BY DAVIT SAHAKYAN (Op-Ed Contributor)
This week’s G7 summit in Charlevoix, Quebec was less about highlighting the common grounds among the world’s leading nations and more about trying to conceal the huge disagreements on trade policy between President Trump and the rest of the G7 leaders. While US protectionism hurts all its trading partners, Canada appears vulnerable to it the most, which poses policy dilemmas and challenges Canada is ill-equipped to resolve.
Refusing to sign a joint G7 statement, President Trump threatened to impose more auto tariffs on US allies, in addition to 25 percent tariff for steel and 10 percent for aluminum on imports from the EU, Canada, and Mexico.[i] Although these moves have been condemned by many of the world leaders, it is Canada that stands to lose the most from a trade war with the United States. The United States absorbed more than 76 percent of Canada’s total exports both in 2016[ii] and 2017[iii] and continues to remain an indispensable market for Canada.
In fact, the huge and lucrative market south of the border has been both a blessing and a curse for Canada. On the one hand, it has served as a source of rapid growth for the Canadian economy, especially after the signing of NAFTA. On the other hand, the overdependence on the US economy has made Canada vulnerable to the volatilities of the US market, especially in the wake of economic shocks, such as the dot-com bust of 2001 and the 2007-08 financial crisis. As a result, Canada’s trade policy in the last two decades, with only minor changes, has evolved around two main objectives. First, maintain and protect the access to the US market; second, diversify away from the US market and towards other established and emerging economies.[iv]
The first objective faces a serious test in the form of NAFTA renegotiations currently under way. While the outcome is yet to be seen, Canada and Mexico may need to be able to resist US pressures to concede in sensitive areas, such as the auto industry and agriculture. The second objective has become especially crucial as the current US administration has become increasingly protectionist. Canada’s overdependence on the US economy has made it extremely vulnerable to new tariffs imposed by the United States. According to the Government of Canada, the country is highly dependent on international trade, which comprises 60 percent of the GDP. Moreover, 20 percent of jobs are linked to exports. Without international trade there would be 3.3 million fewer jobs in the country, which would raise the country’s unemployment rate to above 25 percent.[v]
Given the standstill in multilateral trade liberalization, the policy of opening up new markets has been largely implemented through preferential trade agreements (PTAs). In fact, Canada has signed more than a dozen PTAs since the late 1980s with several dozen countries.[vi] Notwithstanding the significant number of PTAs signed by Canada between 2006-2015, however, “the average annual real growth of Canada’s goods and services exports between 2001 and 2015 was only one-fifth of the average pace for the Organisation for Economic Co-operation and Development (OECD) as a whole, with Canada ranking 33rd out of 34 countries on this indicator.”[vii] One reason for such underachievement may be due to Canada’s inability to push for the type of liberalization favored by Canadian businesses. For example, as reckoned by a number of Canadian trade officials, Canada failed to strike a deal with Singapore largely because Singapore refused to open up its services sector, a priority for Canadian businesses, and provide Canada with access to its services market on a par with the United States. Furthermore, despite the completion of the Canada-EU Comprehensive Economic and Trade Agreement (CETA), trade talks with other major economies, such as Mercosur, China, and India, have so far proven unfruitful.[viii]
Although the diversification away from the United States seems the most sensible trade policy for Canada, its implementation may prove extremely difficult given Canada’s huge dependence on the US market. Moreover, the pressure to open up new markets through preferential trade agreements may diminish the bargaining power of Canadian negotiators, exacerbating the situation even further. The daunting task of maintaining a fine balance between retaining secure access to the US market and diversifying away from it and towards new established and emerging markets looks poised to define Canadian trade policy for years to come.
[ii] World Bank, World Integrated Trade Solutions. https://wits.worldbank.org/CountryProfile/en/Country/CAN/Year/LTST/TradeFlow/Export/Partner/all/ (accessed 9 June, 2018)
[iii] http://www.worldstopexports.com/canadas-top-import-partners/ (accessed 9 June, 2018)
[iv] Author’s interview with a senior Canadian trade official. Ottawa, ON, Canada. 23 May, 2018.
[v] Global Affairs Canada (2018a), Global Markets Action Plan, http://international.gc.ca/global-markets-marches-mondiaux/plan.aspx?lang=eng (accessed 9 June, 2018).
[vi] Global Affairs Canada (2018b), https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/index.aspx?lang=eng (accessed 9 June, 2018)
[vii] Stanford, Jim. (2017. Pages 440-441). “Is More Trade Liberalization the Remedy for Canada’s Trade Woes?” In Redesigning Canadian Trade Policies for New Global Realities, edited by Stephen Tapp, Robert Wolfe, and Ari Van Assche, 435–452. Institute for Research on Public Policy.
[viii] Author’s interviews with Canadian trade officials. Ottawa, ON, Canada. 22-24 May, 2018.
Image source: Leah Millis, Reuters
About the Author
Davit Sahakyan, PhD is a professor of economics and international political economy at Pace University in New York.
This article is produced by the Eurasian Research and Analysis Institute, Inc. (ERA Institute), a public, 501(c)(3) nonprofit institution devoted to studying Eurasian affairs. All views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).