Canadian Trade Policy Review: Defend and Diversify

By Jeff Fraser, Director, Global Trade Consulting

There’s a fever pitch amongst political observers in Canada in anticipation of the upcoming federal election on September 20, 2021. The vote is an opportunity for the current minority Liberal government led by Justin Trudeau to solidify a majority mandate in the wake of the turmoil wrought by the COVID-19 pandemic.

Trade issues are unlikely to feature prominently in the election that is widely seen as a kind of referendum on the current government’s performance and proposed policies surrounding the handling of the COVID-19 pandemic. Nevertheless, those businesses whose livelihoods have been impacted by trade-related issues will have strong memories of what they deemed to be favorable or unfavorable trade policies, and these are likely to have some influence over their votes.

Given the imminence of the election, it’s worthwhile reviewing the Trudeau administration’s approach to trade and how it’s handled the various issues that have arisen since it secured its first mandate in 2015.

Approach to Trade

When it came to office the Trudeau administration inherited from the preceding Conservative government already existing free trade negotiations with Europe and a bloc of Pacific Rim countries. From the outset, the government had made clear that it was going to maintain an “open for business” approach to trade. That meant promoting the tenets of multilateralism and a globalist agenda that would allow Canada to further integrate into global supply chains.

This became an especially poignant position for the government with the election of the Trump administration in the U.S., which campaigned heavily on an agenda of trade protectionism that heavily criticized the virtues of free trade and, in particular, the North American Free Trade Agreement (NAFTA) that had been a hallmark of trade across the continent for more than a generation.

It’s quite possible Ottawa simply viewed the protectionist rhetoric as clever posturing. After all, the Obama administration had campaign on a similar platform in its first campaign and ended up furthering America’s push toward globalization. Yet, the Trump administration wasted little time in demonstrating it was not just paying lip service to Big Labor in the U.S. or looking to score votes in states disaffected by deindustrialization.

On the contrary, on its third day in office, President Trump had effectively dropped out of the Trans-Pacific Partnership that would have given the U.S. greater access to markets in Asia and South America. Seven months later – after more anti-NAFTA grandstanding – the administration made it clear it was intent on renegotiating the trade pact to get a better deal for U.S. workers and the Trudeau administration found itself on the defensive – a position it would retain for the balance of its mandate.

Promotion of Free Trade

When the Trudeau administration took the rein of trade promotion, negotiation for the Comprehensive Economic and Trade Agreement (CETA) with the European Union had been ongoing for eight years and was in its home stretch. There were, however, remaining issues to resolve, not least of which was the issue of access to Canada’s protected dairy market. But it was actually Canada’s access to Europe’s dairy market that forced an 11th hour refusal by the Belgian province of Wallonia to refuse to sign onto the deal, sparking frenzied negotiations to alleviate concerns. As it turn outs, the Wallonia’s fear was for naught. Since the agreement came into effect in September 2017, cheese exports in the January-April period from the EU to Canada have risen 14% while Canadian cheese exports to the EU have declined 35%, according to data from the European Commission.

Dairy aside, the CETA deal had gone a long way in spurring trade activity across the Atlantic. In fact, when looking at pre-pandemic trade figures, Canada’s trade with the EU grew 27% from the last year of trade before the CETA deal was signed, reaching a high of €66.8 billion in 2019, significantly higher than the 13.7% growth in trade between Canada and the rest of the world. The average annual growth rate in trade has gone from 4.4% in the pre-CETA era to 7.9% in two years following CETA’s implementation.

Exports from both parties have gone up markedly since the trade agreement was implemented – 25% in Canada and 28% in the EU. However, exports from the EU to Canada saw a far more pronounced decline in 2020 than Canadian exports to the EU. The Canadian industries that have witnessed the greatest growth in exports to the EU include ore, slag and ash, pharmaceuticals and agriculture.

Lingering Lumber Woes

The dairy dispute in the lead up to the CETA deal being finalized wasn’t the first trade issue with which the Trudeau government had to reckon. In the final months of the Obama administration, a U.S. International Trade Commission investigation into the impact of Canadian lumber on the U.S. lumber found cause for injury and imposed anti-dumping and countervailing duties averaging 20.22% on Canadian softwood lumber imports.

The move resurrected a decades-old dispute the two countries over how lumber is harvested and that translated to a competitive advantage for Canadian lumber producers. The Canadian government, while expressing disappointment, didn’t take any retaliatory action until June 2018 when it imposed a 10% tariff on U.S. imports of softwood plywood (along with a long list of other products) in retaliation to the Trump administration’s 25% levy on certain Canadian steel products and 10% on certain Canadian aluminum products on the grounds of national security. However, the U.S. did reduce the duty rate on Canadian softwood lumber in late 2020 to 8.9%.

The issue recently resurfaced when the U.S. Commerce Department proposed more than doubling the duty rate for Canadian lumber imports to 18.32%. While a final decision is yet to be made at time of writing, the proposal came at time when lumber prices were soaring (they have since subsided slightly but remain at double their 2020 rates) in response to market demand.

A New Deal for North American Trade

When Washington announced its plan to renegotiate NAFTA, Ottawa’s main goal was less about securing new benefits as it was about containing its losses. The negotiation was positioned as an opportunity to modernize free trade – and it was – but it was also a risky venture for Canada which has realized massive gains in access to the U.S. market since NAFTA’s implementation.

The negotiation process – a painful and convoluted 18-month odyssey that ultimately led to massive uncertainty in North American trade – saw a great deal of grandstanding by officials from all three countries. However, Canada was forced to reconcile its difference with the U.S. in short order after Washington and Mexico City announced a bilateral trade pact in lieu of lingering resistance from Ottawa. Within 90 days a trilateral pact had been buoyantly signed by representatives from each country.

The Gains: In the end, Canada gained a commitment from Washington to better harmonize regulatory systems to make investment in Canada by U.S. companies more attractive. In addition, the new Rules of Origin for automobiles are anticipated to create greater demand for Canadian auto parts production.

The Losses: The negotiation forced Canada to conceded about 3% of its protected dairy sector to U.S. producers (who now claim Canada is not living up to its end of the deal and have prompted the first formal USMCA complaint). The deal also forced Canada to expand its de minimis threshold from $20 to $150, allowing a far greater share of U.S. e-commerce imports into the country (though the threshold remains far below that of the $800 U.S. threshold). Lastly, Canada retained its ability to resolve country-to-country disputes via tribunal vs. the (now impotent) World Trade Organization, but capitulated to U.S. demands to remove the investor-state dispute system (ISDS) that allowed private corporations to take legal action against a state for infractions of the trade deal.

Steely Resolve

Perhaps the most impressive demonstration of the Trudeau administration’s ability to stand up for Canada’s interests was the dispute over steel. In June 2018, the U.S. government leveraged an obscure clause in the Trade Expansion Act of 1962 to place tariffs on aluminum and steel imports on grounds of national security. While Canada was initially exempt from the levy, Washington reversed course and imposed tariffs of 25% on Canadian steel and 10% on aluminum. The move was viewed with contempt in Ottawa, which immediately reacted by imposing in-kind tariffs on select U.S. consumer goods produced in U.S. states that rely heavily on exports to Canada. It took nearly a year to resolve the matter, but in the end the tariffs were removed through a memorandum of understanding that Canada’s steel and aluminum imports wouldn’t exceed “historical levels,” the quota for which was significantly higher than Canada’s average trade in steel-related goods with the U.S.

Trade Diversification

One of the key goals of the Trudeau administration’s in recent years has been reducing its reliance on its main trading partner, the U.S., in response to growing protectionist sentiment in Washington. While protectionist policies were championed by the Trump administration, the relatively new administration of Joe Biden appears to have minimal interest in reversing protectionist measures.

In 2018, the Trudeau government made headlines when it delayed the signing of the resurrected Comprehensive and Progressive Agreement for Trans-Pacific (CPTPP), snubbing a meeting with Japanese Prime Minister Shenzo Abe, because the agreement failed to include clauses that would protect Canada’s cultural industries and auto sectors. There were also issues around labor rights, intellectual property protections, gender rights and rules of origin.

In the end, the parties reached mutual ground and the agreement was implemented at the close of 2018. The 11-country trade bloc gives Canadian businesses new avenues of market growth and product sourcing that would reduce their reliance on the U.S.

In addition, Canada’s recent entry into formal negotiations with Indonesia – a member of the Association of Southeast Asian Nations (ASEAN) – combined with its membership in the CPTPP will allow Canadian businesses to diversify their global supply chains and further integrate themselves into global value chains.

Remaining Issues

Whether or not the Trudeau government is re-elected or a new government takes over, policymakers in Ottawa will have a number of issues to resolve in the coming months, including frictions with Washington over Canada’s opening of its dairy market to U.S. producers and the dispute over softwood lumber. In addition, Can-Am relations will also be impacted by Washington’s yet-to-be-passed $1 trillion infrastructure bill, which includes Buy American provisions that would block Canadian firms from bidding on federally funded infrastructure projects. While Canada’s federal policymakers have raised concerns about the protectionist measure and have launched a charm offensive to promote the virtues of doing business with Canada, there has been little in the way of suggested retaliatory measures at the time of writing.

It will also need to renegotiate terms of trade with the United Kingdom where a provisional agreement is now in place for the immediate post-Brexit period. Perhaps most significantly, diplomatic relations between Ottawa and Beijing remain icy and the potential for impact on trade is high. This will mean Canadian businesses will need to find contingencies not only for trade with the U.S. but for trade with China, Canada’s second-largest trade partner.

Jeff Fraser is a director of global trade consulting based in Canada. He has almost 30 years of experience in trade management and holds extensive knowledge in Canadian customs valuation, tariff classification and international trade agreement compliance, as well as appeals and dispute settlement.