You will be hearing a lot about the Trans-Pacific Partnership trade agreement (“TPP”) this year. The Harper Conservative government signed it on Oct. 5, 2015, but for it to be effective for Canada, it has to be ratified by the new Liberal government of Justin Trudeau. This outcome, presumably, is not a foregone conclusion — the new International Trade Minister, Chrystia Freeland, said the new government will take a very close look at it. And so you can expect a lot of advocacy and commentary on the TPP in Ottawa and across Canada in the coming year.
The trade agreement will also come under close scrutiny in the US. This is an election year south of the border, and there will be partisans on both sides of the TPP ratification debate. Some of the commentary in Washington will influence decision-makers and opinion-formers in Canada. This will all make for interesting political theatre — which would be entertaining if the stakes weren’t so high.
In this column, and the next two, I will discuss specific aspects of the TPP related to e-commerce and intellectual property. But before I do, let me disclose straight away that I am an ardent free-trader. And I’ll try to convince you why Canada should be pro free trade as well.
Why Canada Needs Trade
Canada is one of the largest countries in the world when it comes to its territorial expanse. While Russia is by far the biggest in terms of physical surface area (17,075,200 square kilometres), Canada (9,984,670) is the second largest, with the United States (9,826,630), China (9,596,960), Brazil (8,511,965) and Australia (7,686,850) filling out the top six.
While we are enormous in terms of our physical expanse, we are modest in terms of population. On this metric, the behemoths are China (1,385 million) and India (1,252 million), followed by the US (320 million), Indonesia (249 million), Brazil (200 million), Pakistan (182 million) and Nigeria (173 million). Canada, with a population of 35 million, ranks 37th in the world in terms of population, with only 0.49 per cent of the world’s people. (China is at 18.8 per cent; India 17.6; US 4.4; Indonesia 3; Brazil 2.8; Pakistan 2.6; Nigeria 2.5).
In other words, this country of ours is a relatively small market. Nevertheless, in terms of our gross domestic product as a percentage of the world’s GDP, Canada’s number again increases to 1.48 per cent. This is still a small figure, but quite a bit higher, proportionally, than our population percentage (at 0.49 per cent).
In a nutshell, if Canada’s businesses and professionals could only sell their goods and services to other Canadians, we would all be quite the poorer for it. Simply put, if we tried to pull a “North Korea” in terms of economic autarky, we would be about as poor as the Hermit Kingdom. Instead, because of our ability to trade with other countries around the world (but particularly the US), we have come to enjoy a relatively high standard of living.
Indeed, Canada is one of the most active trading countries in the world. Compare our exports as a percentage of total GDP: Canada 31 per cent; Australia 20; Brazil 11; China 22; US 13. Trade is important to all these listed countries, but to us it is vital — almost one third of what we produce is sold to buyers in other countries.
This reality is even more pronounced when you consider the high-value-added world of technology-oriented products and services. Again, while Canada has a good-sized market, it pales in comparison to the much larger ones in the United States, Europe and Asia. For example, virtually all Canadian software companies that I work with have sales to customers outside of Canada, and indeed those foreign sales typically make up 80 to 95 per cent of their total sales. There are a few exceptions to this rule, but not many.
For Example: Desire2Learn
To illustrate the role – and criticality – of international trade to the Canadian economy, consider the example of Desire2Learn (or “DTL” as it is often called). DTL was founded in 1999 by an enterprising University of Waterloo engineering student who wanted to use information technology, and other digital assets, to change the way education and learning are carried out and managed.
Today, the company has over 850 employees, mainly in the Kitchener-Waterloo area in Ontario, but it also has offices around the world (in Australia, Europe, Brazil, Singapore and most recently Dubai). DTL sells a suite of software products, and related products and services, to schools, universities and increasingly large enterprises, in each case to assist them with managing and carrying out ambitious online learning objectives.
Put succinctly, DTL’s market is global, and international trade agreements help underpin DTL’s activities around the world. In the next two columns, we’ll see specifically how the TPP’s e-commerce and IP chapters assist a company like DTL. But there are a number of other sections in the TPP that impact a company like DTL.
Broad Scope of the TPP
The TPP is an incredibly comprehensive agreement. It has 30 chapters. Those covering trade in “goods” include the following: trade in goods (essentially reducing and in most cases eliminating tariffs on some 18,000 items); special rules on trading in textiles; rules of origin (addressing which goods qualify for the tariff reductions); customs administration / trade facilitation (to allow exporters/importers to get their goods across borders more easily); sanitary/phytosanitary measures (so that bona fide public health measures don’t become disguised barriers to trade); and technical barriers to trade (to harmonize technical standards, or at least get governments to recognize each other’s standards).
For years before and after the second world war, trade liberalization essentially meant these sorts of measures, focusing on reducing tariffs and other barriers to moving physical products across borders. Indeed, by the time of Confederation (in the 1880s and 1890s), Canadian industry had been built up behind a wall of high tariffs that produced in Canada a “branch plant economy,” where a single manufacturing operation produced a broad array of products with fairly short production runs for each (because they were sold only into the tiny domestic Canadian market). Interestingly, at the time of Laurier, when he proposed a significant trade-liberalization deal with the Americans in 1911, he promptly lost the federal election over the issue (setting back the cause of free trade, especially with the Americans, for decades).
A different result, however, ensued in 1988 when Prime Minister Mulroney fought and won (resoundingly) a federal election on the proposed Free Trade Agreement with the US (later expanded to include Mexico in the North American Free Trade Agreement, or NAFTA).
Goods to Services
NAFTA, like the TPP, goes beyond tariff reductions and the trade of goods, and also covers services. There are sections dealing with trade in services; financial services specifically; temporary entry for business persons (assisting with the short-term movement of employees across the borders of the signatories to the agreement); telecommunications; and government procurement (governing how public bodies manage major acquisitions of goods and services, to ensure fairness among the bidders emanating from different jurisdictions who belong to the trade treaty).
There’s more. The TPP also has provisions dealing with: competition policy (because differing competition rules could distort the market); state-owned enterprises (particularly relevant for those industries where there is a major presence of government-owned entities); small and medium-sized enterprises (to help ensure that smaller companies get access to economic opportunities); transparency and anti-corruption (because all the other disciplines operating on the trading parties and their companies will be for naught if unscrupulous governments and businesses flaunt the rules through bribes, kickbacks and worse); and dispute settlement (how to handle contentious issues, so as to avoid trade wars).
DTL and Global Trade
So, back to DTL and their goal to become the premier learning technology company in the world. They need to be able to specialize in this vertical market, which is quite small in Canada, but on a global basis is big and profitable. But for DTL to do business around the world with confidence, ideally their software will be protected from misappropriation wherever they have customers — that will revolve around the IP chapter of the TPP that we’ll consider in a later column.
Equally, DTL will want to be able to conduct distance-selling with customers, partners and suppliers from around the world (and more on that and the e-commerce provisions next month). But also, as DTL sets up subsidiary companies and offices in various key markets outside of Canada, it wants to know that these facilities will not be expropriated or interfered with unfairly (especially in a discriminatory manner simply because they are “foreign-owned” by a Canadian entity) — and hence the importance of investor-protection provisions in trade agreements like the TPP.
There are the other benefits to companies like DTL from trade arrangements, including being able to move staff around to different offices in the world on a temporary basis; and the certainty that wherever it does business, it is treated the same way (i.e., “national treatment”) as a business owned and operated by “locals” in that jurisdiction. This is the comfort level that the TPP would give to a Canadian company like DTL — and to a foreign company wanting to come to Canada. And we are all the richer for it.
George Takach is a senior partner at McCarthy Tétrault LLP and the author of Computer Law.
