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72nd Annual Summer Conference, August 7–10, 2003

What’s next for NAFTA?

By Michael Wilson 

Recently your president, David McGown, expressed some concern regarding the support of the Progressive Conservative party for NAFTA, open markets, WTO, free trade policies and so on.

Out of that discussion came the idea for this panel on the receptiveness among Canadians for expanding and broadening NAFTA in the context of possible future directions for trade policy.

First, let me be quite clear. The Progressive Conservative party is fully committed to open markets and NAFTA. Our new leader, Peter Mackay, has publicly stated this in strong terms. I can also say that, in discussions I have had with him on the review which he has promised, he is quite committed to exploring opportunities to broaden Canadian trade opportunities. That likely will be the thrust of the review of NAFTA that will follow from his discussions at the time of the leadership convention.

Trade has been good for Canada. The current minister for international trade recently described NAFTA as an “unqualified success”, making a “strong contribution” to job creation, innovation and opportunity among Canadians.

Some numbers – our total merchandise trade with the U.S. and Mexico amounted to $584 billion in 2001. Canadian direct investment in the U.S. was $198 billion in 2001. U.S. direct investment in Canada was almost the same – $215 billion. Mexico is now Canada’s 6th largest trading partner with $15.1 billion in 2-way trade, and $2.5 billion Canadian direct investment in Mexico.

All three countries have benefited and, again in the trade minister’s words, “NAFTA has made North America one of the most efficient, predictable and transparent regions in the world in which to conduct business.”

I quote Mr. Pettigrew on this to demonstrate how far the current governing party’s policy has come since 1987 when they were adamantly opposed to the FTA to their current position of unqualified support for NAFTA.

In other words, there is no turning back on free trade, NAFTA or open markets. The question today is how to improve upon this and where are the best opportunities.

Let me step back for a minute from the trade question itself and focus on two related issues – September 11 and the nature of the U.S./Canada bilateral economic relationship.

The profound impact that September 11th has had on the U.S. in particular, has caused the external focus of that country to shift. Trade relations with Canada must be seen in the context of their much broader security concern. Trade and investment flows were causing the border to disappear. Now, after September 11th, the border has become a potential barrier to these flows. Security, immigration, transportation patterns, investment flows must all be considered in any future trade policy discussions.

The broader national security attitudes of the U.S. Administration will also colour trade policy decision-making. If Canada is viewed as a less reliable or less supportive partner in a security sense, it will affect our ability to influence positive changes in market access. We must be proactive in seeking change that will complement or support security considerations in order to achieve our trade policy objectives. The converse is of greater concern. If we are not seen as a supportive and reliable neighbour, we could find ourselves on the defensive, a most unattractive prospect.

And let me be clear, while it is in our trade interests to cooperate with the U.S. on border, immigration and other security matters, I believe it is also very much in our own security interests to work together as we have been.

Now, a few comments on the nature of our bilateral economic relationship. First some numbers.

Canadian exports to U.S. – close to 90% of our total exports.

Canadian imports from U.S. – about 18% of their total imports.

These are significant numbers for both countries.

The structure of the two economies is quite similar. We are both quite advanced industrial nations with strong service sectors. One key difference. While we both produce significant amounts of resource products, Canada uses fewer of these at home and therefore exports much more proportionately of these than the U.S.

Our economies are quite integrated.

  • Over 50% of total trade is now intra-company.
  • Specific and important sectors are very integrated – autos and auto parts, information technology and office equipment, energy, banking
  • Transportation links are quite integrated as well.

There are other links between the U.S. and Canada – NATO, NORAD, G-7, and the security relationship which has continued from the deep linkage developed during WW ll.

These factors, together with the fact that NAFTA is in essence two strong bilateral relationships, are critical in establishing the next stages of trade developments following NAFTA. Our focus should clearly be on the U.S.

As Tom D’Aquino of the CCCE has said, the Mexico/U.S. relationship is profoundly different from that of Canada and the U.S. This factor is a key consideration to the future directions to our bilateral trade relations.

So, where to in the post NAFTA world?

First, let me be clear. I am not a full time trade policy expert. There are many very qualified individuals who have done excellent work in recent years. Wendy Dobson and Danielle Goldfarb have made strong contributions to the border papers produced by the CD Howe Institute. They have drawn on work done by a number of experts and observers, too numerous to refer to. The Canadian Council of Chief Executives has done some good work as well.

Suffice to say, I have drawn some conclusions based on this work and have put on my political hat as a former trade minister in order to provide some observations to respond to David’s questions on NAFTA – plus.

My first observation is that, to make progress we must engage the U.S. in the broader security dialogue that I have referred to. This is key for both security and economic reasons both of which are important to both countries. We must be proactive, sensitive and responsive to U.S. concerns as we would expect them to be of ours. Their interests are driven more by security factors while ours will be more on the economic side. But there is much room for common ground – simply because there are incentives in both the trade and security fields for us to work together.

Secondly, I believe that, because of the policy fields where I think we can make progress (which I will come to shortly), it will be more effective to pursue a bilateral U.S./Canada solution rather than a trilateral one. Broadening to a trilateral solution would not be precluded longer term. Indeed, in some initiatives, either U.S./Mexico or U.S./Canada, it might well become practical or effective to broaden the participation to include the three countries.

Third, my focus is more on trade issues. The CCCE and others, including Scott Brison of the Progressive Conservative party have done some good work articulating policies which address border, security and defense issues. The dialogue and agreements developed by John Manley and Tom Ridge are important examples of how we must work together. They also bear importantly on the flow of goods, services and people across our common border as well as enhancing efficiencies for regulation (an “already tested” principle) and establishing priorities on improving our transportation infrastructure (road, rail and air (space) plus telecommunications, computer networks, pipelines and electric power) on a continental basis.

I briefly mention these because they are important elements in achieving advances in trade and resource sharing policies. If we can demonstrate progress in these areas which meet both of our objectives in the security and economic fields, progress in trade matters should become more promising.

Now back to trade.

What is the unfinished business arising out of NAFTA?

There were a number of industries or parts of industries which were exempted from NAFTA. From Canada’s point of view, we kept culture/entertainment/media, health care, parts of agriculture and water off the table. The U.S. exempted sugar, peanuts, coastal shipping and softwood lumber. Textiles and clothing were subject to very tough rules. There were other exemptions. Each of the three countries had a list of very sensitive issues. I would be surprised if much progress could be made here. The political fallout would be too great.

The only exception would possibly be if the stakes were larger, that is, if the larger economic benefits of a broad WTO negotiation or the free trade agreement of the Americas could be shown to balance the heavy political costs. But we certainly aren’t there yet.

Where there could be clear benefits and definite possibilities for progress is in the prospect of some form of customs union, that is where the two countries decide to accept a common external tariff on goods entering either country.

The Howe border papers talk of three variations of custom unions – “sectoral”, “basic” or “deep” customs unions. Personally, I think we should only contemplate a series of sectoral unions to which I would add related initiatives which would enhance the benefits that the customs union would bring. Some of this gets pretty technical, but let me try to capture the essence of what I have in mind.

Let’s pick sectors where the two country’s economies are quite integrated, for example, automotive, energy, steel, computer and related products. The industries are quite similar on both sides of the border and the external tariffs for the most part are pretty close as a reflection of this integration and similarity.

In addition to equalizing the external tariff, there are opportunities to liberalize and simplify the rules of origin. There might be some attraction in both countries to exclude these sectors from trade remedy laws. There could be recognition of each countries standards, as well as elements of regulatory cooperation.

The sectors that I have identified represent a significant part of the economies of both countries, so the economic benefits of what I have described are quite meaningful.

If progress can be demonstrated here, there could well be interest generated in expanding this further. Indeed, I may be too limited in my scope already.

Because of the significant amount of two-way cross-border trade in these sectors, this initiative can be integrated with the work already underway in the Manley/Ridge border security dialogue.

But to go further than these fairly logical candidates would raise too many sensitive political issues and would likely render the project dead on arrival.

I have painted this prospect in a positive light because I think there are real opportunities and clear benefits here. That is not to say that there are not problems or complications to deal with, but if done on this type of limited scope where solutions can be found and managed it might well provide a promising way forward. At any rate, if I were minister today, I would certainly be asking for more work to be done in this area.

I am running out of time so let me quickly identify other areas which should be on any NAFTA – plus agenda.

There are important trade-related issues which have been raised by the recent report by the standing committee on foreign affairs and international trade which deserve further discussion and consultation.

  • Future of the Canadian dollar (quite long term).
  • Chapter 11 – uncertainty surrounding impact of this on investments, particularly page 3 (needs more immediate attention).
  • Other dispute settlement mechanism improvements.
  • Free movement of people.

A final comment on the acceptability of further liberalization in a NAFTA plus world.

I think the Canadian environment is reasonably favourable. NAFTA has treated us well. The economy has been transformed. We are more efficient and productive as a result. Canadians know this from what they read and hear. Many know it instinctively or directly through personal experiences. Most of the hoary concerns regarding the impact of NAFTA have not materialized. The fact that most mainstream political dialogue is supportive of further liberalization supports this positive view.

Yes, there are concerns about sovereignty and the unknown or the negatives of globalization. Those concerns will always and should always be there. They have been for decades, even centuries. Countries and governments constantly weigh the costs and benefits. I believe the balance clearly has favoured the benefits. Others will debate or reject that view. That will always be the nature of this debate. And to move forward, I believe it is necessary for there to be transparency and consultation involving a willingness to have a balanced, rational and open dialogue. This is improving, but needs to improve more…..on both sides.

Clearly much can be done.

But all of this is interrelated.

This is not just about national security, or border access or defense or trade as individual and unrelated matters.

It is about all of these initiatives – they must be managed in a coordinated and strategic way.

The federal government must have a strategy. It must have a plan. It must manage the relationship with the U.S. in a coordinated and indeed visionary fashion.

The Prime Minister and key affected ministers plus the provinces must know what they want to achieve, what our priorities are, what sensitivities there are in the U.S. as well as in Canada. Governments must take advantage of the shifting political environment in each country to achieve progress.

So….is there a menu of opportunities to explore in NAFTA plus?

Yes there certainly is.

Is there a plan to move forward and explore these with our partners in the U.S.? That is not apparent.

Developing this strategy and addressing the U.S.: Canada relationship in a coordinated way should be a top priority for a new federal government. Canada must and should be proactive. We need to demonstrate the political will, energy and foresight to move forward and realize these opportunities.

There is much to be gained.