Dive Deeper – Canada’s new trade agreements and access to worldwide markets
July 1, 2019
The Government of Canada has been active on the world stage negotiating and securing multiple free trade agreements. Within their current mandate, the government has secured and ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Comprehensive Economic and Trade Agreement (CETA). Recently it has also made strides on the renegotiated North American Free Trade Agreement (NAFTA).
The progress made in increasing trade with new partners and securing treaties is commendable. However, there are signs that Canada is falling short in taking advantage of the new markets that are available. In this month’s Dive Deeper we take stock of CPTPP, CETA, and the Canada-United States-Mexico Agreement (CUSMA) replacing NAFTA. We highlight the basics of the trade deals, some early results, and next steps.
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
CPTPP came into force on December 30, 2018 and is an agreement between 11 countries across the Pacific. With Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam as signatories in addition to Canada, the group represents 13.5 per cent of the world’s GDP and roughly 495 million consumers.
Prior to signing onto the free trade deal, Canada did not have bilateral trade agreements with seven of the countries involved. CPTPP reduced or eliminated tariffs participating countries had placed on Canadian goods and reduced costs for Canadian businesses looking for export opportunities into Asia. Canada’s beef, poultry, and pork industries, as well as machinery producers, are expected to see significant gains from increased market access provided through the deal.
In addition to eliminating tariffs, CPTPP gives Canada a forum through which it has reached a trade agreement with countries it failed to reach bilateral agreements with, Japan being the key example. Canada and Japan could not see eye to eye on a trade deal, but through the CPTPP Canada gained access to a large developed market with a highly-protected agri-food market. Tariffs for Canadian beef, which stood at 39 per cent, shrunk to 27.5 per cent for fresh and 29 per cent for frozen products with similar cuts to pork products, making Canadian pork more affordable than U.S. imports in a highly desirable market for Canadian farmers. As a result, Canada has been closing the gap with the U.S. for imports into Japan, the top destination for U.S. beef. Preferential access for Canadian beef has increased sales to Japan by 100.2 per cent in the first quarter of 2019 compared to the year before – a growth worth $51.38 million US. Similarly, Canadian pork saw a 122 per cent increase in imports to Japan in February 2019, signalling that Canadian producers are gaining market share from U.S. counterparts.
In addition to the above, canola oil will be free of tariffs in five years. This would come as a welcome addition if trade tensions with China worsen by allowing Canada preferential access to other markets.
Despite the success in agri-foods, there are still a few aspects of the trade deal that we must wait to see the benefits of. While waiting, Canada needs to ensure that we are prepared to take advantage of any opportunities that arise from this to drive economic growth. CPTPP has labour mobility provisions that simplify the process of bringing in workers from any signatory countries. As processes are smoothed out and more countries ratify the agreement, Canada must be prepared to utilize this to attract new workers and address our skills gap.
Canada must also be prepared to be agile in the e-commerce realm. As CPTPP solidifies, e-commerce, expedited shipping, and customs clearance will get simpler with identical rules across multiple markets. This provides more access for Canadian businesses and increases the likelihood of cheaper intermediate suppliers entering the market. Ensuring that regulations are streamlined for Canadian businesses to take advantage of this opportunity should allow for stable growth for SMEs and large corporations alike.
Comprehensive Economic and Trade Agreement (CETA)
CETA is our country’s trade agreement with the European Union (EU) that came into force on September 21, 2017. Although older than CPTPP, benefits of the trade agreement with our partners across the Atlantic has been less apparent. The deal has been criticized as one sided and is yet to be ratified by all member states, slowing down simplified access to European markets for Canadian business.
In 2018, European exports to Canada rose by 14.5 per cent while Canada lagged behind, growing at half that pace. Steep regulatory barriers and technical differences has harmed the efforts made by Canadian beef and pork producers in utilizing tariff-free trade. The industry was highlighted as one of the most important elements of the trade agreement, yet products are unable to enter one of the richest markets in the world due to lacking regulatory harmonization. Regulations however are not harming both sides. European producers have been able to meet almost all quotas that have been granted to producers, reinforcing the need to catch up and close the $155 million trade deficit with the EU in just beef and pork. Evidently, producers have shifted focus to CPTPP countries as sales in the same products has increased dramatically to the countries off the western coast of Canada.
Another added layer of complexity is the ratification of the trade deal. Despite being approved by the EU in 2016, and coming into partial force in 2017, ratification has only been confirmed by 13 countries. Some of the larger economies, including France and Germany, have yet to ratify the agreement. As recently as June this month, there has been skepticism that France will follow through on their promise to ratify the trade deal this year. This limits full access to markets and limits growth for Canadian businesses.
Progress made thanks to CETA has not been all stagnant. Recently the Government of Canada announced that it has built on CETA with the Transatlantic Supercluster Collaboration Agreement, which ties Canada’s five superclusters with cluster organizations across Europe. The goal of these clusters is to share knowledge and innovation potential to build the foundations for opportunities to come. The agreement brings together Canada’s five superclusters with the European community of 25. The move creates a hub for international cooperation connecting people between Canada, the EU, and their international counterparts.
Canada-United States-Mexico Agreement (CUSMA)
Despite new trade agreement around the globe, the U.S. and Mexico remain Canada’s foremost trading partners. The NAFTA update remains largely true to its predecessor but does modernize some aspects of the deal for the three parties. Some of the more prominent changes are:
- Country of origins rules: 75 per cent of automobile components must be manufactured in the three countries to qualify for zero tariffs.
- Updates to labour provisions: 40-45 per cent of car parts must be made by workers earning $16 or more in addition to Mexico passing new laws to give better protection to workers.
- Increased access for US dairy farmers into the Canadian market.
- Intellectual Property (IP) and Digital Trade provisions:
- Extends copyright terms to 70 years after author’s death (previously 50 years).
- New provisions to protect internet companies from content produced by their users
- Introduces a 16-year sunset clause
Maintaining a tariff-free market across the three countries is crucial in keeping current supply chains, infrastructure, and business relationships intact. Unfortunately, CUSMA is yet to be ratified by all parties and is adding uncertainty for businesses. Announcements were made in May of this year by both the Government of Canada and U.S. that all tariffs, retaliatory and otherwise will be lifted. Although this was welcome news and pointed towards timely ratification, Mexico has been the only party that has ratified the treaty. Despite starting the process, Canada is still waiting to ratify the treaty in tandem with the U.S., where the ratification process has been dragging. Canada’s House of Commons rose for the last time this summer on June 20th, leaving the chances for ratification prior to this fall’s federal election in the air. Although there is a chance that the Prime Minister could recall government in order to push ratification through in a timely manner, there are still some risks that stem from our neighbours to the south.
Currently the U.S. Congress is divided. The Republican-controlled senate should not roadblock the ratification process. Unfortunately, the concern now rests with the House of Representatives where the Democrats hold majority and control the timeline for ratification. The Democrats have voiced concerns around the agreement and could opt to send the agreement back for re-negotiations, changing the terms of the agreement. This highlights the main concern with early ratification and why the Canadian government is choosing a wait and see on how Washington D.C. approaches the situation. Compounding the issue are political calculations made by the Democrats with the 2020 presidential elections approaching, which may push ratification on indefinitely.
Unfortunately, the delay in CUSMA’s ratification means Canada’s growth will not come from long-standing trade partners in Mexico and the U.S. However, CPTPP and CETA provide opportunities that Canada must take full advantage of if we are to get all goods that we have to offer to global markets. Both trade deals give Canada preferential access to markets over the U.S. which in turn should give the competitive advantage our businesses. It will likely take years for the U.S. to negotiate and come to terms on bilateral agreements with the same groups Canada now has trade agreements with. Canada must make the most of this head start and consolidate our position in these new markets. The federal government should use this time to streamline processes and regulations to encourage more businesses to take advantage of new markets. Working with the private sector will also allow the federal government to better understand trade dynamics and thus improving Canada’s presence in the global marketplace.