ARCHIVE: TRADE, INVESTMENT POLICY AND INTERNATIONAL COOPERATION
New Administration Offers Rare Opportunity to Revitalize Trade
Glen Hodgson, Senior Vice-President and Chief Economist, Forecasting and Analysis Winter 2009
A new administration in the United States creates the opportunity to breathe new life into Canada–U.S. economic relations. Canada should revitalize the stagnating North American trading relationship by presenting the Obama administration with an action plan for reducing the remaining barriers—regulatory, or non-tariff, barriers in particular—between the two countries. Renewal of trade arrangements with Canada should be high on the Obama administration’s priority list. The new administration will need to focus on the short-term economic imperative of restoring economic and financial confidence, but it must also consider measures to strengthen the competitiveness of the U.S. economy over the medium term. As Canada is still America’s largest trading partner, renewal of trade arrangements with Canada should be high on the Obama administration’s priority list, particularly if Canada unilaterally drops barriers such as rules of origin. Building on Integration North American economic integration has grown, and an enhanced Canada–U.S. trading relationship needs to reflect that reality. Key Canadian sectors have become deeply integrated into the North America economy, where domestic content—the percentage of a good or service sourced from Canada—has fallen to 50 per cent or lower. Nevertheless, Conference Board research shows that North American trade has stagnated since 2000 when measured in real terms, with price effects removed. The North American Free Trade Agreement (NAFTA) provides a strong backbone for an enhanced trading relationship. Existing institutional arrangements are not broken beyond repair, although Canadians would argue that dispute settlement under NAFTA should be revisited. But NAFTA is also fully implemented and offers little scope for re-energizing the trading relationship. A common action plan is needed to reduce the remaining barriers to trade between our two countries. Both parties should agree that non-tariff barriers are a key factor in the recent plateauing of North American trade volumes. Rather than full harmonization, mutual recognition of each other’s regulations may be the most concrete way to make real progress on non-tariff barriers between Canada and the U.S. Reducing non-tariff barriers would allow firms on both sides of the border—especially manufacturers—to seek out efficiencies through enhanced specialization and expanded cross-border trade in inputs, as well as in final goods and services. Looking Beyond North America The time has also come to consider the advantages of a more common, regional approach to free trade and investment with countries and regions outside North America. No doubt there will be political and economic challenges in trying to advance this approach, but the slow progress Canada has made with other major trading nations or regional blocs clearly signals that we need to examine alternatives. This examination might entail a joint Canada–U.S. study on the economic benefits of more liberalized trade with another major region, as well as related ministerial discussions. Acting Unilaterally Canada can also take unilateral action to improve the international competitive position of its firms, without negotiating with the U.S. Such actions could include: - fully implementing the recent agreement among Canadian provinces to mutually recognize labour credentials and qualifications;
- creating a single national securities regulator through common federal and provincial action, which would establish the conditions for similar mutual recognition of financial regulations in the U.S. and other countries;
- accelerating efforts to establish pan-Canadian standards and processes, which could then be aligned with American ones;
- removing barriers to imports used in production, ideally by unilaterally eliminating the federal government’s country rules of origin (or, alternatively, unilaterally eliminating remaining import tariffs);
- acting on the recent advice of the Competition Policy Review Panel, which would see the federal government clarifying the Investment Canada Act, and reducing barriers to foreign direct investment in Canada across the board and in specific protected sectors; and
- introducing explicit policies at the federal and provincial levels that promote the economic value of outward investment by Canadian firms.
In sum, the current economic downturn has brought international competitiveness into sharp focus and offers an opportunity to strengthen the integrated North American economic partnership. Canada would advance its economic interests by refining trade policy both unilaterally and in concert with the United States.
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