transcend trade, and always have. Russia, for instance, should clearly face consequences, including in trade, for its invasion of Ukraine. Reaction to unfair trade practices by China is to be expected.

So where to now?

Some countries have been exploring ways to level the playing field on the environment through trade concepts such as a Carbon Border Adjustment Mechanism, a tariff that can be imposed against those not meeting measurable standards. In discussions with the EU on the Global Arrangement on Sustainable Steel and Aluminum, the U.S. has been proposing more favourable terms of trade for members meeting environmental criteria, with additional tariffs to be applied against others. These ideas may be a step in the right direction, but they’re too narrow and moving too slowly.

The U.S. is also pursuing new approaches through framework agreements such as the Indo-Pacific Economic Framework for Prosperity and the Americas Partnership for Economic Prosperity; Canada is a member of the latter. But these are in large part aimed at strengthening alliances, and they seem unlikely to make more than limited progress on core trade issues.

Canada would like to be inside the room on these various initiatives, and we may yet get there. But we would serve ourselves well if we could bring concrete, workable ideas for new approaches to trade rules to the table. Broader and more holistic trade rules need to be developed that more directly incorporate non-economic objectives and are explicitly interventionist. Just as innovation is needed to enable the global transition to cleaner energy, it is also needed to create new trade rules that incorporate non-market issues.

We shouldn’t just do this in an effort to stay inside the U.S. tent. While ideas like friendshoring or nearshoring or receiving a waiver under the White House’s Buy America initiative can be of great benefit to us, we must remember yet again that we cannot just rely on the goodwill of our southern neighbours. Instead, Canada can lead, pulling in like-minded partners to design a new approach to trade policy that widens its focus to the most important issues of our time. That would be the most effective way to gain real influence.