It’s Time for a Course Correction on Trade Policy

In the 1980s Canada departed from its uniquely multilateral focus on trade policy and embraced bilateralism. It made sense at the time. The Uruguay Round of multilateral trade negotiations was proceeding very slowly given its complexity and large number of participating countries. Since Canada’s main objective within each multilateral round was to secure better access to our main market, the U.S., we could do that more quickly and efficiently with a bilateral agreement and, as a bonus, obtain preferential access to the U.S. while the multilateral system caught up.

The U.S. had already taken up bilateralism in a big way, signing agreements with many of its smaller trading partners.  Indeed, the implicit American strategy was to set up a hub and spoke system with the U.S. as the hub, enjoying preferential access to multiple markets at the expense of those other countries’ access to each others’ markets. This was the big country game, emulated by the EU.

Unfortunately, for small market countries like Canada, bilateralism becomes less attractive over time as it will always be a spoke in an entangled world of bilateral deals, with the constant erosion of preferences.  Further, the more such deals, each with slightly different rules, e.g. on rules of origin, the more difficult it is for businesses to navigate in decision-making on for increasingly complex global value chains.

Our best hope at the time was to expand on the bilateral agreement with the U.S. into a hemispheric trading bloc. The addition of Mexico into NAFTA was an important defensive achievement for Canada in heading off a bilateral U.S.-Mexico arrangement that would have impaired Canadian access. However, subsequent negotiations on a Free Trade of the Americas Agreement came to naught when Brazil and Argentina ultimately decided that they preferred to be big fish in the smaller Mercosur pond.

With the Doha Round of multilateral trade negotiations also suffering from fatal sclerosis, Canada settled-in to a second best strategy of bilateralism, initially with many small trading partners, and eventually with more important ones like South Korea and the EU.

We were also latecomers to the recently concluded Trans Pacific Partnership (TPP), an important decision if it goes ahead because Canada would enjoy equal access to the markets of participating countries, including Japan, one of our largest trading partners. Further, TPP is a step in the right direction, away from the blatant distortions of rampant bilateralism to the reduced distortions of plurilateralism.

Where we go from here on trade policy depends largely on the outcome of two recent agreements – the Comprehensive Economic and Trade Agreement (CETA) with the EU and the TPP. Unfortunately, Canada is mainly a bystander in ratification decisions.

Should both agreements come into force, Canada will then have good, secure access to the markets of most major trading partners, with the notable exception of China and possibly the UK. On the other hand, if one or both of those agreements founder, where does that leave us?

In those circumstances, the obvious initiatives would be bilateral agreements with the UK and Japan as priorities. Dealing bilaterally with China on ‘free trade’ is problematic for many reasons.

A more fruitful strategic approach for Canada may be to return full circle to multilateralism, but not the multilateralism as it was practiced under Doha – too many parties with divergent interests on too many issues.

Indeed, it is fair to say that if the difficult trade issues of the 20^th century (e.g. agriculture) cannot be negotiated by the whole international community, then that is even more the case for the critical trade issues of the 21^st century – services, investment, IP, competition, regulatory cooperation, security.

It should not be beyond the capacity of ‘the willing and able’ to devise a process for dealing multilaterally with these 21^st century issues. Indeed, even though the U.S. has made some efforts in this regard, its leadership is arguably suspect. That would provide Canada, the ‘honest broker’, (after all, we punched above our weight in decades past as members of the ‘Quad’ – U.S., EU, Japan, Canada) with an opportunity.

There are important precedents: e.g. the Agreement on Government Procurement in the WTO adhered to by about half the member states and the WTO Trade in Services Agreement (TiSA) initiative involving 25 members.

It would not be beyond the ken of the like-minded to develop a more bundled approach for a 21^st century agenda that goes beyond existing services, investment and IP disciplines and/or an agenda to rationalize the myriad of bilateral and plurilateral undertakings into a new multilateral agreement, taking the most liberal undertakings as the standard.

It may be too soon to define with any precision the way forward given the uncertainties surrounding the U.S. election cycle, Brexit, TPP and CETA implementation. It is not too early, however, to re-open the trade policy discourse with a view to developing a strategy for when the air finally clears.

Andrei Sulzenko

Executive Fellow, The School of Public Policy