Commentary: Canada’s two tracks on trade

2017 will be a pivotal period for companies doing business in or though Canada, as two geopolitical events will impact its place in the global trade marketplace, according to Keith Haurie, vice president of business development for ONESOURCE Global Trade.

   This year will be a uniquely pivotal period for companies that do business in or through Canada. Two geopolitical events are shaping the position Canada will occupy in the global marketplace for imports and exports: the risk that the North American Free Trade Agreement (NAFTA) will be substantially altered, and the precise approach Western powers will take with respect to Asia now that the United States has officially (and somewhat noisily) withdrawn from the Trans-Pacific Partnership.
   Another important factor is the recently ratified Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union.
   At this time, however, there are still more questions than answers.
   For example, will U.S. President Donald Trump follow through on the promises he has made with regard to NAFTA by invoking Article 2205 and starting the countdown to withdrawal? Or will he instead use this threat as leverage to extract politically convenient but structurally trivial concessions from Mexico, leaving the meat of the agreement unchanged?
   If these negotiations bring an end to NAFTA, will bilateral deals eventually replace the North American bloc, and if so, how?
   Will Canada move forward with the 10 remaining TPP counterparties to ratify the deal, as Kenjiro Monji, Japan’s ambassador to Canada, recently suggested, thereby taking a more powerful role as the West’s primary trade linkage to TPP’s pan-Asia bloc? Or will Canadian Prime Minister Justin Trudeau vie for smaller trade deals, perhaps bilateral agreements, with TPP counterparties instead, as Mexico President Enrique Pina Nieto signaled his country would?
   More generally, questions remain about Canada’s ability to expand its role in the global marketplace, given the strong likelihood that its neighbor to the south will, at best, pursue smaller, bilateral trade agreements or, at worst, enact protectionist measures that discourage imports and impede investment.
   With all that said, a couple of things are reasonably certain.
   It is tough to imagine NAFTA being dismantled and nothing replacing it. Too many industries that are critical to the economic health of the United States – and its northern and southern neighbors – rely on intra-continental trade liberalization for this to occur.
   While political interests may allow President Trump to make a show of “restructuring” the agreement in a way that boosts his popularity, an all-out trade war is implausible because of its obvious economic consequences.
   And despite Trump’s rhetoric, it is unlikely that the U.S. can impose high tariffs on Mexican imports while leaving Canadian imports unscathed. As outlined in a recent Reuters news report, talks to revise NAFTA will involve negotiations between all three countries.
   Mexican Economy Minister Ildefonso Guajardo has suggested that a united front between Canada and Mexico will extract the most favorable terms for a negotiated NAFTA, but if Canada disagrees, two options remain: revert to the original Canada-U.S. FTA or negotiate a new bilateral trade agreement with the United States.
   Canada’s decision may be influenced by the simple fact that foreign trade is a more significant contributor to the country’s economy than it is to the U.S., which makes Canada more dependent on maintaining the free trade provisions of NAFTA.
   It is also unlikely that the TPP’s demise will reduce the appetite of smaller Asian economies to collaborate in an attempt to reduce their risk exposure to China. If anything, it will create a more urgent environment to do this.
   Because these geopolitical issues appear to create conditions favorable for them in the short term, Canada could follow the U.S. lead and pursue bilateral deals with its trading partners, particularly nations in Asia. While there are significant trade linkages between Canada and Central and South America, direct trade relationships with Asia are more scarce. However, Canada is said to be in talks with Japan on a trade agreement.
   A more aggressive approach, however, would be for Canada to actively supplant the U.S. in proposed trade agreements or those pending ratification. While it is unlikely the TPP will be salvaged, an altered deal that closely resembles the TPP could, for instance, emerge between united Asian economies and Canada and Mexico.
   This path is plausible thanks to the diversity of Canada’s export economy. According to the IMF, its top five exports are vehicles, mineral fuels (including oil), machinery (including computers), gems and precious metals, and wood. It also exports a significant sum of aircrafts, pharmaceuticals, and aluminum.
   Canada and the U.S. share eight of their respective top-10 exports by value, although the U.S. exports far more on a net basis.
   On top of its economic benefits, particularly to large corporations, CETA is in this respect sound public policy because it demonstrates Canada’s desire to engage in more complete trade liberalization. Approved by European Parliament in February, it will eliminate virtually all (98 percent) of tariffs between Canada and the EU, and most benefits can be applied provisionally beginning in April.
   Whether or not Canada has the capacity and political will for such an aggressive approach is an open question, but on the surface it does not seem beyond imagination. Regardless, look for Canada to be a central player in the evolution of global trade liberalization, and for the resulting complexity to open new doors for Canadian business.