Time to hit reset on Canadian trade negotiations with Asia

Glen Hodgson is senior fellow at the Conference Board of Canada.

Canada's trade dialogue with its Asia partners encountered a rough patch in November, when, at the last minute, a multicountry agreement was not advanced. Even as we work to clarify NAFTA with the United States and Mexico, we need to hit the reset button on its trade with Asia.

Canada is right to treat Asia as a priority. Asia is clearly the most interesting global growth market for the next decade and beyond. Since the 2008-09 global financial crisis and recession, developing Asia has sustained growth of 5 per cent to 6 per cent annually, led by China and now India. A rapidly growing middle class and globally ambitious businesses translate into significant and rising purchasing power for goods, services, business inputs and investment.

For the Conference Board of Canada, the top priority is timely completion of a free-trade area among Pacific Rim countries. The Trump administration's decision to remove the United States from the Trans-Pacific Partnership negotiations creates an advantage for Canadian exporters in various sectors. Canada proposed new language adding "comprehensive and progressive" to the existing title, creating the mouthful "Comprehensive and Progressive Trans-Pacific Partnership" (CPTPP). However, we had reservations when the negotiating finish line apparently appeared more quickly than expected last month, seeking more time to engage with Canadians on the benefits of Trans-Pacific free trade.

There is strong evidence that CPTPP will generate benefits for many sectors of the Canadian economy. There are significant benefits for Canadian agriculture and agri-food – notably beef, and fruit and vegetables – and for other sectors, particularly with the absence of the United States from the negotiations.

There are other reasons for the need of a timely completion of CPTPP. It would provide an opportunity to strengthen the trade and investment relationship with Japan, which has high and rising real incomes and sophisticated tastes. Moreover, it would create a platform for further expansion of free trade within the Asia-Pacific region, which would be good for global and regional growth. In addition to the initial participants, a number of countries that are attractive markets for Canadian exporters and investors – such as Colombia, Indonesia, Taiwan, and Thailand – could be included in a second round of CPTPP discussions. Other countries could presumably join the agreement if they accept its principles and conditions.

A second priority in Asia is to extract more value from its existing free-trade agreement with South Korea. Canada's exports to South Korea are modest at just over $4-billion annually, with a large bilateral trade deficit. Many Canadian exports are primary goods and end-sales to South Korean consumers – diverse items such as resources, food products, educational services, and entertainment. Improving Canadian firms' access to the value chains of South Korean business conglomerates, as suppliers of intermediate goods and services, could be an added area of focus for Canada's trade development and promotion efforts in South Korea.

Then there's China. Undoubtedly, engaging with China more fully is an important trade policy objective for Canada. After nearly four decades of economic reform and gradual opening, China is now deeply engaged in the global economy. It is Canada's second largest trading partner, with a huge trade surplus in its favour exceeding $30-billion annually.

Canada could seek to go well beyond a plain-vanilla trade deal focused on market access and the elimination of tariffs, even though it would add to the complexity and demands of future negotiations. For example, Canadian businesses would benefit from a more open and level playing field in China for high-value services such as wealth management, insurance, professional services and segments of banking. Protection of and respect for intellectual property has been a long-time issue, as has limiting the arbitrary use of regulations – such as product safety – to frustrate or manage trade.

Labour mobility will be a big issue in any negotiation involving services. Greater clarity and alignment on the governance and operations of Chinese state enterprises, specifically when they are making investments in Canada, would be highly desirable.

The ultimate challenge with any trade negotiation with China is the difficulty in separating commercial interests from political ones.

China's one-party political system means that topics such as rule of law, human rights and labour standards could be barriers to trade talks whenever they are raised.

Realistically, any properly balanced free-trade talks with China will likely proceed slowly, should look for specific areas of progress that could produce early wins, but could also be blown off course by the political issue of the day. That is not a reason to delay or avoid trade talks with China – but it is a reason for realism in the pace and extent of any negotiations.

A focus on trade with Asia-Pacific as a whole, rather than just China, could allow Canada to make more immediate progress in advancing its free-trade interests.