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Budding Signs of Trade Diversification a Welcome Sign for Canada’s Trade

Budding Signs of Trade Diversification a Welcome Sign for Canada’s Trade

There’s been much ado in Ottawa as of late regarding the promotion of free-trade ideals and the pursuit of a globalist agenda in economics.

The recent handshake agreement on a rebranded United States-Mexico-Canada Agreement (USMCA) has understandably been the preeminent focus of business and political observers. But setting aside momentarily that historic détente in Can-Am relations, there’s been a great deal of work taking place in Ottawa to establish the conditions that will enable and empower not just globalism but genuine trade diversification.

Most Canadian businesses – particularly those for which trade across the 49th parallel is integral to their livelihood – have been alarmed by how quickly trade relations between Canada and the U.S. have regressed over the past 18 months, and how closely the USMCA negotiations came to leaving Canada without a free trade agreement with the U.S.

And yet, it was with little fanfare that Canada’s Parliament recently gave royal ascent (the last step in the ratification process) to the Comprehensive & Progressive Agreement for Trans-Pacific Partnership or CPTPP. For the uninitiated, the CPTPP is a multilateral free trade agreement involving 11 Pacific Rim countries. Originally, the agreement (then dubbed the Trans-Pacific Partnership) was a 12-nation pact that included the United States. However, U.S. President Donald Trump withdrew from the agreement via executive order on his third day in office.

Fearing the proliferation of protectionism and looking to solidify strength in numbers in Asia against China’s rising hegemony, the remaining members of the TPP relaunched trade talks in a rather expeditious manner in 2017. One year later, not only have those talks concluded, but also the required six signatory countries formally ratified the agreement, allowing entry into force on December 30, 2018.

For Canada, participation in the CPTPP represents a further bet on multilateral trade and the pursuit of a free trade agenda that is meant not only to provide greater import/export options for Canadian businesses, but to reduce Canada’s dependence on trade with the United States. That agenda has reasonably been pursued with increased vigor given Washington’s hyper focus on Buy American trade policies, bi-lateral trade, and the elimination of trade deficits.

To be sure, Canada’s globalist trade agenda predates the era of Donald Trump and the rise of trade protectionism. It is evident in the 2016 signing of the Comprehensive Economic & Trade Agreement (CETA) with the European Union; an agreement that took seven years to negotiate under an air of cynicism and opposition on both sides of the Atlantic.

Some have argued that Canada-EU trade data under CETA is indicative of Canadian businesses’ vulnerability to compete in a multilateral environment. These detractors note that since CETA’s provisional application in September 2017, exports to the EU increased only a modest 3.3 per cent versus a 12.9 per cent increase in imports from the EU.

But a closer look reveals one-fifth of those new imports are made up of machinery, indicating  the buds of economic diversification, rather than a sign of global non-competitiveness. Machinery is most often imported to enhance production efficiency and make businesses more innovative and internationally competitive. The fact that this taking place in a less-than-favorable exchange rate environment for Canadian businesses is all the more encouraging.

Far from driving job loss, the imports are spurring employment growth. In the year following CETA’s implementation, Canada’s unemployment rate fell from 6.2% to 5.9%. Furthermore, employment in some of the sectors most affected by the top imports from the EU, such as, mining and health care has risen 4.13% and 0.75% respectively. Granted, employment in manufacturing did drop 1.37% during that period; however, that figure is likely made up of job losses due to automation as much as job losses due to lost business.

It is also reassuring that trade growth with the EU hasn’t been limited to the UK, traditionally Canada’s largest European trading partner. According to a CBC report in September, exports from Canada to European countries other than the UK, grew 6.9%. This is yet another sign that Canadian businesses are looking outside their traditional comfort zones for both sourcing and selling opportunities.

Precisely how widely used the CPTPP will be amongst Canadian businesses is anyone’s guess at this point. Like the CETA countries, the CPTPP group is made up of diverse economies. And, like the EU, trade with the CPTPP group will require a reliance on ocean freight, multi-lingual communication and packaging, as well as multi-cultural considerations for how products are marketed.

The path of least resistance for Canadian businesses would be to breathe a heavy sigh of relief that the North American bloc has been salvaged by USMCA and revert to tried and true trade relationships with existing supply chain partners. No one would blame them for doing so. And for many businesses – particularly smaller ones – keeping trade within North America might be the only realistic approach.

For many others, the CPTPP and CETA represent a historic opportunity for businesses to diversify their sourcing and selling markets, but also to plant seeds that will grow sales, encourage innovation and productivity, expand product portfolios and serve as insurance against current and future trade disputes. For those reasons alone, businesses should be setting their sights on leveraging Canada’s newly acquired free trade prospects.

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.