Free Trade: Canada & the EU

Last week, the Harper administration and the European Union announced their agreement in principle on a free trade agreement (CETA), which will eliminate 99% of tariffs between the two countries, as well as a considerable amount of trade red tape and regulation. The details of the agreement are due to be announced on Tuesday, but without some huge hiccup, the deal will go through. As a Canadian living inside the European Single Market, I have high hopes that I may soon see reasonably priced Kraft Dinner at my local supermarket.

What Harper calls “the biggest deal our country has ever made” will likely have many positive consequences for Canada, but it is unclear that it is the most significant deal Canada has ever made. It is definitely a step in the right direction, but personally, I’m worried that free trade with Canada is of instrumental value to Brussels. Van Rumpoy was explicit in the announcement of CETA that he hopes it will set a precedent for other trade agreements with North America. The worry I have, which I haven’t seen expressed anywhere is that CETA may serve as a pilot program, which will inform the free trade talks going on between the EU and the US, which started in July. The way I see it, as one of few free trade partners of both the EU and the US, Canada has a lot to gain from being middle man. It could be that the effects of the new trade policy are biased upwards while the EU-US agreement is in the works, but will fall after it is announced.

In addition, I would call the Kyoto Accord to Harper’s attention as the biggest deal our country has ever made if he hadn’t torn up Canada’s involvement last year. And even if I put my not-so-passive aggressiveness about environmental policy aside, I would cite NAFTA, last year’s foreign investment agreement with China, and NATO as rival claimants.

Although the media may be overestimating the significance of CETA by failing to consider a pending EU-US agreement, and focusing on the ‘biggest deal … ever” to provide a much needed counterpoint to the senate expenses scandal dominating the airwaves at present, there are still very tangible benefits for Canadians to anticipate. CETA is likely to provide useful personnel mobility, increasing trade benefits and integration, and geopolitical rebalancing of Canada’s allegiances.

First, the personnel mobility implicit in the details of CETA we know allow transatlantic corporations more flexibility in shifting their employees within the new free trade block. The readiest example of how this will benefit Canada is that allowing natural resource experts from Europe to contribute to the energy sector in Alberta.

Second, although Canada-EU trade is dwarfed by Canada’s trade relationship with the US, the abolition of commercial protectionism in CETA will open up the EU market to Canadian producers, and give Canadian consumers more choice at affordable prices. If I may appeal briefly to the theory of comparative advantage, Paul Samuelson’s example of “a true and non-trivial rule in the social sciences”, there is a welfare gain to be made under free trade, where countries focus on their comparative advantages, producing more between them. This benefit is also non-trivial in the political sense because it’s not easy to justify the policy to lobby groups representing producers who are threatened by Canada’s lack of comparative advantage in their industry. In principle, there will be a net welfare gain if they redistribute their labour elsewhere, but that’s not an easy suggestion to justify to cheese producers, who will have to compete with millions of tonnes of incoming European product. The Harper government’s solution to this specific problem and others like it has essentially been to buy disadvantaged producers silence in the short run with demand subsidies. The sustainability of such a subsidy of uncompetitive industry is somewhat worrying, but that’s too big a topic for a mid-post digression. However, by buying the silence of these producers, CETA comes off as pretty near to a pareto improvement for Canadians.

The benefits of the policy initially appear to effect the 10.5% or €46.6bn of Canada’s trade, but the agreement will likely cause this percentage to increase, creating further trade integration between Canada and the EU in the future. The EU actually has a history of trade integration in response to free trade agreements. Intra EU trade has increased approximately 8% since the establishment of the single market. (Mankiw) Hopefully Canada will see a similar effect, and CETA will actually cause an increasing market for Canadian products.

The third consequence of CETA relates to the second, but focuses on the geopolitical implications of Canada diversifying its trade relationships beyond US monopoly and monopsony power. Most of Canada’s trade is with the US, and while this is pragmatic from a proximity sense, US trade has a huge amount of power to make or break Canada. The EU agreement hopefully signifies another step down the road to Canadian, which is distinct and independent from American interests.

The employment consequences of the policy are unclear. Most experts seem to think that the new agreement will create jobs in Canada, but there are some dissenting opinions. I don’t know enough about job creation to provide commentary here, but from an intuitive point of view, I do know that jobs will likely move towards Canada’s sectors of comparative advantage. I believe that although the net job consequences of CETA are unclear (but probably positive), the competitiveness consequences will demonstrate the truly positive effects of free trade.

I would also like to commend Harper on burying the partisan hatchet and finishing up on what was initially a Liberal initiative, despite the populist temptation to scrap it and start from square one.

In conclusion, as a not-so-sophisticated economist, I wield the full weight of my totally inconsequential opinion in saying that I’m confident that free trade is a good thing in the increasingly globalized world. From this perspective, CETA is definitely a step in the right direction. Hopefully it will lead to an overhaul of many outdated protectionist policies in sectors where it does not make sense for Canada to produce. From a purely self-interested point of view, I’m hoping to avoid always carrying cider for my mother when I return to Quebec because it’s damn heavy and Quebecois cider isn’t even any better than Strongbow. (Also, I’d really love to get my hands on some KD in the UK).