Are trade agreements with Asia in Canada’s interest?

Deepening our economic relationships with Asia’s emerging economies would allow Canada to diversify away from our traditional reliance on U.S. and European markets for our exports – all the more important given the obvious long-run economic challenges facing in those jurisdictions.

But “promoting Canadian exports” and “signing a free trade agreement” are not synonymous. An empirical review of Canada’s existing FTAs suggests that our exports to FTA partners grew more slowly than our exports to other countries, while our imports from FTA partners grew more quickly than with other countries. If our goal is stronger exports and stronger trade balances, signing more FTAs is the wrong way to go.

Canada’s trade relationships with Asia are already unbalanced. With Japan, the ratio is about $1.50 in imports for every $1 in exports. With Korea, it is 1.65-to-1. With China, the imbalance is enormous: over $3 in imports for every dollar of Canadian exports. The result is a large cross-Pacific trade deficit that undermines employment, incomes, and well-being in Canada. The trade deficit with these three economies alone, has swollen to almost $40 billion per year, a drain on our economy’s purchasing power at a time when demand conditions limit domestic employment.

In addition, we export mostly unprocessed or barely-processed resources (coal, aluminum, forestry products, and minerals) to Asia, but we import from them an increasingly sophisticated basket of value-added manufactured goods. In the long-run, we cannot base our role in global markets on extracting and exporting non-renewable resources. Moreover, by exporting resources, then importing value-added products made from those resources, we also export the jobs and value that are associated with processing those resources.

According to the Canadian Auto Workers union, Canada’s trade deficit with Japan, China and Korea has cost us nearly 200,000 manufacturing jobs, the largest proportion of the downturn in Canadian manufacturing, and corresponding loss of decent well-paid jobs, in over ten years.

Canada’s key challenge in its trade with Asia is to foster sophisticated, technology-intensive, high-productivity industries here. Those efforts to nurture desirable industries will include encouraging more exports. Free trade agreements, however, have proven a poor tool to that end. Indeed, Asian economies’ successful industrialization is testimony not to the virtues of unregulated markets and free trade, but to the effectiveness of state-led interventionist development strategies.

For years Canada has played by the free-trade rules no matter what, while other countries (like those in Asia) took a less ideological, but more effective approach to industrial development. Rather than applying the same old free-trade cookie-cutter to our future international relationships with Asia, we should instead take a page from their playbooks. Let’s develop and implement pro-active sectoral strategies to expand Canada’s presence in a range of desirable high-tech industries, both traditional (like automotive, aerospace, and telecommunications) and new (biotech, green energy, and advanced materials). In that regard, more trade (but not free trade) can be a useful tool, but is not the end in itself.

Canada has a vital interest in concluding trade agreements with significant Asian countries because the Asian region has become the engine of global growth and because Canada as a trading nation will benefit by taking advantage of the opportunities in those markets. Although the United States will remain our most important partner, Canada's trade is shifting towards the emerging markets. For instance, work by EDC with Statistics Canada data shows dramatic compound annual growth rates between 2000 and 2008 in Canadian trade with India of nearly 20% and with China of 15%. Counting the EU as one entity, China is already our third largest trading partner. Four other Asian traders round out our top 10 export markets, Japan, Korea, India and Hong Kong.

The larger Asian countries have higher import barriers of various sorts than does Canada. To be successful in these markets we need to get these barriers down. This is particularly important for our exporters of agricultural products. Canadian entrepreneurs and producers need not only exports but also what these countries can provide, high quality reasonably priced inputs for our agricultural, manufacturing and services industries.

For the above reasons negotiating trade agreements with this region makes sense but there are two additional reasons for doing so now.

First the WTO Doha Round negotiations have ground to halt, closing down the opportunity of using the multilateral approach to open Asian markets.

Second and even more important we face a situation where other countries such as the U.S., the EU, Australia and New Zealand, are negotiating agreements to open up Asian markets for their producers who are very often in direct competition with Canadians. The U.S. is leading an effort to build a broad TransPacific Partnership agreement from which Canada has been excluded because our protectionist policies in dairy and poultry and American concerns about Canadian copyright protection. Japan may soon join these talks leaving Canada very much out in the cold. Furthermore, the U.S. and the EU now both have free trade agreements in place with South Korea. This puts Canadians at a real disadvantage in the Korean market. Unless we can quickly bring our own negotiations with Korea to a successful conclusion, Canadian producers of pork, beef and honey will lose their traditional share of the Korean market.

Clearly Canadian officials have some important negotiating work ahead of them!

John Weekes has a 39 years of experience in the field of trade policy and negotiations. Mr. Weekes served as Canada's Chief Negotiator for the North American Free Trade Agreement (NAFTA), including for the side agreements on environmental and labor co-operation. He was Ambassador to GATT during the Uruguay Round of multilateral trade negotiations and Chair of the GATT Council in 1989 and then of the GATT Contracting Parties in 1990. In the 1970s he participated in the Tokyo Round of GATT negotiations.

The question of whether Canada benefits from free trade needs to be rephrased to this: What Canadian interests or business sectors gain and at what cost to jobs, environmental protections, social policy and development options for Canada and its trading partners?

The Council of Canadians is not opposed to trade. We are opposed to the NAFTA-type free trade model which became a template for the WTO and most later bilateral and regional agreements. These deals were only marginally about tariffs and should be understood instead as powerful tools allowing governments to regulate corporate activity and investment. They are the product of an ideology that says markets work best the less governments touch them. This ideology has led directly to the current global ecological, food security, employment and financial crises. Not surprisingly the ideology itself -- trade liberalization -- is in crisis, too, questioned by mainstream economists and rejected outright by peoples around the world.

Granted there remain some tariffs and other barriers to Canadian investment and exports abroad. In fact, we have a free trade agreement with most Asian nations – it’s called the WTO. Unfortunately, rich nations such as Canada have abandoned the WTO to pursue bilateral deals designed to give temporary gains to a limited number of business interests. In Canada they are mining, agricultural products and finance.

Developing countries have successfully used the WTO negotiations to demand a more level playing field. They seek to protect their right to develop by temporarily shielding important sectors from foreign competition just as developed countries have done. The fact they have abandoned the WTO shows how rich countries saw it as a venue for furthering their domination of global trade.

On a purely economic level the case for free trade with Asia is weak. Canada's exports with non-FTA partners have been growing faster than with countries where we have bilateral free trade agreements. In the majority of cases Canada's trade deficit has grown after free trade deals were signed.

Finally there are much more pressing issues than trade we must deal with such as ecological collapse, food insecurity, social inequality and joblessness worldwide. Free trade has no solutions to these problems. In fact the ideology behind liberalization is largely to blame for overproduction, under-regulation and a lack of serious action on climate change.

Dairy Farmers of Canada (DFC) recognizes the importance of trade for a country such as Canada. Consequently, DFC has never opposed Canada from engaging in trade talks. We believe, however, that all countries have sensitivities and these must be addressed appropriately in any trade agreements.

In all trade agreements negotiated by Canada, the dairy and other supply managed sectors have been excluded from the application of certain provisions pertaining to market access. These exclusions have not stopped Canada from successfully negotiating trade agreements with important countries such as the U.S., Mexico, Chile, EFTA, etc. While negotiations with South Korea and Singapore have been stalled, it is in part because of domestic opposition in these countries to the terms of such agreements.

Furthermore, DFC strongly believes that agriculture plays a critical role in our societies by providing food security to local populations, maintaining viable rural communities and looking after the world's precious land resources. Trade rules, should recognize the specific and strategic role of agriculture and allow for policy measures that promote stability of food supplies and prices while allowing flexibility for countries to address their own challenges, be it climate, price volatility, through appropriate market regulating mechanisms.

DFC believes in regulated markets. We also believe in the notion of fair trade taking place within the context of a true internationally agreed rules-based trading system. It is within the context of an internationally agreed trading system that the Canadian dairy industry has implemented and maintained the efficient supply management system, which continues to evolve and adapt to the changing market environment.

The market conditions that prevailed when supply management was established in the 1960s are similar to those that exist in countries that have deregulated their dairy policies. The realities of the dairy sector do not match neoclassical theoretical prescriptions (market self-regulation). Milk is highly perishable and 13,000 dairy farmers sell 80% of the milk produced in Canada to 3 main processors, and the rest to hundreds of smaller processors.