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Economic Insight A TPP deal falling victim to U.S. election may be good news for Canada

Trans-Pacific Partnership (TPP) leaders (L to R) Australian Prime Minister Malcolm Turnbull, Brunei's Sultan Hassanal Bolkiah, Canadian Prime Minister Justin Trudeau, Chilean President Michelle Bachelet, Japanese Prime Minister Shinzo Abe, Malaysian President Najib Razak, US President Barack Obama, Mexican President Enrique Pena Nieto, New Zealand's Prime Minister John Key, Peruvian President Ollanta Humala, Singapore's Prime Minister Lee Hsein Loong and Vietnam's President Troung Tan Sang wave as they pose for a family photo prior to a meeting on the sidelines of the Asia-Pacific Economic Cooperation (APEC) Summit in Manila on November 18, 2015.

SAUL LOEB/AFP/Getty Images

The road to ratification of the massive Trans-Pacific Partnership trade deal was always going to be long and arduous.

The fact that trade-bashing Donald Trump is now the presumptive standard bearer of the U.S. Republican Party makes that journey all the more difficult in the months ahead.

Oddly enough, the demise or postponement of the TPP just might be a good thing for Canada.

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Really? Canada is a small, export-oriented economy. Surely, this country should seize every opportunity to advance rules-based trade and break into new markets.

Of course.

But joining the 12-country TPP was always more of a defensive gambit for Canada, rather than about making substantive and transformative trade gains.

New research bears this out. A recent C.D. Howe Institute study was the first publicly available economic modelling of what's in the deal for Canada. The study found that the country stands to make "relatively modest" gains from the TPP, including a 0.08-per-cent boost to GDP by 2035. The benefits are limited because tariffs are already generally low in the region, countries kept their most protected sectors off the table, and some companies won't bother going through the red tape to get the preferential access the deal offers, the study concluded. And besides, Canada already enjoys preferential access to the United States and Mexico through the North American free-trade agreement.TPP was a rear-guard action for Canada, which came late to the table. The United States was bent on getting the deal done to create a counterweight to China in the region – with or without Canada.

If there is a deal, Canada should join. A TPP without Canada would give our NAFTA partners, the United States and Mexico, a clear competitive advantage, particularly in the massive Japanese market. Canadian exports of beef, canola and forest products, in particular, would be badly disadvantaged.

Indeed, preserving the benefits of NAFTA may be the most important reason why putting the TPP on ice would be good for Canada.

Mr. Trump's vow to rip up NAFTA is an empty threat that only the U.S. Congress can make good on. But his stance on trade more broadly will make TPP ratification this year unlikely. Mr. Trump's anti-trade rhetoric and Bernie Sanders' prodding could turn Hillary Clinton, his likely Democratic rival, even further against the deal as she tries to avoid being outflanked on trade.

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The TPP would dilute the preferred access Canadian companies currently enjoy in the United States. Nine other countries – including Japan, Vietnam and Malaysia – would get the same advantages Canada and Mexico now enjoy in the world's largest market, including significant supply chain advantages. By default, that waters down Canada's trade edge.

It's worth remembering that Canada joined the NAFTA negotiations in the early 1990s to preserve the gains made in the earlier Canada-U.S. free-trade agreement. At the time, Canadian trade negotiators would have been happy with the status quo.

Then there are the not-insignificant tradeoffs that Canada made to get the TPP done – most notably on autos and dairy.

Under current rules, cars built in North America must contain at least 62.5 per cent NAFTA content to avoid import duties. The TPP would lower that threshold to as low as 35 per cent for some parts, enabling car makers here to source roughly two-thirds of their parts from lower-wage countries outside North America. That could hurt Canadian-based parts makers

The TPP would also open roughly 3.3 per cent of Canada's highly protected milk market to foreign competition. The Liberals are under intense pressure to live up to a pledge by the previous Conservative government to compensate dairy farmers for any losses caused by the TPP.

Not doing the TPP could save the government billions of dollars.

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U.S. President Barack Obama will no doubt press Prime Minister Justin Trudeau to ratify the TPP when he visits Ottawa in late June.

Mr. Trudeau would be wise to politely smile, bide his time and watch how the U.S. elections play out.

And by all means, Canada should ratify the deal if the United States and other countries do.

In the meantime, the government should pursue other promising opportunities, including bilateral trade negotiations with China and India. And if the TPP does wither and die, Canada should immediately push to reopen talks with Japan. These efforts should be focused on opening new opportunities and giving Canada a trade edge.

It's time to stop looking back nostalgically at the way things were, and position Canada for a future that could be a lot less U.S.-centric.

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