Canada’s trade strategy – don’t get left out

Published in the Waterloo Record and the Guelph Mercury on June 22, 2012 –

(Note: this borrows from an earlier post on “Trade strategy for the not-so-powerful” but updates relative to Canada’s invitation into the TPP)

The announcement this week that Canada has been invited to participate in multilateral negotiations for the Trans-Pacific Partnership agreement has been met with the usual mix of excitement and dread that usually accompany issues related to international trade.

For while there is broad academic agreement as to the aggregate national benefit that countries derive from trade, the more localized impacts on industry and employment leave a much more complicated mix of costs and benefits.

The Trans-Pacific Partnership, while still at the negotiation stage, promises to expand trade across an eclectic group of Asian and Pacific states that together comprise more than 600 million consumers. However, beyond this broad promise of market access we know very little about what membership will entail, especially as it relates to issues of intellectual property and sector-specific support policies.

Rushing into a comprehensive economic agreement blind would seem to be folly. Yet it follows the pattern of trade policy in Canada that prioritizes the broad promise of improved access to markets over tangible data as to its benefits.

Like the Trans-Pacific Partnership, negotiations toward the Comprehensive Economic Trade Agreement with the European Union are premised on government belief that the deal will bring $12 billion in annual gross domestic product (GDP) gains and 80,000 new jobs. Yet a deeper look at the research shows these projections are out-of-date and ignore the current shape of negotiations. Other research highlights a much wider range of estimates, ranging from the government’s optimistic scenario to downright pessimistic projections of between 28,000 and 150,000 jobs losses.

Given this range of potential outcomes, why in the world are we rushing headlong into this?

The answer is simple — if we don’t, someone else will.

In an economic environment where the Doha round of trade negotiations at the World Trade Organization has hit a standstill and where unemployment is a priority concern in every nation around the world, bilateral and multilateral trade agreements like the Comprehensive Economic Trade Agreement and the Trans-Pacific Partnership reflect the strategic political games that pit countries against each other in the search for first-mover advantage for preferential access to other trade markets.

The real question being asked is subsequently not “what are the benefits of membership?” but rather “what are the costs of exclusion?”

Years ago, I had the privilege of working with American political scientist Lloyd Gruber. His best known work is Ruling the World: Power Politics and the Rise of Supranational Institutions. In it, Gruber highlights that, as opposed to what most think, countries don’t necessarily benefit from signing up to trade agreements. In fact, he says, they often lose.

So why do they sign up? Simply because they believe they would be worse off should they choose not to sign up and thus fall behind others in the pecking order of preferential trade.

For while we’re negotiating the Comprehensive Economic Trade Agreement, the EU is working on a similar set of free trade negotiations with India. And while Canada and India don’t compete on a great deal of products today, there’s no reason to think that in product lines such as automobiles, machinery and high-tech innovation and pharmaceuticals we won’t soon. The Comprehensive Economic Trade Agreement thus gives Canadian producers a limited window to lock in potential European consumers.

Far more important is that the EU is considering the expansion of its trans-Atlantic relationship with the United States into a similarly comprehensive economic and trade agreement. Given similar U.S.-Canadian export strengths, in particular around high-tech machinery and industrial products, auto parts and agricultural products, beating our southern neighbours to the punch ensures we’re able to negotiate a better deal than were we following them to Europe.

The costs to access Europe might be high, in this case opening up government procurement, doing away with buy local provisions and implementing stricter intellectual property regulations that may entail significant impacts on the cost of pharmaceutical products.

The costs of being second in line behind the U.S. and others could be even higher. And thus whether it be our negotiations with the EU, Japan, India, South Korea or now the broader Trans-Pacific Partnership, Canada’s policy stance has been to aggressively seek to be at the forefront of preferential trade agreements.

This strategy certainly entails risks, as the aforementioned Comprehensive Economic Trade Agreement-related costs highlight. These shouldn’t be taken for granted, nor should we fail to debate them and mitigate them as best as possible.

However, deciding on an alternative strategy requires us to consider the counterfactual of what happens if others beat us to the punch and force us to negotiate at a disadvantage.

And in a world of integrated supply chains and of increasingly competitive markets for the high-value, high-skill products and services that we’ve grown accustomed to being leaders on, choosing not to participate will place Canadian businesses and the individuals they employ at a distinct competitive disadvantage.