Canada and the TPP

The Trans Pacific Partnership trade agreement that was reached in Atlanta overnight represents the culmination of five years of negotiation among the twelve participating countries.  Strange to say, the final push to get the stalled negotiations completed was provided by the Canadian election. Fears that the October 19 vote might produce a government in Ottawa that was much less favourably disposed to free trade finally broke the many logjams that had arisen.

Not surprisingly, Prime Minister Stephen Harper is lauding the deal, but with exactly two weeks left until polling day, this may be a risky strategy for him and his party. There can be little doubt that Canada's existing trade deal with the United States and Mexico, the so-called NAFTA treaty, has contributed mightily to the rapid erosion of the country's once-dynamic manufacturing sector that has been seen over the past decade and more. The painfully slow recovery in manufacturing that is now taking place in response to the weakness in the Canadian dollar is clear evidence that the sector has experienced an irreversible structural shift, and not just a cyclical slowdown.

Among the major opposition parties, the NDP has already indicated that it will not be bound by the new deal, while the Liberals seem inclined to read the fine print -- of which there will be a great deal -- before coming to a position. The Tories have promised that the new Parliament will have the final say on whether Canada signs the TPP treaty, but it seems inevitable that claims and counterclaims about its likely impact on the economy will be flying in the last two weeks of the campaign.

It's already known that the deal will make things even harder for the beleaguered auto sector, thanks to a slightly scuzzy side deal between the US and Japan over the content of "Japanese" vehicles sold in North America. Japanese manufacturers (and others) will now be able to include more components from cheaper sources in their vehicles while still claiming preferential tariff treatment. The difference -- a fall from a 60 percent local content requirement under NAFTA (i.e. 60 percent of the value of the vehicle from Canada the US and Mexico) to 45 percent under TPP (i.e. 45 percent from all twelve TPP countries) stands to be very significant for what's left of the auto sector in southern Ontario.

Fears that the Harper government would bargain away Canada's so-called supply management system for dairy products -- a scheme that keeps local farmers in business by ensuring that I pay three times as much for milk here as I would five miles away, across the border -- have largely been neutered. Very limited quotas for imported dairy products will be phased in, but it's much more likely that this will mean we start to see New Zealand cheddar in our stores than that the price of liquid milk will drop.

The full agreement will be published, we are told, in the next few days, at which point affected parties will presumably start to squawk.  One major element of the deal that has not been mentioned at all in the early going is the treatment of investment. NAFTA and the TPP are lazily described as trade deals, but it's very often the treatment of multinational investments that proves most significant (and contentious) in the long run. Expect Canadian nationalists to come out strongly against the deal if it affords foreign companies protection from the actions of Canadian governments and courts. (Come to think of it, expect Canadian nationalists to come out strongly against the deal anyway -- that's what they do.)

Canada's Trade Minister, Ed Fast, confidently asserts that the government "certainly doesn't expect" any job losses from the TPP. Pull the other one, Ed: the whole point of deals like this is to compel inefficient sectors of the participating countries to face competition from abroad, which inevitably means there will be job losses. The hope is always that these will be offset by job gains in other sectors.

Economic theory, relying on a concept known as comparative advantage, asserts that free trade deals always make the participating economies as a whole better off. Thus governments can supposedly redistribute the gains made by one sector to offset the losses incurred by another. Great in theory, but does it ever really happen? And in a huge country like Canada, where so much power is held by provincial governments rather than federally, is it ever really possible? It will be interesting to see how Messrs Harper, Mulcair and Trudeau answer those questions in the next two weeks.