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Economy

The Tectonic Trade Plates are Moving: CETA, TTIP and the TPP

Nov 15 , 2013

In a triangular world of North America, an Asia dominated by China and Japan, and Europe, the interplay between the three is shifting. Canada, a medium-scale advanced and resource-rich economy, is working hard to establish a foothold in both Atlantic and Pacific camps while consolidating its North American base. The emerging trade architecture across the triangle is also evolving, potentially shaping economic trends for years to come. After four long years of effort, Canada has finally concluded a free trade agreement with the EU just as the US is launching its own Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations with Europe, partially as a counterpoise to China’s growing influence. At the same time, the Trans-Pacific Partnership trade talks (TPP) grind on, having completed 19 rounds with the end still not in sight, despite optimistic statements to the contrary. Canada, originally a skeptic, had to lobby hard to be admitted to the TPP negotiations as a latecomer and is now an enthusiastic supporter. Its deal with Europe will open the way to some key concessions that will be needed to help deliver a successful TPP conclusion. Canada needs a credible TPP outcome both for shorter-term tactical and longer-term strategic objectives. It is the one regional trade forum where Canada has a seat and a place in the long game that could lead eventually lead to a Free Trade Area of the Asia-Pacific (FTAAP), embracing both North America and China.

On October 18 of this year, Canada and the EU finally reached agreement in principle on the Canada-EU Trade Agreement (CETA). The conclusion of the Agreement, originally expected by the end of 2012, was held up by several sensitive issues; among these was access for European cheese producers to the closed Canadian market (effectively off-limits to most dairy imports due to a longstanding system of supply management), extended patent protection in Canada for brand-name pharmaceuticals and access to government procurement contracts at the provincial and municipal level. There were also market access constraints on the EU side. The difficult issues are of course always left for the final phases of any negotiation but it appears that it was the announcement of the TTIP talks this past summer that spurred both sides, particularly Canada, to make the extra effort to conclude CETA before EU attention turned elsewhere. The TTIP, formally launched in July in Washington, has a goal of early completion (“on one tank of gas”), but if the duration of the Canada-EU talks is anything to go by it will have to be a very large tank.

While these developments were taking place in trans-Atlantic trade discussions, trans-Pacific negotiators from the 12 Trans-Pacific Partnership (TPP) countries were in Brunei concluding what may be their penultimate round of negotiations, prior to the APEC Summit in Bali in early October. In Bali, TPP leaders proclaimed they were on track to complete the negotiations and reaffirmed their desire for completion by the end of this year. This is an unlikely prospect given the range of issues to be tackled, further complicated by the recent entry to the negotiations of Japan and its insistence on protecting its five “sacred” agricultural commodities (rice, wheat, sugar, beef and dairy).

Canada, having finally completed CETA (the only agreement of any significance it has negotiated since NAFTA 20 years ago), it will now turn with renewed vigor to the TPP talks. The compromises necessary to achieve the EU agreement give an indication of where Canadian negotiators may have some flexibility. Canada has always taken a defensive posture with regard to dairy and pharmaceutical issues—these were the stumbling blocks that made it less than welcome when it first lobbied for TPP participation as a latecomer in 2011. The concessions granted the Europeans (doubling the duty-free cheese quota, extending the patent protection period by two years to compensate for time elapsed during the approval process, opening subnational procurement markets above certain thresholds) indicate that Prime Minister Harper is prepared to tolerate some internal political heat in order to reach deals that bring overall economic benefit to the country – and political benefit to his government. Canada wants a successful outcome to the TPP negotiations not only for domestic political reasons (a general election is due in 2015), but also for tactical reasons such as protecting its NAFTA access to the US market and ensuring that it is not disadvantaged vis–à–vis the US in any market-opening deals involving Japan. 

Beyond these tactical objectives lies the longer-term strategic play of re-establishing Canada’s Asian credentials, which have languished over the past decade or more. While Canada made a particular point of ignoring China for political reasons when Mr. Harper first took power in 2005, the rest of Asia fell off the radar more by benign neglect than design. That situation has since been reversed, but it will take time and a sustainable commitment to re-establish Canada’s credibility. The TPP is one important way to do this because, if successful, it will lock Canada into one of the emerging trade tracks in Asia, the other being the Regional Comprehensive Economic Partnership (RCEP), which is centered on ASEAN but has China playing a key role. While China is unlikely to be willing to adopt the disciplines of the TPP any time soon, the TPP nevertheless offers a potential bridge to China, India and beyond if the RCEP and the TPP can eventually be brought together to form a broad Free Trade Area of the Asia Pacific (FTAAP). According to credible economic models, while the TPP and RCEP will bring big economic gains ($295 billion and $500 billion for the TPP and RCEP respectively), the real gains come with a combination of the two in a region wide FTAAP, where the gains will total $1.9 trillion.

China is central to these economic gains both because of the size of its economy and the relatively high trade barriers it still embraces. Until China is ready to take on trade agreements with greater discipline and ambition, North America will work on strengthening its trans-Atlantic ties as a counterpoise while pushing forward the TPP as a foothold in Asia. Canada is positioning itself to be ready, should the US-led TPP and the China/ASEAN dominated RCEP ever come together. The tectonic plates are moving and Canada does not want to be crushed.

Hugh Stephens is Principal of TransPacific Connections. He currently serves as Executive-in-Residence at the Asia Pacific Foundation of Canada and is a Fellow at the Canadian Defence and Foreign Affairs Institute. He is also an Associate Faculty member in the School of Business at Royal Roads University in Victoria, British Columbia.

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