The Wrong Trade Agreement

The suspense is over. After months of lobbying, bargaining, and pleading, the U.S. has finally allowed Canada to join its much-hyped Trans-Pacific Partnership (TPP) trade initiative. All that remains now is to figure out why we wanted in in the first place.

The main argument is that a “high standard” TPP agreement will expand Canada’s access to a $20-trillion Asia-Pacific market. This is not especially convincing. Canada already has NAFTA with the U.S. and Mexico, which make up the lion’s share of the TPP. There are also bilateral agreements with Chile and Peru, and a deal in the pipeline with Singapore. How much more free access can yet another free trade agreement provide? Sure, the TPP also includes Brunei, Vietnam, Malaysia, Australia, and New Zealand, but while these economies are not irrelevant to Canada’s trade interests, they are not particularly relevant to them, either. The problem is that the TPP covers the Asia-Pacific countries where Canada already has free trade or doesn’t much need it, but not the giant markets, especially China and India, where we need it most.

The proponents respond by claiming that the TPP is an expanding agreement that’s open to new partners. This argument is even less convincing. In any international agreement, there’s an unavoidable trade-off between “widening” and “deepening.” As more countries are brought into the TPP – with more interests, issues, and egos –it becomes increasingly difficult to achieve an ambitious outcome – and the more the TPP starts looking like the WTO. Already, it’s hard to imagine the U.S. and Vietnam agreeing on labour standards. Or Australia and Japan (assuming Japan wants in) agreeing on agriculture.

The claim that the TPP could “solve” Canada’s complex and all-important bilateral relationship with the U.S. is the most far-fetched. While North American economic cooperation clearly needs strengthening in areas like labour mobility, regulatory standards, and shared infrastructure, this will be achieved by narrowing the negotiations to just Canada and the U.S., not by widening them to a dozen or more countries in Asia and South America.

All of this highlights a basic dilemma of trade policy today. Most of the “easy” trade liberalization has already been done. Over half of all global exports – from coal to computer chips – face zero tariffs, while another third contend with “nuisance tariffs” of just two or three per cent. And services trade is becoming even freer, as everything from education to accounting to telemedicine is increasingly exported “friction free” across the world’s digital networks. This is not to say that there are no trade challenges left. But they involve the toughest issues – like exchange rates – and the most powerful countries – like China.

Hence the current love affair with bilateral and regional initiatives. They allow presidents and prime ministers to sign sweeping free trade agreements in sectors that are already largely free and with countries that easily fall into line, while avoiding having to open up “sensitive industries” or compromise with the toughest trade partners. Despite the hundreds free trade agreements in existence today, together they marginally impact less than 14 per cent of world trade, and significantly impact (with preference margins above 10 per cent) less than two per cent. Not surprisingly, there are no free trade agreements between the major powers – the U.S., EU, China, and Japan. What this means is that countries are chasing more and more bilateral and regional deals even as global free trade renders them less and less important.

The TPP is yet another exercise in reality avoidance. Confronted with a world trading system in which its power is diminishing because other giants are rising and because it gave away most of its bargaining chips in past negotiations, the U.S. sees the TPP as a lever to help it regain lost dominance and shape the kind of trade system it wants. To avoid having to deal with competing powers and interests, the U.S.’s game plan is simple – establish the terms of the TPP first by using leverage over weaker countries to get the rules it wants, then force the rest of the world to sign on. Thus, Canada was sternly warned that supply management had to go if it wanted in, but there was no mention of any U.S. protectionist policies – anti-dumping, buy America, the Jones Act – offered in exchange. That’s because the U.S.’s goal is not to liberalize its own market but to use the “carrot and stick” of the TPP to pry open other countries’ markets – especially China’s. Of course, this strategy hinges on the unlikely assumption that China, India, or Brazil can be pressured to accept a U.S.-written agreement on a “take it or leave it” basis.

Like it or not, none of the major trade challenges we face today can be solved without agreement among the global powers. Multilateralism may be a messy, frustrating, two steps forward-one step back process, but there’s no rational alternative. It’s understandable why the U.S. might see the TPP as a path back to the good old days when it called the shots and set the pace – even at the risk of fracturing the global trading system which the U.S., as much as anyone, needs. It’s less understandable why Canada would want to go along.

Photo courtesy of Reuters