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Trade Policy Challenges: The Year Ahead

Trade_Policy_Challenges_Header.jpg

Image credit: Adam Scotti/ Prime Minister’s Office

COMMENTARY

by Lawrence Herman
CGAI Fellow
January 14, 2021


Table of Contents


Introduction

Canada will be facing some serious trade policy matters in 2021, including tough ones with the Americans – even with the Biden ascendancy in Washington. A number of highly qualified persons have already provided views on what lies ahead (e.g., John Weekes in Policy magazine, Jan. 1, 2021). Without wishing to duplicate any of these earlier efforts, here’s a short review of some immediate challenges for the Canadian government in the coming year.

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Trade with the Americans

On the U.S. list, there’s the looming concern about Biden’s Buy American agenda, which threatens to exclude Canadian suppliers to the U.S. government procurement market. Then there’s the perpetual softwood lumber dispute, continuing as a thorn in the bilateral relationship.1 Canada has two World Trade Organization (WTO) complaints going and just invoked a dispute panel under the Canada-United States-Mexico-Agreement (CUSMA), challenging U.S. duties.2

The U.S. government has its own complaints against Canada, invoking an earlier CUSMA panel itself to rule on Canada’s supply management system and the way the government hands out import quotas for American dairy products.3 Another policy irritant that could rise to the top is Canada’s plan for taxing digital service providers, something indicated in last November’s economic update. Plans for border carbon taxes could also emerge as a tricky policy matter, as Washington and Ottawa move ahead with respective climate change plans.

All of this is in the context of Canada’s trade deficit with the U.S., a bedevilling problem, in part related to the upward movement of the Canadian dollar, which illustrates that trade performance is affected by exchange rates as much as by trade agreements.

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Trade with the Rest of the World

The trade relationship with China will continue to be strained and highly precarious, caught up in Huawei CFO Meng Wanzhou’s extradition proceedings and the reprisal arrests of Canadians Michael Kovrig and Michael Spavor. This confrontation won’t likely be resolved in 2021 and Canadian goods and services exports could again be in the middle of the political storm. Compounding this is Canada’s chronic multi-billion-dollar trade deficit with China, one that has steadily worsened over the last decade.4

In other markets, disappointing data from both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Canada-Korea Free Trade Agreement (CKFTA) show that Canada isn’t taking advantage of the market openings in those agreements.

Take South Korea, where the FTA has been in effect since 2016. While two-way trade has slowly increased, Canada has been behind the curve, with our trade deficit reaching $3.0 billion in 2019.5 We’re doing a bit better with Japan, where trade was roughly in balance in 2019. But even here, the average annual growth in Canadian exports over the last decade has been about three per cent,6 below Canada’s export growth in some other parts of the world. The challenge is for Canada’s performance to improve in 2021.

There aren’t too many policy disagreements with the Europeans, although like the Americans, the EU is dissatisfied with the way Canada hands out cheese import quotas under the Comprehensive Economic and Trade Agreement (CETA). On a higher level, Canada’s performance after CETA’s entry into force in 2016 is a worry, with the trade deficit with Europe going from $14 billion in 2017 to $17.6 billion in 2019.7 As with Asia-Pacific, Canada needs to up its game in the year ahead.

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Canada’s Bedevilling Services Performance

Even if it’s a bit tricky to get a handle on data on services, Global Affairs tells us that in 2019 Canada had a $20 billion services deficit with the world at large, particularly under-performance in services exports to the U.S., although less so with Europe.[8] While $20 billion isn’t all that alarming, when combined with tepid performance on the goods side in trans-Pacific trade, it’s a cause for concern in the year ahead.

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Action at the OECD

The Organisation for Economic Co-operation and Development (OECD) has been struggling to agree on how governments can charge foreign digital service providers like Google and Facebook income taxes on their local earnings.[9] Canada’s finance minister indicated that we would move ahead on this front in 2021 if OECD efforts continue to stagnate. The Trump administration retaliated against the digital taxes that France announced last year. The Biden administration will almost certainly follow the same line, adding to the list of potential irritants this coming year.

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Let’s Not Forget the WTO

In terms of multilateral trade policy, the WTO will continue to be a source of concern. Canada brought a number of like-minded governments together in the Ottawa group in a pragmatic effort to return the organization to operational workability.  Resolving the WTO’s institutional problems – and there are many – won’t be easy, even with a return of American engagement under the Biden administration.

Two priorities for 2021 are ending the U.S. blocking of the new director-general’s appointment and getting the dispute settlement process working again. There is a huge array of other policy items on the menu, among them dealing with the COVID-19 crisis with rules to ensure pharmaceuticals can flow freely across borders. There’s the need for new disciplines on state enterprises (China being the prime example). And the WTO needs to break its straitjacketed negotiating paradigm that requires all 164 members to agree before any new rules can be approved.

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Closer to Home

On the home front, the coming year will witness the largest number of Canadian trade remedy cases in many decades. These involve complaints filed by Canadian industries seeking anti-dumping or anti-subsidy (countervailing) duties on imported goods. While these do not involve matters of broad policy, it is noteworthy that Canada’s trade remedy docket is unusually heavy. And even though these concern specific products, if duties are imposed it will impact Canadian business, whether importers, distributors, domestic producers or, ultimately, consumers.

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Wrapping it Up

This is only a selective list of some of the more noteworthy trade-related policy challenges Canada faces in the year ahead. But it’s not all bad. As the world recovers from the pandemic, global trade will rebound. Canada’s trade picture will contain a mix of vexing issues to be watched as we move forward, even with some light glimmering at the end of the dark pandemic tunnel.

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End Notes

1 There is a huge array of commentary and analysis on this epic trade battle. For a summary to this 35-year-old dispute, see: https://www.international.gc.ca/controls-controles/softwood-bois_oeuvre/index.aspx?lang=eng.

2 “New year, old trade wars: lumber, dairy disputes set for arbitration”, CBC News, 1 January 2021: https://www.cbc.ca/news/politics/new-year-trade-disputes-canada-us-1.5849458.

3 Supra, and see: “U.S. says it will bring first dispute under new trade agreement with Canada, over milk”, New York Times, 9 December 2020: https://www.nytimes.com/2020/12/09/business/USMCA-Canada-dairy.html.

4 In 2018, the value of Canadian exports to China was $27.7 billion versus imports of $75.6 billion. Exports versus imports over the 2010-2018 period shows deficits of a similar order of magnitude. Canada-China Trade: 2019 Year in Review; China Institute-University of Alberta (https://www.ualberta.ca/china-institute/research/analysis-briefs/trade-report.html).

5 Canada’s State of Trade, 2020: Global Affairs Canada-Office of the Chief Economist: https://www.international.gc.ca/gac-amc/publications/economist-economiste/state-of-trade-commerce-international-2020.aspx?lang=eng.

6 Ibid.

7 Canada-EU-International Trade in Goods Statistics: https://ec.europa.eu/Eurostat/statistics. 

8 Ibid. 

9 OECD/G20 Inclusive Framework on BEPS, Progress report, July 2019-July 2020. As explained on the OECD’s website (http://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-on-beps-progress-report-july-2019-july-2020.htm):

“Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually. Working together within OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.”

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About The Author

Lawrence Herman, a former Canadian diplomat and counsel at Herman & Associates, is a CGAI fellow and a senior fellow of the C.D. Howe Institute in Toronto.

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Canadian Global Affairs Institute

The Canadian Global Affairs Institute focuses on the entire range of Canada’s international relations in all its forms including (in partnership with the University of Calgary’s School of Public Policy), trade investment and international capacity building. Successor to the Canadian Defence and Foreign Affairs Institute (CDFAI, which was established in 2001), the Institute works to inform Canadians about the importance of having a respected and influential voice in those parts of the globe where Canada has significant interests due to trade and investment, origins of Canada’s population, geographic security (and especially security of North America in conjunction with the United States), social development, or the peace and freedom of allied nations. The Institute aims to demonstrate to Canadians the importance of comprehensive foreign, defence and trade policies which both express our values and represent our interests.

The Institute was created to bridge the gap between what Canadians need to know about Canadian international activities and what they do know. Historically Canadians have tended to look abroad out of a search for markets because Canada depends heavily on foreign trade. In the modern post-Cold War world, however, global security and stability have become the bedrocks of global commerce and the free movement of people, goods and ideas across international boundaries. Canada has striven to open the world since the 1930s and was a driving factor behind the adoption of the main structures which underpin globalization such as the International Monetary Fund, the World Bank, the World Trade Organization and emerging free trade networks connecting dozens of international economies. The Canadian Global Affairs Institute recognizes Canada’s contribution to a globalized world and aims to inform Canadians about Canada’s role in that process and the connection between globalization and security.

In all its activities the Institute is a charitable, non-partisan, non-advocacy organization that provides a platform for a variety of viewpoints. It is supported financially by the contributions of individuals, foundations, and corporations. Conclusions or opinions expressed in Institute publications and programs are those of the author(s) and do not necessarily reflect the views of Institute staff, fellows, directors, advisors or any individuals or organizations that provide financial support to, or collaborate with, the Institute.

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