Canada and the Trans-Pacific Partnership: Recap and Scoresheet

While the CPTPP’s impact on trade in the already highly open Asia Pacific region will be modest, the deal provides a welcome reassurance of open markets at a time when trade wars are being waged. Moreover, the CPTPP has several particularly beneficial features from a Canadian perspective:

• The CPTPP will promote diversification of Canada’s east-west trade, complementing the resetting of trade relations with Europe through the Comprehensive Economic and Trade Agreement with the European Union, which entered into force in 2017.
• With the suspension of the Trans-Pacific Partnership’s (TPP’s) problematic provisions that sought to expand protection for intellectual property rights and ventured prematurely into the regulation of data flows, the CPTPP sidesteps the controversial economic governance problems of the TPP.
• Without the United States, the CPTPP’s character changes from being an instrument of geopolitical rivalry wielded by the United States to “contain” China and enable more aggressive trade wars to being a buffer between the two.

A Long and Winding Road

The CPTPP’s entry into force will mark the end of a long and winding road for Canada in committing to an Asia Pacific trade strategy, marked by a number of significant shifts in the calculus of costs and benefits.

The agreement started out as a little-noticed negotiation among three, later four, “like-minded” parties (Brunei, Chile, New Zealand, and Singapore) of a Trans-Pacific Strategic Economic Partnership Agreement (a.k.a. P4), which came into force in 2006. The P4 was deliberately set up to serve as the base for a future pan-Asia Pacific free trade arrangement (FTA). However, Canada stayed on the sidelines as the P4 had little immediate benefits: Canada already had an FTA with Chile and was in negotiations with Singapore; meanwhile, New Zealand was a competitor with interests in Canada’s sensitive dairy sector.

The election of Barack Obama in the United States put wind in the P4’s sails and the group quickly expanded. For the United States, the TPP had an expressly geopolitical character – it was the cornerstone of Obama’s “pivot to Asia” to buttress America’s position in the face of China’s rise. It was also about “who writes the rules” for Asia Pacific trade. The TPP was the vehicle to establish those rules based on the US regulatory model.

Canada did not formally apply to join in the face of resistance from New Zealand and the United States. Again, the supply-managed dairy sector was a major factor. This was a “no go” area for Canada under the Conservative Harper government, which repeatedly affirmed its strong support for Canada’s supply management system. But joining the TPP also meant effectively renegotiating the North American Free Trade Agreement (NAFTA), with the United States under onerous terms of entry that put Canada’s other traditional defensive areas on the negotiating table (including Canadian content in media, intellectual property regime preferences, telecommunications ownership policies, and remaining investment restrictions), with little prospect of any valuable concessions from the United States. Weighed against the political costs of joining was the commercial cost of not joining: erosion of Canada’s competitive position in the TPP markets. The only significant market at risk for Canada at the time was Vietnam. The Harper government concluded that joining was not in Canada’s interest.

Japan was arguably the key to Canada throwing its hat into the TPP ring. Like Canada, Japan had resisted joining the negotiations despite its deep interest in the ground rules for international commerce in its backyard. Its reluctance partly reflected the fact that powerful stakeholder groups like the agriculture industry were not in favour of free trade agreements. Japan had come late to the FTA party and the agreements it did sign looked nothing like the legalistic, prescriptive agreements on which the P4 and TPP were based. But more importantly, Japan plays a balancing game against China politically but has its economic interests aligned with trade with China. Thus, notwithstanding prior indications of intent to join the negotiations, Japan’s actual entry into the TPP talks in 2011 coincided with developments in East Asian regionalism that impacted that balancing act – namely the launch of negotiations toward a Regional Comprehensive Economic Partnership that included China.

Japan’s tactical shift changed the calculus for Canada. Canada had been exploring a possible FTA with Japan since the mid-2000s and had participated in a joint study that was published in 2007. Japan’s prospective entry into the TPP now promised to put Canada at a disadvantage with the United States in negotiating access to the Japanese market. Canada thus entered the TPP negotiations for defensive reasons.

Devil in the Negotiating Details

Once the negotiations started, they were anything but smooth. This reflected in part traditional resistance to liberalization in agriculture. However, other factors played a role, including reactions to the non-transparent, lobby-driven trade negotiation process to develop policy for behind-the-border governance issues, the flawed investor-state dispute mechanism, and the controversial intellectual property and cross-border data flow provisions, which promised to raise health-care costs, dampen innovation, and raise privacy concerns.

Moreover, the TPP was associated with and sought to entrench an economic governance framework that was increasingly being questioned as it had proved to be prone to recurring financial and exchange rate crises, was concentrating income gains at the very top of the income distribution, and was generating a painfully slow recovery in jobs and wages.

Estimates of the gains from trade for most TPP parties based on conventional approaches to quantifying the impact of trade agreements varied from minimal to modest. Meanwhile, the implications for national bottom lines of the TPP’s implications of asset values and rent transfers, which required non-conventional evaluation approaches, had not been worked out. Simply put, the TPP’s value proposition was not clear.

Given all this, not to mention the fact that a series of attempts at mega-regionalism had all failed, it is something of a minor miracle that the TPP negotiations finally reached a conclusion, which they did in October 2016. Just in time, as it turned out, for the arrival of US President Donald J. Trump, who had campaigned against the agreement and withdrew the United States from the deal within days of taking office.

The US Game-changing Withdrawal

Without the United States, the deal changed dramatically in overall scale but also in terms of what it represented. Japan slipped quietly into the driver’s seat and pushed for the TPP to go ahead, as the deal now provided it an enhanced leadership role in setting the Asia Pacific trade agenda on terms that Prime Minister Abe had embraced as part of Abenomics. While the biggest winners from the original 12-member TPP – Vietnam and Japan – stood to see their conventionally measured gains from trade sharply reduced, countries with existing FTAs with the United States, including Canada, stood to see their gains increase as their existing preferential access to the US market would not be eroded and they would not have to share trade gains in other TPP markets with the United States. For the remaining 11, the deal still made sense.

Map of Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP or TPP11. Blue highlighted member states. | Thinkstock

Moreover, certain elements of the original TPP deal expressly included to meet US demands could be removed, further improving outcomes for those who remain. The approach to this surgery was to suspend the measures with these concessions, thus leaving in place a text to which the United States could accede in the future on terms already negotiated.

Of particular significance in this regard were the measures covering intellectual property and cross-border data flows. These represented potential negatives for most of the parties (including Canada) in terms of net payment flows and relative claim on global wealth; accordingly, suspension improved the metrics of the deal for them. More importantly, the suspension of the data measures looks increasingly like a case of dodging a governance bullet given the developments bearing on the regulation of data flows in the months since. These developments include major data privacy breaches such as the Equifax leak, the troubling revelations about the use of personal data assembled by Facebook for marketing and political manipulation, and the introduction of the European Union’s General Data Privacy Regulations, which establish new facts on the ground regarding compliance for globally active companies.

For Canada, the US exit made it a bigger fish in a smaller pond and Canada’s game transitioned from defence to offence. Taking advantage of its relatively greater clout, Canada pushed to tweak the deal. This included circumscribing commitments covering cultural products, which was achieved through an exchange of side letters with the other parties, and reflecting elements of the progressive trade agenda of the Liberal Trudeau government, including through the change in the name of the agreement, a side letter eliciting strengthened labour commitments by Vietnam, and side letters acknowledging traditional knowledge.

At the same time, Canada could not push too hard and risk the deal coming apart. The TPP loomed large as a way to diversify its export markets and hedge the new-found risk to Canada’s access to the US market under the now-threatened NAFTA, given the Trump administration’s aggressive protectionism. Even if NAFTA survives, the TPP provides welcome added trade exposure to the relatively rapidly growing Pacific Rim economy. Moreover, the TPP is a prime interest for Western Canada, and thus an important part of the Trudeau government’s domestic political calculus.

Accordingly, after the short-lived brinksmanship and theatre on the margins of the Asia Pacific Economic Cooperation meetings in Da Nang, Vietnam, which had briefly raised the possibility of a 10-member TPP without the United States and Canada, Canada came on board and the CPTPP was pushed through to conclusion. Of symbolic significance, the negotiations were wrapped up in Tokyo, underscoring Japan’s leadership, and the announcement came exactly one year after the US withdrawal.

The CPTPP End Game, Trade Wars, and US Re-entry

As the CPTPP moves forward to implementation, the shifting context promises to make this process anything but smooth.

The launch of a volley of protectionist measures by the Trump administration, which mainly target China but impact entire East Asian regional value chains (not to mention many other US trading partners, most notably Canada), appears to have galvanized negotiations among third parties. Perhaps of greatest significance is the renewal of negotiations between China, Japan, and South Korea for a tripartite FTA, agreement on which would also pave the way for finalizing the 16-party Regional Comprehensive Economic Partnership negotiations.

At the same time, China’s retaliation against the first wave of US tariff measures has led to the Trump administration considering re-entering the TPP as a way to offset the loss of markets in China.

With much more extensive measures and countermeasures looming in the event that the United States decides to pursue unilateral measures rather than seeking redress for alleged breaches through the World Trade Organization, such manoeuvring for market share will change the value proposition of the CPTPP for the participants, perhaps very considerably.

The Economic Impact of the CPTPP

The national interests in the CPTPP go well beyond the immediate impacts on trade and investment. Nonetheless, how the CPTPP adds up as a commercial deal will be an important factor in the ratification debate in Canada as elsewhere.

The CPTPP raises real Gross Domestic Product (GDP) for the parties as a group by about 0.075 per cent, generating economic welfare benefits of about $17.5B in current Canadian dollars by 2035. These gains are smaller compared to those under the TPP12 of about 0.1 per cent gain in real GDP and about $45B in welfare gains.

The commercial rationale for the deal remains in place, even without the United States. Japan and Vietnam, which stood to make the largest gains under the TPP12, still make the largest gains under the CPTPP. Meanwhile, for the parties in the Americas – Mexico, Canada, Peru, and Chile – the CPTPP improves upon the TPP12 as these countries avoid erosion of existing preferences in the US market, with whom they already have trade agreements, while they pick up market share in the Western Pacific from the United States. The same is true for Australia, which already has a free trade agreement with the United States.

Canada’s participation brings a disproportionately large liberalization dividend to the CPTPP, raising the real GDP gain from a minuscule 0.02 per cent to 0.075 per cent, and nearly doubling the overall welfare gains from about $9.7B to $17.5B. This reflects the fact that most of the bilateral relationships among the other CPTPP countries are already substantially liberalized under existing free trade agreements. Canada, meanwhile, brings economic heft to the deal and has comparatively few existing FTAs within the group. This underscores the leverage that Canada had in the final bargaining – which Canada recognized and utilized. While Canada’s participation does result in a discount to the gains for Chile, Mexico, and Peru, this discount is small and does not create an incentive for these countries to block Canada’s entry.

As a trade agreement, the CPTPP’s main achievement is to sweep away most of the remaining – and mostly low – tariffs in the Asia Pacific and to facilitate access to tariff-free trade by liberalizing the rules of origin that determine which products are eligible for such access. In this regard, the estimated gains reported above might turn out to be understated as these estimates do not capture the emergence of new trade in products that were not previously traded.

As an exercise in commercial regulation, the CPTPP has a lighter touch than the TPP12, and that is a good thing. In the year and a half since the TPP12 was originally signed, there have been great advances in analysis of the issues to which the rapidly evolving digital transformation is giving rise and of the economics of the emerging data-driven economy. The European Union, for example, has drawn a sharp distinction between the treatment of personal data – now subject to the General Data Privacy Regulations – and non-personal data, for which the EU’s Digital Single Market mandates free flow across borders. A much better understanding is being gained of the commercial value of data flows, which had not been factored into conventional measures of the impact of trade agreements that informed the negotiating positions leading up to the TPP12 signing. Competition policy for the data-driven economy, including the assessment of the competition implications of cross-border mergers and acquisitions, is actively being developed. Around the world there is a fermenting discussion of the future of work, cybersecurity, and social and political concerns. Canada is only now formulating a digital economy strategy. And in the United States, there have been significant Supreme Court decisions concerning intellectual property rights enforcement. All of these developments underscore that the TPP12 was premature in its regulatory departures and that the CPTPP’s suspension of the intellectual property and data commitments represents a plus.

Finally, as an exercise in shaping globalization, whether and how the CPTPP improves upon the TPP in order to live up to its name change remains to be seen. What was on the table in the TPP12 text would not materially mitigate the factors that have created the backlash against globalization.

The Canadian Interest

Canada’s CPTPP gains are moderately greater than the gains from participating in the TPP, with the real GDP gain rising from 0.068 per cent to 0.082 per cent, and the welfare gain rising from $2.3B to $2.9B. With the United States out of the deal, the cost to Canada of staying out while the TPP goes ahead as a 10-member deal without either the United States or Canada becomes negligible. The decisive issue for Canada in joining the CPTPP is thus no longer the defensive case that drove it into the TPP in the first place, but an offensive case of capturing additional market share in East Asia. In other words, the costs to Canada of staying out are almost entirely opportunity costs.

In terms of sectors, the CPTPP’s biggest impact is in the area where the most protection remains – agriculture and agri-food. For Canada, total agri-food exports to the CPTPP region rise by $1.5B, or 12.45 per cent; this compares to a gain of $1.3B for other goods and $556M for services. In total, agri-food export gains account for about 46 per cent of Canada’s total export gains under the agreement.

Some Bottom Lines

For Canada, the bottom line is that the CPTPP resets our commercial relations in the Asia Pacific on a positive note. While it promises relatively modest gains, it improves upon the TPP by suspending its controversial elements – less is more in this case. Coming at a time when the open trading system and access to the US market on which Canada depends are at risk, it could not be more timely.

Canada’s considerations on the United States re-entering would be complex. The terms of US re-engagement would matter. Canada would experience some dilution of its benefits in terms of preferential access to the CPTPP markets, but that might be small change compared to resolving access to the US market on terms at least equivalent to NAFTA. At the same time, the original TPP terms for intellectual property protection and data are already out of date and should remain suspended. Finally, all the CPTPP parties should be cautious about the agreement becoming a tool to enable trade wars – that would damage everyone’s interests

Dan Ciuriak is Director and Principal, Ciuriak Consulting Inc. (Ottawa), which provides analytical and policy analysis services related to international trade, finance, industrial policy, and economic development. He also holds fellowships with the Asia Pacific Foundation of Canada and the Centre for International Governance Innovation (Waterloo), where his research interests are focussed on the nexus between innovation and trade, and quantifying the economic impact of the digital transformation, along with the C.D. Howe Institute (Toronto), where he focuses on Canadian trade policy issues.