It is a well-worn cliché – but also entirely true – that Canada has been a trading nation throughout its economic history. Recent decades have seen a shift away from multilateral negotiations and toward regional and bilateral free trade. The Canada-U.S. free-trade agreement (FTA) and North American free-trade agreement (NAFTA) were cornerstones in that shift and have been key to Canada's deeper economic integration within North America.
After NAFTA was signed more than 20 years ago, Canada slipped into a lower gear on free-trade policy. Agreements were reached with small markets such as Chile, Israel and Costa Rica, but not with major players. Canada eventually caught the free-trade wave and two large regional trade deals were negotiated – the Comprehensive Economic and Trade Agreement (CETA) with Europe and the Trans-Pacific Partnership (TPP).
The new federal government is reviewing many aspects of economic policy, including trade. So where is Canada's trade policy going?
The CETA free-trade deal with the European Union is more or less irreversible – the ratification process is being completed and full implementation will follow. Both parties will benefit from the deal, which would provide a modest boost to underlying growth potential in Europe and Canada. The Conference Board of Canada had undertaken extensive research on what CETA means for Canadian businesses, which shows that the capacity of individual firms for innovation and adaptation will determine who will be able to take advantage of free trade with Europe.
The other big deal is the Trans-Pacific Partnership (TPP), which is a modern trade deal with wide coverage. TPP is not a perfect deal (few things are). Some of its specific elements are problematic, notably Canada and Mexico having a shorter time period than the U.S. for eliminating auto-sector tariffs on Japanese imports. Concerns have also been raised about protection of Canadian intellectual property under TPP. At initial inspection we think those concerns are likely overstated, but the issue deserves serious examination.
Despite its shortcomings, TPP is not going to be reopened for further negotiation. The real decision will be made in the United States. If Congress ratifies the agreement, in our view Canada would have little choice but to ratify as well. Otherwise, countries like Japan, Mexico and Australia would have more preferential and wider access to the U.S. market than Canada. We would be essentially shooting ourselves in the foot with our dominant trading partner.
With CETA and TPP in place, Canada would have free-trade deals with most of the world that has a material impact on the Canadian economy. What next? We see two overarching priorities for Canadian trade policy.
The first priority is to deepen further our trading relationship with the United States, still our dominant trading partner. Tariffs with the U.S were eliminated decades ago, but a wide variety of subtle non-tariff or regulatory barriers continue to inhibit trade. These barriers are particularly important to trade in high-end services such as financial, IT, computing, media, entertainment and professional services.
Canada could be a major global player in services trade, building upon our strong educational system and cultural and linguistic diversity. Improving the movement of Canadians into the U.S., which is fundamental to delivering high-end services, would be a great place to focus.
The second trade-policy priority is China, our second-largest trading partner. Although our trade with China has grown in real terms, other nations' trade with China, particularly that of countries in Asia, has grown much faster. As a result, Canada's share of Chinese imports has been cut in half over the past decade, to only 1 per cent.
Without deeper trade engagement as part of a larger China strategy, Canada's trade and investment shares in China will continue to shrink. Expanded and freer Canadian trade with China could be advanced either by China actively seeking to become a party to TPP (once the current participants have ratified the agreement) or through our own bilateral negotiations. But if we do nothing, Canada will lose more trade market share in China.
Ultimately, the proof of the pudding will be in the eating – through concrete policy action on existing and future international trade files, and by Canadian businesses embracing the benefits of international trade and acting upon improved access to foreign markets. If the new federal government pursues an active strategy to strengthen trade linkages, Canada can use advances in trade agreements to underpin economic growth.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.