NAFTA is not TPP

Posted on October 9, 2015 in Policy Context –
October 8, 2015.   Lawrence L Herman

Ignorance about basic international trade rules is muddying the debate over TPP

Canadian suppliers would not be entitled to enhanced access to the U.S. market granted to the 10 other TPP members

It’s time to answer some of the misguided arguments about Canada rejecting the TPP Agreement that are being bandied about.

I was dismayed to hear pundits and political candidates claim that, because 85 per cent of our exports are covered under the NAFTA and other trade bilateral agreements, we really don’t need to be part of the TPP anyway.

This shows a regrettable misunderstanding of international trade rules and Canada’s treaty commitments, whether under the World Trade Organization Agreement or elsewhere. So let’s review all this.

Start with the WTO Agreement. It’s a multilateral treaty that legally binds Canada and virtually all other countries around the globe. The fundamental WTO rule is that member states can’t discriminate among goods and services from their WTO trading partners.

That’s known as most-favoured-nation or MFN treatment. You have to treat imports of goods, services (and investments) of all WTO members on a non-discriminatory basis, on a completely equal footing.

MFN is the unshakable pillar of international trade law.

But there’s an important exception. The WTO Agreement allows members to enter into preferential trade agreements (PTAs), either on a bilateral or regional basis, as long as these PTAs cover all or virtually all of the trade between or among them.

That’s what the NAFTA is. It’s preferential in that Canada, the U.S. and Mexico can give better treatment to each other’s goods, services and investments than they give to other WTO members. Countries outside NAFTA still get MFN-level treatment but not the preferential treatment the three NAFTA partners give one another. Like duty-free entry of Canadian products to the American market. That’s why the NAFTA was so important for Canada.

The Canada-EU trade agreement (or CETA) is also a preferential trade agreement. Under WTO rules, just explained, Canada and the EU are also allowed to give one another preferential – or better – treatment than that accorded the rest of the world. As well, Canada can give EU countries preferential – or better – treatment than Canada gives to the U.S. and Mexico under the NAFTA.

For example, it allows Canada to give additional cheese quotas to the Europeans that the Americans don’t get.

That’s what these PTAs are all about. Preferential treatment.

And that’s what the TPP is all about. Under WTO rules, TPP members are allowed to give preferential – or better – treatment to imports of goods, services and investments among themselves than they give to the rest of the world.

So what does all this mean? Well, for starters, if Canada was outside the TPP, it’s true we would still get WTO-level MFN or non-discriminatory treatment from the 11 remaining TPP members.

As well, Canada would still get NAFTA-level preferential treatment from the U.S. and Mexico. That’s because even if Canada were outside the TPP, the NAFTA would still apply among Canada, the U.S. and Mexico.

But Canada would not be entitled to any of the preferences given by the TPP member countries among themselves, including of course, preferential treatment the U.S. gives to its TPP partners.

In the case of government procurement, for example, Canadian suppliers would not be entitled to enhanced access to the U.S. market granted to the 10 other TPP members.

And this loss of preference to the U.S. market would apply throughout dozens if not hundreds of sectors where TPP preferences are superior to NAFTA-level treatment for Canadian goods, services and investments.

This critical point explains the implications of Canada being outside the TPP Agreement.

It would hugely disadvantage Canadian service providers in insurance, engineering, construction, information technology and a host of sectors that would be totally frozen out of any of the preferential access granted to TPP members in the U.S., Japanese or other TPP markets.

Take autos as another example. It’s been the focus of much controversy in recent days.

If Canada was outside the TPP, Canadian-made vehicles would still get duty-free access to the U.S. market, provided they met NAFTA’s 62.5 per cent local content requirement. Fair enough. But Canadian-made vehicles would be competing against, say, Mexican-made vehicles that would not be tied to the NAFTA but would qualify duty-free entry into the U.S. with as little as 45 per cent TPP content.

It means Mexican auto producers could source the remaining 55 per cent of a vehicle’s components from lower-cost sources outside the TPP, say from Brazil or China, and qualify for duty-free access to the U.S. market. That would give Mexican-made cars a huge cost advantage over Canadian-made vehicles fixed at 62.5 per cent NAFTA content for U.S. duty-free entry.

So it’s hard to understand why Unifor and its leadership claims Canada should reject the TPP. Do we really want to freeze this built-in cost disadvantage to the Canadian auto producing sector?

These are just a couple of illustrations to show the significance of preferential treatment in international trade relations.

For all these reasons, it’s important to not make hasty and ill-judged comments about how easy it would be for Canada to just step aside and let the other 11 countries do their deal. For Canada to abandon these advantageous preferences in the TPP would have negative consequences for Canadian companies and their employees, including in the auto sector.

Lawrence L. Herman, Herman & Associates, practices international trade law and is a Senior Fellow of the C.D. Howe Institute in Toronto.

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