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Article Excerpt
Canadian trade policy is at sea, preoccupied with marginal bilateral trade agreements with minor partners and multilateral efforts to defend the dwindling ranks of dairy farmers from the bracing winds of international competition. Meanwhile, it ignores pressing problems in Canada's most important trade relationship. It is tempting to put the blame on the political caution of a minority government and wait for changing political fortunes in Ottawa to be the catalyst for a more rewarding policy approach. Unfortunately, the problem is much deeper and of longer standing. Canadian trade policy has become detached from its economic moorings.
Well done, trade policy is tied to the structure of Canadian and international production and contributes to Canadian welfare and economic development. Trade agreements with Peru, Colombia, and the Dominican Republic offer, at best, marginal new opportunities for a few Canadian firms but have little impact on the economy as a whole. Trade missions to far-flung places that offer limited new prospects may similarly serve political or foreign policy imperatives but make few, if any, economic contributions. What Canada needs is a trade policy that recognizes both the increasing importance of global value chains and the critical role of Canada-US commercial and regulatory integration in gaining full benefit from their exploitation.
Over the past few decades, traditional international exchange has gradually begun to give way to a much more integrated kind, with more and more transborder transactions taking place within firms, among related parties, or within integrated networks. Tremendous reductions in transportation and communication costs have facilitated a quantum leap in the disaggregation and geographic dispersion of production. Many more goods traded internationally today are parts and components. Production is being geared to a much wider market, the range of goods and services that are exchanged internationally has widened considerably, and capital and technology move between nations to promote not only import-substituting, but also export-oriented production.
International exchange now involves a much more complex and sophisticated range of economic transactions and is as likely to entail dealings among related parties as it is unrelated parties. The vertically integrated firms of the early postwar years have given way to much more flexible, horizontally organized enterprises making creative use of regionally and globally organized value chains (Lamoreaux, Raft, and Temin 2003). In the words of the University of Manchester's Peter Dicken, the global economy has been transformed into "a highly complex, kaleidoscopic structure involving the fragmentation of many production processes, and their geographical relocation on a global scale in ways which slice through national boundaries" (Dicken 2003:9). In the 1990s, analysts characterized this process as globalization; understanding of this phenomenon has increased since then, particularly as a result of increasing focus on the evolution of value chains.
In various public statements, the federal government has suggested that it understands globalization and the role of value chains, and hinted at what it should be doing. However, it has not followed through and provided a much-needed rationale for a trade policy that recognizes the reality of modern trade and production patterns, and the centrality of the US relationship for Canada. In its November 2006 Economic Statement, Advantage Canada, for example, the government recognized that "the fragmentation of global value chains meant that countries had to be open to foreign investment and ensure open access to products and services" (Canada 2006). Trade Minister David Emerson has similarly emphasized the importance of Canadian participation in global supply chains. "We're into a world where trade patterns and trade performance are going to be very closely related to the operation of global supply chains, and those are going to be deeply integrated chains, and they're going to be globally distributed" (Emerson 2006a; see also Emerson 2006b). During his visit to China in January 2007, Emerson pitched Canada as the anchor for North American-based value chains. "I urge you to work with Canada, work with Canadians and work with Canadian companies to create globally successful value chains" (Emerson 2007).
If the government appears to understand that Canada's future prosperity depends upon effective participation by Canadian firms in regional and global value chains, its policy preferences remain firmly rooted in the past. Emerson stresses that export market access remains Canada's highest trade policy priority. It is to be achieved through successful completion of the Doha Round of multilateral trade negotiations, the development of strategic partnerships with China, India, and Japan, and the negotiation of bilateral free-trade agreements. Buried deep in the 2007 Budget is $60 million over two years for a Global Commerce Strategy. It has three elements: supporting an expansion of Canada's bilateral trade agreements' network; strengthening Canada's competitive position in the US market; and extending Canada's reach to new markets, starting with Asia. The Strategy assumes that Canadian firms produce identifiably Canadian products to be sold for export to customers in foreign markets. The reality is that an increasing number of firms participate in global value chains, contributing one or more slices in a highly disaggregated production process. There are fewer and fewer "Canadian" products, even as Canadian integration into the global economy increases.
Global value chains create policy challenges that are not responsive to the traditional instruments of trade policy. The impact of further "market-access" liberalization on the Canadian economy is likely to be negligible, coming after 60 years of reductions in border-based trade barriers to low, almost negligible levels for most industrial products in developed countries. Rather, the principal avenues to greater participation in global value chains lie in domestic policies and practices, in a better functioning Canada-US border, and in international regulatory streamlining and convergence.
Conventional trade agreements, whether pursued bilaterally, regionally, or multilaterally, are not only yesterday's policy, but have the potential of leading to unhelpful and even perverse results in today's circumstances. They discipline trade measures on the basis of reciprocity and pairing, as if trade remains largely a matter of two-country, arms-length transactions. They perpetuate the mercantilist bias in trade agreements, focused on increasing export opportunities while disparaging the import side of exchange. Conventional trade policies' high regard for non-discrimination can mask policies that deter deeper integration and frustrate increased economic efficiency. Finally, the compromises built into the regime to ensure political support--from antidumping and countervailing measures to emergency safeguards and special and differential treatment for developing countries--undermine the full development and benefits of modern production methods.
This Commentary examines the implications of the emergence of regional and global value chains for trade policy and conventional trade agreements. It will argue that the theory and practice of conventional trade policy assume that international trade consists of the flow of goods and services across national borders and that states have an interest in influencing the size and direction of such flows. As national boundaries recede as key determinants in international exchange, the instruments of trade policy and the agreements they have spawned provide at best irrelevant and at worst dysfunctional tools for states and can yield perverse results for contemporary trade and investment.
The Commentary begins with a discussion of the traditional political economy of trade policy and trade agreements and the manner in which this political economy is embedded in the structure, rights, obligations, and institutions of trade agreements. It continues by considering the evolving object and purpose of trade agreements from ancient times to the current complex web of multilateral, regional, and bilateral trade and investment agreements. It then examines the rise of global value chains and assesses their impact on trade policy and trade agreements. The Commentary concludes by suggesting some new approaches to update Ottawa's trade and investment policy.
The Political Economy of Trade Policy and Trade Agreements
States enter into international agreements to achieve objectives that are beyond the capacity of unilateral action; constraining or modifying the behaviour of other states is essential to their achievement. The agreements provide a vehicle for states to yield autonomy over areas of national policy in return for complementary action by other states. The object and purpose of trade agreements is relatively straightforward: to govern the conduct of states in their regulation of the flow of goods and services across their borders and their treatment of imported goods and services in domestic markets. States accept obligations on their treatment of imports and exports in exchange for reciprocal treatment by their treaty partners.
Origins of the Modern Model
Modern trade agreements emerged 150 years ago, starting with the 1860 Cobden-Chevalier Treaty between Britain and France, which by virtue of its most-favoured-nation clause, led to freer trade throughout Europe. The benefits were brief, as political rivalries culminating in the Great War, followed by the Depression of the 1930s, left trade among European countries without a governing framework. The United States had always remained aloof from trade agreements with the exception of agreements with Hawaii, Canada (1854-1866), and Cuba. Canada remained similarly aloof, except for efforts that helped forge the imperial preference system.
The road to a new treaty-based framework for the conduct of international trade began in the United States with the adoption of the Reciprocal Trade Agreements Act (RTAA) in 1934. The brainchild of Secretary of State Cordell Hull, the RTAA enabled the president to negotiate on a reciprocal basis, within limits established by Congress, the reduction of US tariffs. It was, as Gil Winham observes, "revolutionary in that it explicitly accepted that setting tariff rates should no longer be a matter of unilateral policy ... but a bilateral issue to be settled through negotiation" (Winham 1992:19). The RTAA provided the inspiration for the 1947 General Agreement on Tariffs and Trade (GATT), which emerged as the primary instrument for the reduction of trade barriers following the failure to bring the more ambitious International Trade Organization into force.
The object and purpose of modern trade agreements are set out in the preamble to the GATT: the parties "recognize that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, developing the full use of the resources of the world and expanding the production and exchange of goods." Slight variations are found in bilateral and regional free-trade agreements and in the 1994 Marrakesh Agreement Establishing the World Trade Organization (WTO). The object and purpose they establish provide the basis for elaborating the core principles of trade agreements and the provisions setting out the rights and obligations of the parties.
An Uneasy Blend of Mercantilist and Ricardian Ideas
The underlying political economy of such trade agreements finds its inspiration in an uneasy blend of mercantilist and Ricardian ideas. The politics of trade rest on the belief--backed up by experience--that there are votes in promoting exports but not in facilitating imports. The economic benefits of trade, on the other hand, as first suggested by Adam Smith and more fully explained by David Ricardo and his successors, flow from expanding the market, facilitating specialization and the international division of labour, exploiting comparative advantage among producers, increasing productivity, and allowing consumers to gain access to the best the world has to offer at competitive prices. (1) At the same time, governments have learned that political benefits accrue to those who save jobs threatened by competing imports. The US Reciprocal Trade Agreements program and the subsequent GATT provided an ingenious solution to this conundrum: organize trade negotiations to maximize market access for exports in foreign markets, paid for by conceding reciprocal import access to one's own market. As well, these commitments are held together and made more valuable as a result of the overarching commitment to non-discrimination--as expressed in the most-favoured-nation (MFN) and national treatment principles--and the binding of these commitments in a treaty. The postwar multilateral process of mercantilist bargaining succeeded in providing governments in the developed countries of the OECD with the necessary political cover to negotiate agreements that delivered on the Ricardian promise. (2)
Despite its demonstrated effectiveness, mercantilist bargaining generates continuous tension between the politics and the economics of trade agreements, which is amply on view in the structure and rationale of the GATT's core principles and their implementing articles--notably MFN treatment, national treatment, market access, reciprocity, and dispute resolution (Curzon 1965, Dam 1970, Hudec 1975, and Jackson 1997 all provide detailed overviews of GATT rights and obligations).
Ricardian Influences: The economic justification of the MFN principle is consistent with the Ricardian goal of reducing barriers to the exploitation of comparative advantage and other benefits of international trade by all participants in the system. MFN treatment builds a defense against preferential trade practices by providing for the automatic and unconditional extension of any benefit granted by one country to all others in the system. This beneficial impact arises from distributing the benefits of...
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