Canada Risks Being Left Out of Trans-Pacific Trade Deal

November 14, 2008

As Prime Minister Harper arrives in Lima for the APEC Leaders’ Meeting, following the visits earlier this week of Foreign Minister Lawrence Cannon and Trade Minister Stockwell Day, he will join counterparts from the 20 other member economies, including the US, China and Japan.

The global economic crisis will be at the top of the leaders’ agenda, but APEC is not in a position to offer any ideas to address the immediate challenges beyond what was already discussed at the G20 meeting in Washington. APEC can, however, be expected to make a strong statement of support for the conclusion of the Doha trade round. Trade ministers have been tripping over each other to highlight the risk of protectionism during the current crisis and in voicing the urgency of concluding the long drawn-out WTO negotiations.

Even as they talk up the multilateral system, many leaders and ministers are in Lima to announce bilateral and regional trade deals with other APEC members. In particular, we can expect over the next few days that there will be a series of announcements from member economies planning to join the Trans Pacific Partnership (TPP). Formerly known as the P4 agreement, this FTA started life in 2005 as a deal among small countries with highly open economies, namely Singapore, New Zealand, Chile and Brunei Darussalam. It nevertheless stood out among the plethora of FTAs in the region for four reasons: a) transpacific membership, b) relatively comprehensive coverage of sectors, c) an open accession clause, and d) the inclusion of labour and environment side agreements.

The original P4 have been shopping the deal to other APEC members, including Canada. Earlier this year, P4 catapulted to the big league when US Trade Representative Susan Schwab announced her government’s intention to join the deal. Since then, Australia, Vietnam and Peru have also said that they intend to join, with South Korea rumoured to be not far behind. If P4 does become P9 or more, it will effectively form the nucleus of any broader transpacific free trade agreement. Even APEC is talking about the TPP as a starting point for the Free Trade Agreement of the Asia Pacific (FTAAP) – an idea which was giving some rhetorical support by leaders at the Sydney meeting in 2007 but which has no mechanism for advancement within the consensus framework of APEC. In her statement to the press announcing the American intention of joining TPP, Schwab described the deal as “reinforcing the Asia-Pacific Economic Cooperation (APEC) goal of promoting regional economic integration and that it could serve as a potential way to build towards the Free Trade Area of the Asia Pacific.”

Even though Canada was identified early on as a desirable partner in the P4, Ottawa has not signaled any clear interest in the deal. Canada already has an FTA with Chile and has been negotiating with Singapore since 2001. Brunei would not pose a stumbling block for Ottawa, but it is the prospect of free trade with New Zealand – notably in the dairy sector – that has made our trade officials nervous. Canada’s supply management system in the dairy industry would likely not survive entry into the P4, which makes this deal a highly sensitive political issue, especially in Quebec. Senior policymakers may be prepared to contemplate changes in supply management in the context of a global trade round that results in a wide range of compensating benefits for Canada; they are less willing to give up the supply management card for a much smaller trade deal such as the P4.

But P4 in its new incarnation as the TPP may no longer be a small trade deal. Indeed, if it is the nucleus of an FTAAP, it becomes a potentially mega-deal, albeit one with a long time horizon. In any case, the entry of the US, Australia, and possibly South Korea into the TPP should make Ottawa take another hard look at this agreement. Canada has unfortunately developed a bad track record of starting FTA negotiations with Asian partners and failing to conclude them. In the case of both Singapore and South Korea, the Americans began negotiations with those partners after Canada did, and yet were able to complete a deal (the Korean deal has yet to be ratified by Congress) before Canada. To the extent that one of Canada’s bargaining chips is to offer third country trading partners preferred access to the US market through NAFTA, that chip is devalued by those countries concluding agreements directly with Washington. If the US joins TPP, will the members of that deal still have much interest in welcoming Canada to the party?

It is of course uncertain that the US will in fact join TPP, not least because the current administration is in no position to commit the Obama team to a deal that may be deeply unpopular with the American public. Furthermore, the US is joining just in time for negotiations on financial services and investment that the original four have agreed to commence in 2009. Even though the “open accession” clause suggests that new members have to sign on to the original elements of the deal, it would not come as a surprise if the US is able to re-visit some of the founding commitments. Whether or not these issues can be ironed out between the US and the existing members is an open question. However, Ottawa should seriously weigh the risk that not being part of those discussions would make it more difficult to join at a later stage, even if Canada is still welcome. Singapore’s George Yeo has publicly stated that any APEC member willing to sign up for TPP by the time of the Leaders’ meeting in Lima will be entitled to join in the negotiations on investment and financial services.

Canada has been exceedingly cautious about trade deals with Asian partners, preferring to pursue FTAs with Caribbean/Latin American countries and with the EU. Even where Ottawa has entered into negotiations with Asian countries, there has been a glaring failure to conclude. The TPP is a welcome mat for Canada and an opportunity to not only close with Singapore (and potentially Korea), but to also join with a growing number of APEC member economies in a deal that could be a precursor to region-wide free trade. Many APEC leaders may leave Peru with a list of new dance partners for actual or potential trade deals. Will Canada join the dance or will it continue to watch from an increasingly lonely corner of the room?