The Trade Environment: Evolving Context and Canadian Priorities

This companion paper to the Fall 2021 Economic Outlook focuses on major trade challenges that Canada faces. Many of these challenges pose specific threats or opportunities that could seriously impact Canadian trade and prosperity. These challenges are important enough that in our view, the Government should immediately engage in senior-level dialogue with public and private sector partners to assess the situation and determine how to proceed.

Highlights

• A supportive international trade environment is a necessary component of needed efforts to shift focus of policy attention from demand to supply, and bolster investment, including as necessary to decarbonize the economy over the medium to long term and to capture the benefits of digital transformation. Canada faces several significant trade challenges that threaten to make this transition more difficult. 
• The biggest challenge is the apparent lack of interest in the administration of President Biden in Canada and how certain American actions threaten to damage Canadian important interests and undermine the Canada-U.S. relationship. We examine an emerging pattern of American behaviour whereby the United States is restricting imports of traditional manufactured and resource products (many of them Canadian ranging from automotive products to softwood lumber), while calling for more open trade and strengthened rules for high technology products where the United States has a comparative advantage and strong domestic support for open competition. Alarmingly Biden’s Trade Representative, Katherine Tai, is openly musing about continuing with President Trump’s approach of favouring managed trade over negotiation of market access commitments that encourage competition in international markets. In addition, she is suggesting that unilateral American tools to restrict trade may be more in the American interest than internationally agreed rules in trade agreements. 
• These worrying developments underline the importance of diversifying Canadian trade by strategically focusing on the markets that offer the best prospects of developing new business opportunities for Canadians. A key part of this must be a hard-nosed assessment about whether, or not, China would be prepared to seriously reform its trade distorting domestic practices as part of its stated objective of joining the CPTPP. If Canada concludes that China is prepared to do so, Canada should support a decision by CPTPP members to open negotiations with China to determine whether and how this could be done. Obviously, this would require careful attention to the management of the American reaction to such a prospect.
• Clearly part of the Canadian response should be to engage in advocacy efforts in the United States building on the model deployed successfully during the renegotiation of the NAFTA. 
• However, the threat posed by these challenges from the United States and the need to make important decisions about our relationship with China require urgent consideration and action going beyond advocacy. In our view it would be appropriate for the Government to engage immediately in senior-level dialogue with public and private sector partners to assess the situation and determine how to proceed.