Promise and Peril: Canada-U.S. Trade Policy

Despite ten years of relative success of NAFTA and the WTO, the commitment to free trade faces renewed threats in both Canada and the United States. Panelists at this event on bilateral trade policy discussed the impact of trade on the two countries, focusing specifically on two questions: (i) what lessons can Canada and the United States incorporate from each other's trade policy? (ii) What do Canada and the United States still need to learn about competitiveness to make free trade successful and sustainable in the future?

Participants in the panel included:
Jeff Colgan, author, The Promise and Peril of International Trade
Gary C. Hufbauer, Reginald Jones Senior Fellow, Institute for International Economics
Christopher Sands, Senior Associate, Center for Strategic and International Studies
Jim Holbein, Former NAFTA Secretary
Paul Bailey (Discussant), Counsellor (Trade Policy), Embassy of Canada in Washington, D.C.

Jeff Colgan, author of The Promise and Peril of International Trade and a member of Canada25, set the stage for the discussion with an overview of the debate surrounding international trade today, with specific reference to the questions currently being debated in Canada and the United States. Colgan underscored two specific lessons Canada could learn from U.S. foreign trade policy. First, he argued that embracing globalization does not imply submitting to "homogenization," or that all economies must go down the same path. Opponents of free trade tend to depict globalization as a "race to the bottom"; in Canada, opposition to free trade often manifests itself as a fear of succumbing to the "Americanization" of economic life. Colgan rejected these myths and said, "Canadians can relax; free trade does not mean a loss of sovereignty."

Colgan's second lesson from U.S. trade policy is that Canadian trade policy needs more leadership. He mentioned the tuna-dolphin case as an example of progressive, "far-sighted" leadership on the part of the United States in the conduct of its trade policy—though self-interest explained much of the U.S. position. Regarding leadership, however, Colgan argued that the Canadian government's recent foreign policy review was a disappointment. Essentially descriptive, the trade policy section of the review fails to provide a coherent, long-term vision, and eschews the hard trade-offs of choosing where to focus trade priorities. Colgan said that instead, the government pledges to focus its efforts "on the just about every region of the world." The lack of consideration of other complementary policy goals, such as institutional reform of multilateral organizations, promotion of corporate responsibility, or technical capacity building in developing countries, is also discouraging.

Colgan also stressed the importance of leadership on the part of both Canada and the United States to ensure the success of the global trade system and existing multilateral institutions. Indeed, "some of the gains from trade need to be reinvested into the system in order to sustain it," whether in the form of building political capital to sustain pro-trade constituencies or establishing worker assistance programs such as the Trade Adjustment Assistance program in the United States.

Gary Hufbauer outlined a number of challenges that confront both the United States and Canada. One common challenge is determining "how much government do we want?" A direct corollary to this question is determining the level of the corporate tax burden, particularly in an era where business is mobile. Hufbauer argued forcefully for a decrease in corporate income tax rates, lest Canada and the United States find themselves increasingly pressed by competitors such as Brazil, India, and China in the battle for new investment. He also made a strong plea for worker adjustment programs, noting that Canada has done more in this area than has the United States. Such efforts must be broad-based without becoming a substitute for unemployment benefits.

Hufbauer outlined some of the steps that Canada and United States can undertake together. He urged the two governments not to succumb to "irrational security concerns," which could lead to additional requirements at border crossings, such as biometrics; ultimately, the economic cost far outweighs the security benefits, which he said are marginal. He also underscored the need for swift action, backed by political will in both capitals, to deal with border congestion. There is an acute need for a "federal override" to allow Washington and Ottawa to step in and sort through the maze of overlapping state, provincial, and municipal jurisdictions if major infrastructure development is to go forward more swiftly. Hufbauer also mentioned some technical measures that would go a long way toward improving bilateral trade: mutual recognition of diplomas and credentials, establishment of a common external tariff to reduce the "nuisances" associated with rules of origin, and revamping the safeguard system in North America. Hufbauer concluded by suggesting that Canada become an example for the rest of the world and get rid of all of its tariffs entirely. The vast majority of Canadian trade is free to begin with and such a move would help other countries whose customs services, he said, were a source of petty corruption.

Jim Holbein remarked that since the United States and Canada signed the Free Trade Agreement in 1988, the trade relationship has blossomed but has not solved all outstanding irritants—problems such as softwood lumber have festered on regardless. Holbein was doubtful whether the two countries could still learn much from each other, but argued that there are still many opportunities for common cause in the context of the WTO and the Doha round of negotiations. Gains from tariff reductions, he said, have already been achieved. Holbein argued that Canada has a leading role to play in educating developing countries about the benefits of free trade and "showing them the way forward."

One participant remarked that Canada has already taken steps in this direction, funding several capacity-building projects in developing countries. Hufbauer added that Canada could play a role in sharing knowledge and best practices with developing countries in the area of customs enforcement.

According to Holbein, there is a need for domestic leadership and tackling protected sectors (e.g., textiles, sugar) to achieve further gains from free trade, though the political challenges are not to be underestimated. He suggested that we shift our focus to higher tech trade, but noted that it is difficult in a war-time economy. Another area ripe for improvement is assistance for small and medium enterprises, which do not benefit nearly as much as their larger counterparts from worker assistance programs and investment schemes pushed by the government.

Christopher Sands reflected on how problems of governance affect trade relations. Despite the vision of a single economic space envisaged under the NAFTA, in practice cross-border trade flows are subject to federal government regulations as well as state and provincial requirements. Sands remarked that the management of U.S. foreign policy toward Canada has become increasingly decentralized, and is now conducted at various levels of government. The priorities of local constituents in different regions and electoral districts have become a principal driver of challenges and amendments to the legal frameworks underpinning cross-border trade. This has far-reaching implications, for companies looking to invest in North America may select the United States over Canada to "avoid being on the wrong side of Congressional protectionism." Understanding the importance of domestic politics is therefore crucial when thinking about foreign trade policy. The greatest challenges in Canada-U.S. trade policy are not economic in nature, but political.

Sands remarked that Canada-U.S. trade disputes have typically been more acute in sectors dominated by commodities (e.g., softwood lumber, steel), where market prices fluctuate frequently and significantly. When prices are low, producers, especially small and medium enterprises and family-owned businesses, are quick to call for protectionist measures as their "tool of first resort." Other sectors with more constant, predictable margins (e.g., the auto industry) have fared better. Likewise, sectors that have been opened up to cross-ownership have integrated further (e.g., the energy industry), whereas others, such as the steel industry, have remained fragmented across North America, in part because of the inability to agree on a set of cross-ownership rules.

Despite these political and structural challenges, Sands argued that Canada and the United States in fact have been doing quite well in resolving common problems. One example was the successful bilateral cooperation in dealing with the SARS outbreak in Toronto. As for longer standing irritants such as softwood lumber, beef, etc., he argued that these problems were ultimately about governance, which requires a political solution rather than a legal one. Indeed, for all the legal injunctions and rulings Canada may win, dissolving the dispute means dealing with U.S politicians. To do so successfully requires building "political goodwill" and identifying areas of mutual policy interests. Also, it is important not to let the symbolism of specific trade irritants dominate Canada-U.S. discourse.

Paul Bailey wrapped the discussion noting that the dynamics in U.S.-Canada trade policy had undergone a dramatic shift since the end of the Cold War. He recalled the political calculations that were typical of trade negotiations between allies during that period, when the need for a united front trumped the interests of individual governments. As a result, Canada and others sometimes had to "bite the bullet" in the form of trade concessions (e.g., during the GATT negotiations). Bailey nevertheless cautioned against taking Canadian trade policy decisions or outstanding Canada-U.S. trade irritants out of perspective: many countries would trade Canada's problems with the United States for theirs any day. The United States and Canada should use their good trading relationship as an example for the rest of the world.

Finally, Christopher Sands commended Canada25 for organizing a thoughtful roundtable discussion on trade issues, and encouraged members to continue their work with a focus on long-term challenges. Indeed, today's governments are already grappling with current challenges and ongoing irritants; forums such as Canada25 need to be thinking of the problems that Canada and the United States will be confronting ten years from now and beyond.