Trade policy, particularly with the United States, has been a central driver of Canada’s economic evolution and wealth creation. Today, that stability is at risk under Donald Trump’s administration. The detailed Trump economic agenda is still forming, but arbitrary U.S. trade action would threaten Canadian economic interests. Retreating from free trade would be a disaster for Canada, which has built its wealth on selling, buying and investing with other countries.
Nimble and ambitious Canadian trade policy will be much required in the months and years ahead. My recent study, titled Succeeding in the Age of Trump: Refocusing Canada’s International Trade and Economic Priorities, provides the key elements of such a policy.
In some important respects, the next era of international trade has already begun. Exports to the United States have been essentially flat since the mid-2000s. Canadian exports, imports and investment flows are slowly diversifying away from U.S. dominance. Trade has grown significantly with Asia generally and with China in particular, which is now Canada’s second-largest trading partner. Canada has finally committed itself to pursuing free trade with other large regions and countries, notably the Comprehensive Economic and Trade Agreement (CETA) with the European Union and a free-trade agreement with South Korea.
Under an activist trade policy, Canada could position itself as an open, integrating hub for global trade and investment. Canada is the only country with tariff-free market access to both the United States and the EU. Building on the transition already under way, Canada could be a preferred investment destination and trade enabler for global firms.
Further relaxation of restrictions on foreign direct investment (FDI) would help strengthen that positioning. Ottawa took a positive step when it announced in late 2016 a renewed commitment to attract FDI and that it would be creating a new agency to consolidate efforts within the federal government. Canada could become an even more attractive destination by streamlining the investment review process, clarifying in advance the criteria for assessing “net benefit” to Canada and further aligning the investment-attraction efforts of all levels of government.
Next, the Trump administration has opened the door to modernizing the North American free-trade agreement. Canada should embrace the opportunity, recognizing the Trump administration is likely to insist on adjustments to the existing deal and may be reluctant to extend NAFTA to new sectors. Canada’s operating philosophy should be to preserve the gains made under the Canada-U.S. free-trade agreement and NAFTA. It should also push its negotiating partners to incorporate elements of modern trade deals that reflect the evolution of international business over the past 25 years.
Canada should have a number of objectives in modernizing NAFTA. Reducing non-tariff barriers and promoting free trade in services should be a priority. More common regulatory standards between Canada, the United States and Mexico could help achieve this goal. Opening the North American market for services would benefit businesses and consumers in all three countries. Further, Canada could seek explicit recognition as a preferred energy supplier within an integrated energy market. It could also seek greater access to U.S. government and private procurement. U.S. firms would seek more access to Canadian government procurement in return.
A renewed NAFTA should also directly address the concerns of sectors and workers that perceive themselves as negatively affected by free trade. Despite its benefits, trade will be a scapegoat for job losses and declining industries unless all three partners undertake a commitment to address adjustment to economic change.
Beyond NAFTA, Canada could continue to globalize its free-trade ambitions. Regional deals are ultimately more efficient than a series of bilateral negotiations. Although the Trans-Pacific Partnership is dead, Canada should be at the table in any free-trade talks among Pacific countries. Bilateral negotiations are already taking place with India. Other priority candidates include Japan, Mexico (if NAFTA renegotiations were to fail), Britain (once Brexit is completed) and China (under the right conditions). Trade development could also be enhanced with countries where deals are in place.
This is a time for Canada to be ambitious in its trade policy. The age of Trump will continue to produce surprises and Canada will need to be nimble to navigate this future.