A Lever to Move the World

After too many false dawns to count, Prime Minister Harper has finally announced his “historic” free trade agreement with the EU. This is one instance where the political spin may actually be understating the achievement. Not only is this the first major transatlantic trade deal in 70 years, giving Canada a significant jump on the United States – now pursuing its own EU strategy – it could turn out to be a crucial lever to help accelerate the pace of global trade talks after two decades of drift.

The idea of transatlantic free trade has had a long germination period, to say the least. First mooted in the late 1940s – NATO’s article 2 included “economic collaboration” among its goals – and revived again in the 1960s, it was dropped both times because key players lacked the political courage to push it through. This latest initiative can be traced to former Liberal trade minister Roy MacLaren’s call for a transatlantic free trade agreement back in 1995, and his tireless campaign to advance the idea ever since. Today’s success is a testament to nothing if not policy perseverance.

Why is the agreement important? The obvious reason is that Canada will now have preferential access to the world’s biggest market, giving Canadian exporters and investors a significant advantage over their American and Asian rivals. It’s easy to forget, amid the Eurozone’s recent financial woes, that Europe’s combined GDP is larger than America’s, almost twice China’s, and over ten times India’s. Meanwhile, Canadian consumers will pay less for thousands of European products – from cars to Camembert to Chanel perfume.

The agreement will also strengthen Canada’s competitive edge, not just in Europe, but in the critical U.S. market and beyond as industries expand, streamline, and take advantage of lower-priced inputs. So far, the Canadian debate has been bizarrely focused on the fate of heavily-protected dairy farmers – mainly because they have the funds to complain loudest – but this sector represents a minuscule fraction of two-way trade – and trade itself is becoming less important to the transatlantic economy than fast-expanding investment, technology, and people flows. By layering free access to Europe on top of its existing free access to North America, Canada has executed the ultimate hub-and-spoke strategy, significantly increasing its attractiveness for global investment and production.

But perhaps the biggest impact of the agreement will be felt beyond the bilateral economic relationship. There’s no question that a successful Canada-EU deal will be noticed in Washington and spur U.S. officials to accelerate their own free trade negotiations with Brussels – especially when they face growing pressure from U.S. exporters to level the playing field.

The realization that a transatlantic deal is doable and that it may presage a bigger U.S.-EU deal or even an eventual North America-Europe bloc (should Canada push to trilateralize the discussions, which increasingly makes sense) will also be felt in Asia, which, up till now, has had the lead in the globalization race. Who knows, a successful Canada-EU agreement might even give the comatose Doha Round of global trade talks a needed shot in the arm when WTO trade ministers meet in Bali this December.

This wouldn’t be the first time that far-sighted Canadian trade policy helped set in motion a process of competitive liberalization worldwide. There’s no doubt that the 1988 Canada-US FTA spurred to Mexico to join the NAFTA talks three years later, which in turn persuaded the EU and other world trade powers to seal the deal on the Uruguay Round in 1994.

Canada has taken an important step towards transforming itself into the most competitive economic space in North America. And it has provided clear evidence that the cause of trade liberalization is not dying or dead, which even this week’s Economist was gloomily suggesting. The Harper government will now be looking for credit for both these achievements, and rightly so – it deserves it.