Canada is a trading nation. In fact, the Canadian economy is one of the most dependent on trade among large, developed nations. While Canada’s recovery from the pandemic has been robust, its longer-term economic prospects will depend greatly on the expansion of global trade.
The incoming Biden administration has signaled a desire to reenter the Trans-Pacific Partnership.
The incoming Biden administration has signaled a desire to reenter the Trans-Pacific Partnership (TPP), which President Trump walked away from in 2017. Canada could see a major and much-needed boost if the U.S. joins the pact given the degree of interdependence between the United States and Canada. In fact, it is hard to think of anything that could be more consequential to the Canadian economy.
Canada was not always the multicultural and open society and economy it is today. It was only in the 1960s when Canada eliminated its immigration policies favouring European and American immigrants. Official multiculturalism – a defining feature of Canada today – was adopted in the early 1970s.
The postwar era was also defined by protectionism and economic nationalism (for example, the establishment of the Foreign Investment Review Agency and the nationalization in the oil industry). Canadians were particularly concerned about losing their sense of economic and cultural independence as a result of living next to the behemoth known as the United States.
A lot has changed over the past few decades. In the late 1980s, Canada entered into a free trade agreement with the United States, which became the basis of the North American Free Trade Agreement when Mexico joined in 1994. Since then, Canada has been particularly aggressive at initiating and signing other free trade agreements, most notably with the European Union (the Comprehensive and Economic Trade Agreement, or CETA) and with a number of Pacific Rim countries as part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – what became of TPP when the United States pulled out.
Since the 1960s, when the Auto Pact was signed, the importance of international trade to Canada’s economy has increased dramatically. The diagram below shows Canada’s total trade as a per cent of gross domestic product, or its trade exposure.
From 1961 to 2019, the relative importance of international trade to Canada’s economy has nearly doubled, according to the World Trade Organization. In 2019, total exports and imports accounted for 67 per cent of Canada’s GDP. In some sense, this means that two-thirds of Canada’s economy depends on international trade. As a comparison, the U.S. economy is markedly less dependent on trade because of its large domestic market.
TPP or tariffs
Had the U.S. entered TPP, the nations in the pact would have represented approximately 40 per cent of global GDP and created the largest trading bloc in the world, generating significant economic benefits across the board.
Analyses conducted by the World Bank, Global Affairs Canada, the United States International Trade Commission and the Peterson Institute for International Economics found that TPP would generate incremental economic benefits across all member countries.
The diagrams below show the estimated incremental growth that would have occurred under TPP with the U.S. as a member in 2020, 2025 and 2030, according to the study conducted by the Peterson Institute.
The analysis, published in 2016, shows that all member countries stood to benefit, and some more than others. On a relative basis, Vietnam, Brunei and Malaysia were to be the big winners, according to the analysis. Canada was also estimated to do particularly well, with incremental growth in GDP of 1.3% by 2030. To be clear, this is growth in real incomes that would not occur without TPP, the analysis predicted.
Then there’s the U.S., which according to the analysis stood to gain an incremental $129 billion in gross domestic product under the trade pact. Making the loss of the missed opportunity all the more acute is that this analysis, particularly for Canada and the U.S., represents a low estimate of the gains, given the significant events of the past several years.
Unfulfilled potential
Today, it’s a different story. What became of the Trans-Pacific Partnership never fulfilled the potential of the original pact that included the U.S. Instead, a radically changed economic landscape emerged, for better or worse:
- Renegotiation of NAFTA, which has tethered Canada closer to the U.S. economy.
- The U.S.-China trade war that has significantly affected the Canadian economy.
- The rise of economic nationalism around the world.
- A pandemic that has caused the largest economic contraction since the Great Depression.
Instead of embracing a Pacific trade pact, the Trump administration focused on imposing tariffs, which caused the Chinese authorities to impose countervailing tariffs. The result was a trade war.
To be sure, many economists and political analysts agree with Trump’s overall diagnosis of the U.S.-China relationship. But they disagree on the prescription and would have preferred a different approach, one centered on TPP that induces China to open its economy and addresses grievances like forced technology transfer and currency manipulation, among others.
If entering TPP provides the Biden administration with the cover needed to negotiate an end to the U.S.-China trade war, it could generate substantially greater economic benefits for countries that have been harmed by it like Canada.
An analysis conducted by BMO suggested that the U.S.-China trade war harmed Canada nearly as much as the U.S., which is not surprising given the degree of integration between the Canadian and American economies (as noted in a previous article, Canada and the U.S. are one economy separated by two currencies).
Other important benefits of TPP include enabling Canada’s trade diversification efforts, increased labour and environmental protections, regulatory alignment, economic development in developing countries, increased intellectual property protection and decreased economic uncertainty.
The takeaway
If early reports are in fact true and the U.S. re-enters TPP, it could give the boost that Canada needs over the medium to long term to help the economy grow and shrink the deficit. That deficit is projected to be nearly 20% of GDP this fiscal year and at least 5% next fiscal year, according to the Fall Economic Statement. These projections do not take into consideration the additional $100 billion of spending announced to address the second wave of the coronavirus and support the economic recovery.
Indeed, the end of the trade war, along with the re-entry of the U.S. in the Trans-Pacific Partnership, could go a long way to helping pay for this additional spending.
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