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Oct 9, 2017 | 09:00 GMT

8 mins read

Trade Profile: Canada Negotiates Its Diversity

The iconic CN Tower anchors Toronto's skyline on a clear day.
(CARLO ALLEGRI/Getty Images)
Editor's Note

Global trade is changing. The kinds of multilateral agreements that characterized the postwar years have stalled over the past two decades, prompting countries and economic blocs to try to negotiate smaller deals with fewer partners. Nations and blocs have more leeway under this new model to negotiate the trade agreements that best suit their interests and to avoid those that don't. Now, more than ever, the future of international trade depends on a country or bloc's defensive interests, offensive interests and underlying factors of production. Our fortnightly Trade Profiles aim to break down these factors to facilitate an understanding of where global trade stands today and where it's headed.

In the 11th installment, we focus on Canada.

A Snapshot of Canada
Key Interests

Economic Background

Canada's trade strategy is at the mercy of its geography. Thanks to its location, trade with the United States is unavoidable for Canada. An estimated 80 percent of the country's population lives within 100 miles of the U.S. border, meaning that its regional economies have become integrated with and reliant on those of the United States. Discussions in Canada of free trade often default to talk of whether pursuing greater economic and political integration with its southern neighbor would be good for the country. In addition, the size of Canada's territory relative to that of its population has compelled it to adopt one of the world's most decentralized political systems. Though the federal government devolves significant powers to its provincial and territorial counterparts, Ottawa nevertheless retains control of several core functions, including regulating domestic and international commerce. The resulting system of government suits the vast and sparsely populated country, but it often makes it difficult for Canada to implement its trade agreements. As international trade agreements become more complex, these issues will assume even greater importance in the country's trade strategy.

Canada's modern trade policy emerged in the 1980s, when Prime Minister Pierre Trudeau formed the Royal Commission on the Economic Union and Development Prospects for Canada, also known as the Macdonald Commission. The country had begun pursuing freer trade in earnest in 1965 through the Canada-United States Automotive Products Agreement, which removed all tariffs and several non-tariff barriers between the U.S. and Canadian auto sectors. But the Macdonald Commission went further, recommending a free trade agreement and, in the process, putting to rest the debate that previously dominated Canadian trade policy over whether to deepen economic ties with the United States. Within three years, Ottawa and Washington had finalized what became known in Canada simply as the Free Trade Agreement. The commission also quieted some of the protectionism, particularly around the manufacturing sector, that characterized Canada's trade strategy for 100 years prior.

About 80 percent of Canada's population lives within 100 miles of the U.S. border.

Still, traces of protectionism and resistance to free trade live on in Canada today, most prominently in the New Democratic Party. The sentiments have taken root in parts of Ontario and Quebec, where the automotive industry once dominated and has since ebbed over the past few decades. Interest groups, including environmentalists and aboriginal communities across the country, also oppose aspects of free trade that interfere with their priorities. Furthermore, the dairy industry is still under Ottawa's close protection. Canada introduced a system of strict supply management to address the overcapacity that plagued the industry after World War II, when Canadian dairy exports to Europe dropped off following a surge during the war years. Canada has gradually opened up the industry at the insistence of its trade partners, but not without a fight; in fact, the supply management system nearly derailed negotiations with the European Union over a recent comprehensive economic and trade agreement.

Canada's economic diversity poses another challenge for its trade strategy. The country's economic activities vary wildly between and even within provinces. Ontario, for example, boasts a manufacturing base deeply integrated with that of the U.S. Great Lakes region as well as a strong financial sector. Likewise, Quebec is home at once to a booming high-tech sector and to dairy and mining operations. The four provinces along Canada's Atlantic coast rely mainly on forestry, mining and fishing, while the country's three prairie provinces — Alberta, Manitoba and Saskatchewan — derive their income largely from agriculture and energy exports. British Columbia has a wealth of natural resources at its disposal, too, though the services sector in and around Vancouver accounts for most of its gross domestic product. Balancing each province's interests in trade negotiations, and implementing Ottawa's trade policy across the large and varied country, is no small feat.

Percentage of U.S.-Canada Trade by Province

Under Canada's dual federalist system of government, provinces have control over economic issues that the federal government must negotiate in trade deals. Provincial governments, for example, have the latitude to erect substantial non-tariff barriers, though Canada's federal government retains full authority over regulating domestic and international trade. These province-specific protections can make free trade agreements difficult to navigate. Over the years, Ottawa has had to compensate several of its trade partners after losing trade dispute cases concerning provincial policies, despite the fact that it has no control over them. Trade deals, moreover, often require support legislation from provincial lawmakers to take effect. And beyond complicating international trade, the division of power in Canada makes interprovincial trade expensive: The non-tariff barriers between provinces cost the Canadian economy an estimated $50 billion-$130 billion each year.

Trade Implications

Trade Strategy

As non-tariff matters make their way into more and more trade deals, Canada's provinces will need to play a bigger role in setting the country's trade policy. Provincial governments, after all, have exclusive jurisdiction over many of these issues, including labor and environmental standards. In addition to their regular meetings with the federal government to discuss trade, the provinces recently got a seat at the table during negotiations over the landmark EU-Canada trade deal. The European Union pushed for their inclusion because of the scope of the agreement, which covered several areas under the provinces' control. The agreement, and the process that led to its creation, may well set a precedent for Canada's future pacts, particularly as the country looks to expand its trade horizons.  

Since the 2008-09 global financial crisis exposed just how heavily its economy relied on that of the United States, Canada has been determined to become more independent. U.S. President Donald Trump's protectionist agenda has only strengthened Ottawa's resolve to forge new trade relationships abroad, and Canada will push on with the endeavor in hopes of finding new markets for its exports.

Trade Between NAFTA Members

Offensive Interests

Grains and raw materials such as timber and coal historically have been the focus of Canada's attempts to break down trade barriers abroad. The North American Free Trade Agreement (NAFTA) opened up the Mexican and U.S. markets to the goods, which probably won't come back up for discussion in talks to update the deal. Even so, exports of raw materials and grain will continue to figure prominently in Canada's trade strategy as the country hammers out trade deals with new partners.

Canada will also keep trying to reduce barriers to its competitive high-end manufacturing goods abroad, while pushing to include services in future trade agreements. Ottawa has been working to challenge the United States' "Buy American" government procurement policies, though Trump so far has stood his ground on the issue.

To stay competitive without sacrificing the high environmental and labor standards its provinces have in place, meanwhile, Canada has pushed its trade partners to adopt similar guidelines. The country's labor unions have advocated rolling back the United States' right-to-work laws during NAFTA renegotiations to make labor standards and costs more uniform across the bloc. Try as it might, however, Ottawa probably won't win Washington over on the proposal, or on its calls for the United States to implement more rigorous environmental standards.

Defensive Interests

Along with the provisions it hopes to add to NAFTA, Canada is invested in preserving certain portions of the agreement as written, chief among them the dispute resolution mechanism. Chapter 19 of NAFTA puts binational panels in charge of ruling on trade disputes within the bloc. For Canada — where provincial policies are susceptible to scrutiny and objections from trade partners abroad — the system offers recourse to appeal trade disputes outside the complainants' courts. Binational panels have repeatedly ruled in Ottawa's favor, for instance, when Washington has alleged that provincial ownership of Canadian lumber lots constitutes a de facto subsidy. Should the Trump administration manage to do away with the institution, Canada likely will have a harder time making its case before U.S. courts.

Similarly, Ottawa is concerned with protecting the rights of its aboriginal and First Nations populations. Canada's First Nations have more control over some economic matters than even the provincial governments do, and the country wants to make sure their policies don't come under attack from its trade partners down the line.

Canada also staunchly defends its dairy industry in trade negotiations. By closely managing supply in the industry, the country's federal and provincial governments can support it without subsidizing it directly. The price and import controls on dairy products took center stage in Canada's talks over the Trans-Pacific Partnership and the EU comprehensive economic and trade agreement alike. That the U.S. president has criticized the measures suggests they likely will come up again during the NAFTA negotiations.

Finally, Canada is committed to ensuring its continued access to the U.S. market. Canada, as a medium-sized country on the border of the world's largest economy, must enter whatever multilateral trade negotiations the United States does to prevent other countries from attaining preferential access to its southern neighbor. And now that NAFTA is under discussion again, Ottawa will do what it can to defend its access to the U.S. market in the revised agreement. The automotive sector is its most pressing concern. The sector has been integrated with that of the United States for more than 50 years now, and disentangling the two supply chains would damage Ontario's economy. 

Canada's Trade Pacts
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