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  February 28th, 2018 | Written by

Canada Setting Sights on Mercosur is No Coincidence

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  • With CPTPP, US imports into Canada could fall by $3.3 billion.
  • The seventh round of NAFTA negotiations is taking place this week.
  • The significance of a Mercosur deal is far more advantageous to Canada than appears on the surface.
  • An FTA with Mercosur would give Canada tariff-free access to almost all of South America.

When the text for the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) was released last week, astute observers were quick to point out that the resurrected trade deal was likely to further enflame what is expected to already be an overheated negotiation session over NAFTA this week.

As widely reported, an analysis of the CPTPP by Global Affairs Canada shows US imports into Canada—and particularly US auto parts—could stand to fall by as much as $3.3 billion. The news couldn’t have come at an untimelier moment given that the seventh round of NAFTA negotiations is taking place this week with a heavy focus on automotive rules of origin. Since balancing trade between the US and its trading partners has been one of Washington’s key objectives, this is likely to come as unwelcome news.

Canadian officials have maintained that the anticipated signing of the CPTPP in March of this year and last year’s ratification of a free trade deal with the Europe Union is simply a manifestation of the current government’s focus on internationalism, not a fallback plan in the event NAFTA is disbanded.

But there was another development in Canada last week and would suggest Canada is hedging its bets. Shortly after signing the CPTPP, Canadian officials are reportedly flying out to Buenos Aires to speak with officials from Mercosur, the four-nation South American trading bloc that includes key markets such as Argentina and Brazil, as well as Paraguay and Uruguay.

In 2016, bilateral trade between Canada and Mercosur totaled only $8.1 billion, a tiny fraction of the $544 billion in bilateral trade between Canada and the US for that same year. By that measurement, a trade pact between Canada and Mercosur would appear to be of limited significance in the context of Canada hedging its bets against a US withdrawal from NAFTA. But look a little deeper and the significance of a Mercosur deal is far more advantageous to Canada than it appears on the surface.

First, since Canada will already have free trade with Chile and Peru through both the CPTPP and bilateral trade deals, a free trade agreement with Mercosur would essentially give Canada tariff-free access to almost all of South America. For multinational corporations with international supply chains that include links in South America, Canada will become a much more attractive investment market. This is particularly true for organizations that will want to complement production-related cost efficiencies in South America with Canada’s pool of high-skilled laborers and technicians who support research and development, design, marketing and other critical aspects of product development.

Second, Mercosur offers Canadian exporters a market of 260 million people. Add that to the market of 500 million to which Canada secured access via the CETA deal with Europe and the 495 million in the CPTPP and suddenly – within the course of the year – Canada will have secured free trade access (in principle) to a combined market more than four times the size of the US.

To be sure, NAFTA or not, the US and Canada are likely always to be each other’s largest trading partners. Geography, business culture and mutually advantageous trade needs have cemented that trade relationship in perpetuity. But without NAFTA, trade becomes more expensive and less advantageous in certain sectors where businesses will likely be looking for alternative markets for sourcing materials and selling their wares.

Finally, as noted by the Canadian Broadcasting Corporation (CBC), access to Mercosur will likely come as a welcome development to the country’s auto parts sector, which will face stiff competition from foreign imports through CPTPP, but can offset that competition by targeting the Mercosur market.

It’s important to note that talks between Canada and Mercosur won’t necessarily result in a free trade agreement. The entities have gone down this road before but stopped short of finalizing an agreement for a variety of reasons. Mercosur has been fraught with instability in recent years. The indefinite suspension of Venezuela from the trade bloc in response to the government’s crackdown on political opposition and accusations of corruption and economic mismanagement in Argentina and Brazil have scared away many investors in recent years. Furthermore, Canada is likely to demand that a free trade agreement with Mercosur include provisions related to progressive policies on labor, environment, indigenous rights and gender equality, similar to those on which Canada insisted within the CPTPP.

For these reasons and others related to impasses over critical trade issues, the EU has been unable to finalize a trade agreement with Mercosur even after almost two decades of negotiation. In other words, even if Canada is pursuing free trade talks with Merocsur, there’s no reason to believe an agreement is likely to be realized in the short term.

But with the fate of NAFTA uncertain and Canada’s participation in the CPTPP blocked only by formalities at this point, there is little question that there is great incentive for America’s northern neighbor to find new hemispheric trade allies.

What isn’t clear is how or if Canada’s pursuit of a deal with Mercosur and its signing onto the CPTPP might affect its trade relationship with the US and/or its NAFTA negotiating position. But given the frankness by which trade matters have been discussed between officials across the 49th parallel, it’s reasonable to assume Canadian policymakers will find out soon enough.

Cora Di Pietro is vice president of Global Trade Consulting at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations.