A new reality confronts trade policymakers: no longer is trade policy about managing the flow of goods and services across borders; the trading system is now far more complex, centering on globally integrated supply chains and increasingly value chains.
by Mark Fisher, Jesse Shuster-Leibner and Jeff Phillips
But as the dynamics of global trade change, a disconnect exists between this new reality and the way international trade policy and negotiations are managed, as both are still pursued to protect and service national economies while ignoring integrated sectors, clusters and supply chains that pay no attention to international borders. As a result, we are leaving valuable opportunities to enhance economic growth and prosperity on the table whenever our respective countries’ trade negotiators fly off to the next round of trade negotiations. So, how can free trade agreements support and work to the advantage of already integrated supply chains like those that exist between the United States and Canada? Is it time for a more progressive trade policy framework that takes into account bi-national sectors and supply/value chains so that, together, we can pursue common commercial interests abroad?
Over the last decade world trade in goods has increased dramatically from less than $8 trillion in 2003 to more than $18.5 trillion in 2013. Over the same period, trade in services has more than doubled, from $2 trillion to $4.7 trillion, according to the United Nations Conference on Trade and Development’s 2014 report “Key Statistics and Trends in International Trade.” This growth has been largely precipitated by regional trade agreements (RTA). As of April 2015 the World Trade Organization (WTO) received notification of 612 RTAs around the world, as a global deal has proven difficult to achieve at the multilateral level through the WTO.
The most important RTA for both Canada and the United States is the North American Free Trade Agreement (NAFTA), with two-way trade in goods and services doubling since it was signed in 1994. Canada sells more to the United States in one year than to the rest of the world combined over three years. In real time, this represents over $2 billion in goods and services crossing the Canada-U.S. border every day—or $1.4 million worth every minute, according to the Canadian Embassy in Washington, D.C.
The Great Lakes-St. Lawrence region is a microcosm of the Canada-U.S. relationship and critical continental and global trade corridor. The region supplies 46 million jobs, or nearly 30 percent of the combined American and Canadian workforce. The eight Great
Lakes states and the Canadian provinces of Quebec and Ontario represent 50 percent of the total value of imports and exports between the two countries. Further, the region boasts one-fifth of U.S. and one-half of Canadian manufacturing.
The auto sector, still a manufacturing juggernaut in the region, best illustrates how intertwined we are, with its just-in-time supply chain that relies on speed, reliability and predictability at the border. It’s also the sector that best demonstrates the opportunities both countries could gain through the pursuit of common commercial interests.
The Auto Pact, signed in 1965 by President Johnson and Prime Minister Pearson, recognized that shared industrial and trade policy objectives were required for an industry that dominated the two economies and spanned the border. Based on information from “Learning from the Past – Volume 1: The Automotive Industry and Economic Development in Ontario; a Historical Perspective” and “Working Paper Series: Ontario in the Creative Age,” the pact allowed a single plant to produce specific vehicle models for both markets which rationalized production and led to greater economies-of-scale. Unfortunately, in a global marketplace where the competition for foreign direct investment and business is fierce, enthusiasm for pursuing shared policy objectives has waned.
Take the latest free trade negotiations with South Korea, which exemplify the potential dangers of disintegrated trade and industrial policy for integrated sectors. The United States signed the Korea-U.S. Free Trade Agreement (KORUS) and Canada signed the Canada-Korea Free Trade Agreement (CKFTA) in 2011 and 2015, respectively. Both included important provisions for the automotive industry, such as the treatment of tariffs, internal taxes, enforcement and standards. Yet, ultimately different outcomes were achieved. In the case of the U.S., the country secured a snap-back provision that allows Washington to impose a 2.5 percent tariff if South Korea violates the agreement, an Automotive Working Group (AWG) to address non-tariff barriers and an expedited dispute settlement procedure. Canada was also able to include an expedited dispute settlement procedure in CKFTA but was unable to secure a snap-back provision. This has brought about the ire of some leaders in the Canadian auto industry.
Overall, while it is still too early to assess the full impact of both agreements, the CKFTA is expected to increase Korean auto exports to Canada, which will have a modest impact on the Canadian auto sector, as Korean gains will come at the expense of third parties like U.S. firms. Likewise, the trade diversion effects brought about by CKFTA will likely hamper the anticipated bilateral export gain between the U.S. and Korea expected from KORUS, as stated in “The Canada-Korea Free Trade Agreement: What It Means for Canada” by the C.D. Howe Institute.
What KORUS and CKFTA show is that despite the high level of integration in the auto sector and the recognition that we are each others’ most important trading partners, when it comes to international trade agreements, Canada and the U.S. part ways more often than not and hope that things work out for the sectors most impacted, many of which transcend the 49th parallel. This approach, whether intentional or unintentional, creates supply chain inefficiencies and missed opportunities with respect to fully utilizing our combined strengths—transportation infrastructure like that within the Great Lakes/St. Lawrence Seaway, skilled labor, advanced research and development, access to capital, affordable energy, etc.
As both countries pursue ambitious global trade policy agendas with Europe, countries in Asia and the Pacific Rim and other emerging markets, we need to consider a means of leveraging bi-national economic platforms like the Great Lakes/St. Lawrence Seaway region and integrated industries like the automotive, aerospace and agri-food sectors with an aim to attract more foreign direct investment and do more business together and with the rest of the world.
In today’s borderless, global marketplace, the United States and Canada need to work closer together, and increasingly with Mexico, in negotiating future trade agreements, at least as they relate to cross-border industries. Otherwise we are cheating our families, our workers and our businesses from the full benefits of these agreements and are creating unnecessary drag on our productivity and competitiveness.
However, before we can start on this journey, we must first find lasting solutions to bilateral policy challenges, such as Buy America, country of origin labeling, counterfeit goods, labour mobility and the future of cross-border energy trade.
Mark Fisher is President and CEO of the Council of the Great Lakes Region. Jeff Phillips is Managing Director of Dawson Strategic. Jesse Shuster-Leibner is an intern at the Council of the Great Lakes Region.