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Economic Insight The Trans-Pacific Partnership paints Canada into an economic corner

Canada's Prime Minister Stephen Harper speaks during a news conference on the Trans-Pacific Partnership (TPP) trade agreement in Ottawa, Canada October 5, 2015.

CHRIS WATTIE/REUTERS

Economists have a strong predisposition toward trade liberalization, which is held to increase efficiency and boost productivity through greater specialization in those sectors in which we hold a comparative advantage.

But the new Trans-Pacific Partnership, or TPP, is likely to be damaging to our future prosperity by reinforcing our overreliance on low value-added exports of raw and semi-processed resources, and by further increasing our chronic deficit in the trade of sophisticated manufactured goods and advanced services.

Despite the hype, the TPP does not greatly liberalize our overall trade with the rest of the world, since we already have substantially similar trade and investment agreements with the United States, Mexico, Peru and Chile. The major change is the new relationship with Japan, and the possible addition of China to the TPP at some point in the future.

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On the plus side, the TPP is likely to be of advantage to some Canadian agricultural producers outside the supply-managed sectors as Japanese import barriers are lowered. But there is unlikely to be a major boost to Canadian exports to that country in either sophisticated manufactured goods or in services, given that there are currently few barriers to trade in these areas, and given that we already run a large deficit with Japan in non-resource trade.

The experience of the North American free-trade agreement over the past 25 years tells us that trade and investment liberalization is more likely to deepen and entrench areas of existing competitive advantage than to promote diversification. Access to the large U.S. market has, in and of itself, done nothing to close the large and growing innovation and productivity gap between Canada and the United States.

On the negative side, the TPP will result in a significant further shrinkage of the Canadian auto industry. Canadian and U.S. tariffs on imported Japanese autos (a steep 25 per cent in the case of the U.S. tariff on trucks) will be phased out, removing much of the current incentive for the Japanese auto companies to maintain production facilities in North America.

Even more significantly, the TPP establishes a low domestic-content threshold of 40 per cent to 45 per cent for access to the new integrated auto and auto-parts market, meaning that auto assemblers can make much greater use of parts manufactured in non-member countries. This opens up the prospect for a major shift of parts production to China, which will benefit the big Japanese auto companies much more than the North American producers given geographical proximity and the supply chains that already exist.

Economist Jim Stanford, who is widely respected in the auto industry, estimates that 25,000, or one in four, current direct auto jobs in Canada are at risk as tariffs and the much higher NAFTA domestic-content rules of about 60 per cent are phased out. Down the road, especially if China joins the TPP, there could be a major shift of the North American auto industry to that country.

Beyond the narrow calculus of likely winners and losers from changes to the trade rules, the TPP reinforces policies that prevent Canada from pursuing more active economic-development strategies to diversify our economy.

The TPP will likely limit our ability to require higher value-added processing of our resource exports to Asia, such as restrictions on the export of logs rather than lumber, or on unprocessed fish rather than fish products.

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Like the trade and investment agreement with the European Union (still awaiting ratification), the TPP apparently goes well beyond NAFTA in terms of opening up the procurement of all levels of government to much greater foreign competition. This is significant since it increasingly has been argued that domestic preferences could give a needed leg up to Canadian high-tech and clean-energy companies seeking an initial market, as was shown by the success of the Ontario Green Energy Act in creating capacity and jobs in renewable energy.

Largely because of pressures from corporate interests in the United States, the TPP also reinforces rules that benefit industries that have only a limited production footprint in Canada. For example, the TPP extends intellectual-property rules which seek to lock in drug patents for new classes of drugs and for longer periods of time, likely resulting in much higher costs for Canadian consumers and government drug plans for limited gain.

Viewing the TPP as a trade agreement masks its significance as a tool that will, like NAFTA, be used to challenge government regulation in the public interest. Investors from across the TPP will be able to appeal regulatory decisions before secret tribunals, giving them rights that do not exist for domestic companies under Canadian law.

Put it all together, and the TPP is another significant step in the wrong policy direction.

Andrew Jackson is adjunct research professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.

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