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TPP Is Dead, so What Is Canada’s Plan B for Trade?

TPP Is Dead, so What Is Canada’s Plan B for Trade?

As the Senior Fellow for the Conference Board of Canada, Glen Hodgson brings nearly 35 years of experience in areas such as macro-economics, international trade and finance, and fiscal and tax policy. Supporting the Conference Board’s mandate to advance Canadian competitiveness and prosperity, he identifies and develops new initiatives for research and engagement, undertakes research, and provides public commentary on topics such as Canada and globalization, low-carbon economic growth, sustainable fiscal policy, tax system design and administration, and the creative economy. Here, Glen examines what Canada should do when it comes to trade in the wake of a Trump government:

The U.S. election results bring additional uncertainty to an already uncertain economy. The need for growth-oriented Canadian economic policy has not gone away; expanded trade and investment access to other markets is a cornerstone of that strategy. Canada has just signed the Comprehensive Economic and Trade Agreement (CETA) with the European Union. But the future of an even bigger agreement—the Trans-Pacific Partnership (TPP), a broad free-trade deal involving 12 Pacific Rim countries—is dead in the United States.

In the face of opposition within Congress, the Barack Obama Administration has given up efforts to pass the agreement before the President leaves office. President-elect Donald Trump has said he will “kill” TPP, meaning he will not pursue authorization with the next Congress. Canada and other parties to the agreement will be sent back to the drawing board. Where does Canada go next to enhance its trade with Pacific Rim countries and fast-growing Asia?

Canada was not an early or enthusiastic supporter of TPP. Some of the details of the deal that was eventually negotiated were not in Canada’s interest, specifically giving the United States a longer adjustment period than Canada (and Mexico) for Japanese auto-sector imports. But over all, the TPP advanced Canada’s economic interests with a high-growth region and was worth ratifying—if our American neighbours did the same.

Rather than slipping into neutral, we should develop a Canadian Plan B, built around a two-pronged strategy.

The first and more immediate course of action would be to re-energize the existing free-trade deals Canada has with TPP countries. The North American free-trade agreement (NAFTA) is by far the most important trade deal for Canada, but its future is up in the air as well. What’s the fallback position? If the United States withdraws from NAFTA, presumably Canada and the U.S. would revert to the free-trade agreement (FTA) that was negotiated in the late 1980s by the Mulroney government.

An updated version of the FTA should promote free trade in services, where numerous subtle barriers exist to trade in key services such as transportation. A modernized FTA could aim for more common regulatory standards between Canada and the United States, or at least mutual recognition of regulations where the policy intent is the same.

To win the support of a Trump administration, a renewed FTA would have to address directly the concerns of sectors and workers that perceive themselves as negatively affected by free trade. Dialogue on adjustment practices in North America would go a long way in addressing concerns about the benefits of Canada-U.S. free trade.

Next, Canada could examine ways to enhance trade with other Pacific Rim countries where we have bilateral free-trade deals in place.

In South Korea, we should be investing much more government and private-sector time and resources in trade development and promotion. South Korea is now a wealthy country and an interesting consumer market for things such as food products, education or entertainment services. But Canadian firms also need to gain full access to the supply and value chains of South Korea’s business conglomerates. The same logic applies to existing bilateral free-trade deals with Chile, Colombia, Peru and Costa Rica, among others.

The second Canadian trade-policy path would be to pursue new bilateral and small regional deals with other TPP countries and beyond. If NAFTA ends, Canada could pursue an agreement with Mexico. Canada has been engaged in bilateral free-trade talks with Japan for some time, and this would be a good time to re-energize those discussions. Australia and New Zealand already have their own bilateral free-trade agreement, and Canada could examine seeking access to their bilateral agreement.

We acknowledge that this scattered approach is less than ideal—one large regional trade deal such as TPP would be much better in terms of clarity on rules and securing market access for Canadian international trade and investment. Doing nothing is not a particularly attractive policy alternative, particularly in a world where protectionist, anti-globalization forces are on the rise.

The wild-card trade opportunity for Canada is with China, now Canada’s second-largest trade partner. The federal government is at an early stage of examining free-trade potential with China, and will need to get the right preconditions in place before any serious discussions occur.

The election of Donald Trump and the dual prospects of a revision of NAFTA and the demise of the TPP process will force a re-examination of Canada’s trade ambitions. A number of bilateral options are worth examining, both deepening the engagement on existing free-trade deals and developing new ones. Doing nothing is not an option.

Glen Hodgson/January, 2016