A Siren Call Among Shrill Notes

Foreign businesses have long used Canada as a beachhead for entering the US market. That role has never been more important as the US moves toward protectionism.
IN ANY DISCUSSION ABOUT the impact of US President Donald Trump’s trade policies and the opportunities these policies may present for Canada on the international front, there are two macro-truths that have remained unchanged even in the face of the president’s consistent unpredictability: the first is that Canada has established itself as a champion of the free trade movement just as the United States leads the protectionist upsurge; the second is that uncertainty regarding the precise gulf between these two positions will remain the order of the day for the foreseeable future.

“The rise of protectionism in the US has created a diplomacy vacuum that Canada is well-positioned to fill,” says Michael Woods of international trade boutique Woods, LaFortune LLP in Ottawa. “Multinational treaties such as the Trans-Pacific Partnership and a similar agreement with Europe are now effectively dead from the US perspective, but the demand for international business expansion remains alive and well.”

The upshot is that the Trump era presents unique opportunities for Canadian business. “We’re a G7 country that looks like the global leader in promoting trade liberalization, which means we’re punching above our weight,” Woods says. “That could be a momentum builder for Canada in terms of creating political capital that might advance the cause of open markets.”

Member of Parliament Ed Fast, a former minister of international trade in the Harper government, believes the notion of Canada as an “honest broker” among world powers does not imply that opportunities will come from the government somehow moderating relationships between other countries. “Rather, as a preeminent advocate of freer trade, we can create competitive advantages to lure businesses and investment to Canada,” he says.

However that may be, the socio-historical international perception about Canada’s role in international relations, together with the current global view of our political and international positioning, cannot help but foster the “honest broker” perception in trade circles.

Earlier this year, Canada’s provincial premiers agreed on a Canadian Free Trade Agreement intended to nullify many of the myriad local rules that differentiate doing business in different provinces. While some commentators have pointed to the host of potential exemptions preserving many of these hurdles to intra-provincial trade and concluded that the new regime will be only marginally better than the old one, it’s still a step forward.

“The Canadian market probably feels more acceptable to international trade when we tie that socio-historical perspective to what appears to be a sincere effort to liberalize internally,” says Martha Harrison of Dentons Canada LLP. “It certainly bolsters the view that Canada is a nation that is serious and transparent in how it manages domestic and international trade.”

The new investment hub created by the Ministry of Foreign Affairs to increase and encourage investment in Canada will also help. The $200-million project creates a concierge service for international investors to help them navigate what will remain of the web of rules and regulations that differentiate doing business in individual provinces. “The hub is designed to help foreign investors deal with barriers that may still exist,” Harrison says. “It encourages international investors to see us not only as an advocate for international free trade but as a country that’s putting our money where our mouth is by liberalizing internally.”

Nonetheless, given the torrents emanating from President Trump and his administration, it’s difficult to make assumptions or predictions about the impact of his regime. The best and perhaps the only way to do so at this early stage is to forget what he says and even does from one day to the next. President Trump has proven himself to be ever-shifting both in words and actions. An analysis of Canada’s role on the international trade scene in the era of President Trump has no choice but to ignore the mirages of his tenure to date: that he threatened to do away with the North American Free Trade Agreement (NAFTA) and eviscerate it, then told Canada’s Prime Minister there was really nothing to worry about because Canada was a good trade partner whose behaviour dictated only that NAFTA be “tweaked”; that President Trump’s statements about China stand in dire contrast to the conciliatory welcome he extended to Xi Jinping on the Chinese president’s visit to Washington earlier this year, culminating in Trump’s declaration that China was not, in fact, a currency manipulator and that a new round of bilateral trade negotiations was in the works.

Similarly, the analysis must discount the false comfort some have taken from Trump’s focus on Mexico only to discover in his relatively recent remarks to Wisconsin farmers that he has Canada’s dairy supply management system, softwood lumber industry and energy sector in his sights, and that his support for “Buy America” does not appear to have wavered. It should also discount the indications that the nationalists who surrounded Trump at the outset — particularly Stephen Bannon, recently demoted from his post on the National Security Council — appear to have lost some of their influence, at least for the time being.

THERE ARE FOUR PILLARS intertwined in any construct devised to assess the opportunities that the Trump era opens up for Canada on the international trade front. These are NAFTA; the Comprehensive Economic and Trade Agreement (CETA) with the European Union, ratified by the House of Commons in February and currently before the Senate; the aftermath of the Trans-Pacific Partnership; and Canada’s relationship with China.

NAFTA is relevant to the discussion not only because of the potential changes to the agreement, but because a free trade agreement with the US will almost certainly continue to exist in some form. “We have to put all this in context, and remember that this isn’t the first time that presidents or presidential candidates have threatened to pull out of NAFTA,” says Brenda Swick of Dickinson Wright LLP in Toronto. “There were heated debates between Clinton and Obama about disowning the agreement unless changes were made, and George W. Bush did the same thing.”

Given President Trump’s consistent stance against multilateral agreements, then, and the likelihood that some form of free trade agreement will remain in place between Canada and the United States, Canada will likely remain a viable and attractive springboard for companies seeking to access our southern neighbour’s enormous markets. “Foreign businesses have long used Canada as a beachhead for entering the US market,” says Woods, who spent two decades in government as a trade commissioner and negotiator. “That role has never been more important as European and Asian businesses try to find a way into that market that doesn’t rely on broad multinational agreements.”

On this analysis, CETA, of course, is huge. “The EU is the largest single market in the world and the single most important market after the US, and Canada is the only country in the world to have such an agreement as deep, complex and broad as CETA with the EU,” says Cliff Sosnow in the Toronto office of Fasken Martineau Dumoulin LLP. “Japan and Australia are also trying to negotiate something with the EU, but they’re playing catch-up, so right now Canada does have a leg up on the rest of the world.”

But there’s a problem: Canada has not been taking full advantage of its trade agreements. “One of the things we’ve missed out on is being strategic,” Woods said. “Canada’s tendency has been to get into a bit of a rut by negotiating agreements and then stopping right there.”

What Canada needs to do, Woods maintains, is to ensure that government works with the private sector to highlight the advantages a particular trade agreement brings to specific sectors and regions. “We’ve been heavily influenced by the American laissez-faire approach, so the idea of government and the private sector working together to develop trade goes against the grain of the last 20 years of Canadian political history.

“We need to compete,” says Woods, “to have bums in seats, airplanes going over, and people actively seeking markets and investors instead of just assuming that a trade agreement automatically means we’ll be welcomed with open arms.”

The approach has worked extremely well for Japan. It also proved beneficial in the 1980s when the notion of “Québec Inc.” flourished in French-speaking markets like Algeria. “During the time of the révolution tranquille, we saw a phenomenon where Quebec-based businesses of all sizes cooperated with government to make trade policy work,” Woods recalls. “They treated government as an ally rather than something they had to live with — and we’ve got to get back to that approach.”

Fortunately, it’s already started happening, particularly with regard to CETA. “Our trade people have been working with the private sector by pointing out what’s good for local companies and what they should be doing,” Woods notes. “The same thing is happening in Europe.”

In a worst-case NAFTA scenario, trade will drop off and access will diminish to the US market. New or broadened markets will be critical for our economy. “So let’s get busy creating opportunities in Europe and in encouraging partnerships with companies,” Woods says. “The EU will understand public-private partnerships, for example, much better than the US does.”

It’s all about building alternative markets in Europe, then, and a similar push in the Asia-Pacific region, perhaps through a reconstituted TPP without the US, or by way of separate agreements with China and Japan. Success here could also prove potent in negotiations with the US. “They’ll see that we’re not standing still, that we have something else we can do other than make concessions to them,” Woods says. “So if we’re strategic and play our cards properly, we could even win in those negotiations, especially because we have a particularly strong trade team in Ottawa, including Jonathan Fried [Canada’s ambassador to the World Trade Organization] and Steve Verheul [Canada’s chief trade negotiator for CETA].”

History also militates in Canada’s favour. “Since the days of the Civil War, security has trumped trade,” Swick says. “The potential for cooperation in management of the Canadian-US border, perhaps through some form of perimeter security regime, could be an incentive for the US to see Canada as an even more preferred partner than we have historically been. That in turn would solidify our position as a springboard for foreign businesses looking to US markets.”

AS CETA DEMONSTRATES, the prospects for the “springboard” notion rise and fall to the extent that Canada is successful in negotiating other free trade agreements (FTA). Here, the elephants in the room are Japan and China.

Japan is a significant trade partner for Canada, particularly for agricultural products. It is the second largest market for Canadian pork, the fourth largest for beef, and it imports significant quantities of grains and seeds. However, the Japanese market for Canadian goods is facing increased uncertainty: Australia has beaten Canada to the punch by becoming the first significant agricultural exporter to enter into a new trading relationship with Japan. The United States has, in addition, indicated its own desire to enter into bilateral talks with Japan, an initiative that Trump has deemed a high priority.

As it turns out, the Japanese market was a catalyst for Canada’s interest in the original TPP talks (which included the US). Bilateral discussions with Japan were set aside as the TPP negotiations ramped up. It’s only recently, during the trade ministers meeting in Chile on the fate of the TPP, that the Canadian government reached out to Japan to consider talks again. At press time, Japan had not responded and an answer was not expected until at least the Asia Pacific Economic Co-operation (APEC) meeting in Vietnam in May. The answer may not be positive: in testimony to the House of Commons international trade committee in February, Japan’s ambassador to Canada made it clear that the Japanese government has not given up on the TPP: he urged Canada to ratify it despite the American withdrawal.

There’s also considerable domestic support for the TPP’s continuance. Conservative trade critic and former agriculture minister Jerry Ritz and his colleague Fast both believe that some form of the TPP will survive: “The TPP is hugely important to Canada in the current environment because the US has no trade agreement with Japan,” Fast says. “If the TPP survives with Canada as a partner, we will have a huge competitive advantage on the US, as we do with CETA. That’s one way in which we can be instrumental in shaping trade in the global marketplace.”

THE CONVERSATIONS ABOUT TPP’s reincarnation began at the trade ministers’ meeting in Chile in March. It will continue at the APEC meetings. By all appearances, a reconstituted TPP (sometimes called TPP11) could still be game-changing: Canada, Japan, Australia and Mexico, four of the world’s 20 largest economies, were all partners to the original agreement, with China and South Korea emerging as potential signatories. China in particular may see a TPP without the US as an opportunity to solidify its regional influence.

Carlos Dade, Director of the Trade and Investment Centre at the Canada West Foundation, and Deborah Elms, Executive Director of the Asian Trade Centre in Singapore, argue that a revived TPP11 is critical for Canada if it seeks a real foothold on the other side of the Pacific.

“Under TPP11, Canada would have preferential access to markets that the U.S. companies find attractive, including Malaysia, Vietnam and Japan,” they wrote in a Globe and Mail piece. “Even if Mr. Trump were able to negotiate individual bilateral agreements with these countries, Canada would still be in a better position with one set of rules for a group of 10 markets around the Pacific. This would give Canadian firms an ability to join new, larger supply and production chains — something that would be difficult for the Americans with a hodgepodge of agreements, each with different rules.”

Matthew Kronby of Bennett Jones LLP in Toronto says that Japan’s presence in a renewed TPP is itself sufficient reasons for Canada to pursue it. “There’s no downside here,” he says. “And a deeper trade relationship with Japan would be a big prize.”

It’s not, however, as if the TPP is universally popular in Canada. The automotive industry, in particular, remains opposed. “The TPP in its current manifestation and with its current rules is dead and won’t be resuscitated,” Swick says. “From the perspective of the Canadian government, there’s not enough consensus from business and too much political cost.”

The better route, Swick believes, is for Canada to continue promoting bilateral agreements. “The debate about the TPP is a debate about the strategy of managing the Asia-Pacific market,” she says. “Canada should build on what has been achieved despite the agreement’s collapse, and concentrate on relationships with individual countries.”

In the case of China, that may be easier said than done. It is true that a proposed Canada-China FTA saw its second round of exploratory talks in Ottawa in late April. But to say there was a lack of popular support would be an understatement. The Council of Canadians is opposed. And a Nanos research survey, also conducted in April, found that 88 per cent of Canadians were at least somewhat uncomfortable with allowing Chinese state-owned enterprises to buy high-tech firms or invest in oil and gas; 66 per cent believe commitments from China regarding human rights should be part of any agreement. These findings are directly contrary to key demands that China regards as the underpinnings of any agreement. So it’s unlikely that an FTA is in the cards soon. “We’re talking in generational terms, if at all,” says Swick.

As usual, the wild card is President Trump. Notwithstanding his recent overtures to Xi Jinping, the decided absence of principled policy in his administration to date could reignite tensions that might affect Canada’s relationship-building efforts with the Chinese. “The US is at some point going to say that giving Canada preferential access to the American market is directly opposed to exporting things made with Chinese goods to the US,” says Dan Ujczo, an international trade lawyer in Dickinson Wright’s Columbus, Ohio, office who has worked for both the Canadian and US governments. “[Prime Minister] Trudeau needs to make a choice between doubling down on being competitive in the US and the North American market or trying to be the bastion of free trade and impairing our access to our largest trading partner.”

As Ujczo sees it, the decision is a no-brainer. “Canada should go all in to ensure preferential access to the US because that will be Canada’s best chip in drawing companies and investment from around the world and encouraging them to create more value-added activity right here.”

It’s a delicate balancing act. “If we get too close to the US, we’re going to get burned domestically and if we’re not close enough, they’ll shut us out,” says Paul Moen of Earnscliffe Strategy Group, a Canadian policy consultancy. “Still, I think the current environment will create new business opportunities for Canada if we continue to manage it in a coordinated, well thought-out manner.”