Banking on America: Canada’s Trade with the United States

The recent Democratic primary contests in the United States cast a somewhat ominous light on the notion of free trade. And while there is considerable evidence that threats to renegotiate the North American Free Trade Agreement (NAFTA) were more for electoral advantage than serious proposals, such rumblings can easily take on a life of their own, placing Canada’s trade relationship with the US in jeopardy.

But does Canada have reason to be concerned? It was clear from the nature of the comments raised by Senators Obama and Clinton in economically hard-hit Ohio and Pennsylvania that the real source of their concern lie with America’s trade relationship with Mexico, not Canada. Still, amidst promises to alter those aspects of NAFTA that, presumably, are exporting jobs from Ohio and Pennsylvania to Mexico, suggestions were also proffered that could affect key areas of US-Canadian trade (such as energy and manufacturing) under the guise of environmental and labour protection. Given the potential impact even the slightest changes to NAFTA and American trade policy could have on Canada, some are suggesting that Canada needs to pay much greater attention to its bilateral relations with the US, emphasizing how much the Americans themselves gain from trade with Canada. In short, Canada is not Mexico and the US needs to remember that.

The first, and often most convincing argument in support of strengthening the Canada-US bilateral relationship, is provided by trade statistics themselves. In any given year, over three-quarters of Canadian exports go to the United States; no other nation even comes close. In fact, no other nation individually purchases even 5% of Canadian exports according to annual trade figures from Industry Canada. This alone should be enough to demonstrate the need to maintain and care for a robust bilateral relationship with Canada’s southern neighbours.

Trade, however, is a bit of an ambiguous notion. In the context of the Democratic primaries it was free trade that came under scrutiny, and the North American Free Trade Agreement which serves to foster that particular variety of trade. In fact, not all trade regimes are free trade regimes. In popular parlance, in the media and among the enemies of free trade, various trade systems are often confused as all promoting free trade. This is not exactly the case, and it is important to understand the differences because, for the most part, free trade is bilateral, not global or international.

The best place to start in considering trade regimes is at the broadest level: the World Trade Organization (WTO). The WTO was built on the earlier General Agreement on Tariffs and Trade (GATT), and incorporates that agreement into its structure. The GATT itself, as the name suggests, was merely an agreement designed to regulate trade relations between states and promote a reduction in trade barriers. It was intended to be part of a full-fledged International Trade Organization (ITO) similar in structure to other international charter organizations like the United Nations or the International Monetary Fund (IMF). As it turned out the ITO never came to pass, and the GATT was made to suffice as the instrument for regulating trade and reducing trade barriers.

The GATT functioned surprisingly well, turning out to be one of the most successful post-World War II international arrangements. Eventually, due to threats by the US to impose sanctions on European nations it considered non-compliant with GATT regulations, the World Trade Organization was born in 1995. Unlike the GATT, the WTO consists of an organizational structure, but it is manifestly not an international organization on the model of United Nations organizations, nor is it the ultimate realization of the International Trade Organization belatedly come to pass. The WTO is really nothing more than a judicial elaboration added to the GATT. The WTO maintains the contractual nature of the GATT, with member states as signatories to what amounts to an agreement to abide by certain rules for the regulation of trade among states. What the WTO added to the GATT was an effectively binding dispute settlement mechanism whereby states can take other states before a Panel to hear complaints, with appeals heard by an Appellate Body. The overall purpose of the WTO then is to enforce the contract states have made with each other.

Now, one could certainly object that such an agreement still sounds very much like a free trade regime, especially as the reduction of trade barriers is built into the agreement (though the WTO agreement itself makes no mention of free trade). The obvious response would be that if the WTO is, in essence, a free trade regime, why have so many member states gone on to negotiate additional agreements on a regional or bilateral basis, agreements which specifically invoke free trade as their goal? The reason is that regulation of trade and free trade tout court are not the same thing. The WTO seeks to rationalize international trade; it does not require the virtual removal of all trade barriers. Under the WTO, nations are free to maintain tariffs and other restrictions, both as a stand-alone policy and for the tangential purpose of protecting the environment, human health or a range of other plausible exceptions. Free trade, on the other hand, attempts to diminish and finally remove all barriers, with many of its advocates citing the global economic benefits that accrue to both the developed and developing world.

Perhaps the clearest difference between the WTO and a free trade agreement such as NAFTA can be seen in the parties the two agreements address. WTO deals only with states. By contrast, while states negotiated NAFTA, individual companies can, especially in the area of investments, make claims against states before a NAFTA Tribunal. In no case can an individual or company that feels itself wronged by a foreign state’s trade policies, take action before a WTO Panel. The point here is that free trade is theoretically derived from the philosophic outlook of men like Adam Smith, David Ricardo, and ultimately from John Locke. According to Locke, individuals posses certain rights in the state of nature, and chief among these is the right to claim the fruits of their labour as private property and profit. Moreover, these rights can be claimed against the state when individuals move from the state of nature into civil society. This contrasts with the earlier view of Thomas Hobbes who reserved no such property right for individuals. As such, the WTO has a decidedly Hobbesian appearance while free trade agreements come across as far more of a Lockean and liberal derivative.

The point of this discussion is to highlight that free trade is not a particularly international phenomenon. Rather, though it gives rights to individuals as against states, as far as trade is concerned, the rights are granted to individuals who are nationals of the states party to the agreement. Free trade agreements themselves are highly regionalized, often restricted to a small number of nations. In Canada’s case, this means individualized agreements with Chile, Costa Rica, Peru, Israel and a tri-lateral agreement with the US and Mexico: the one that is causing so much fuss.

There are those who would prefer, however, that international trade were transformed into liberalized and free trade, that individuals should be the subjects of trade agreements and not just states. These defenders of liberal, free trade would prefer to translate the free trade model of bilateral agreements to the international plane, creating what would be, effectively, global rather than international trade. And of course there are those who oppose this, but they do so on the same footing as the advocates of liberalized trade. This group, closer to Rousseau than Locke in philosophic inspiration, agree that states alone should not be the sole subjects of international trade regimes, but they would add representatives of various interest groups – labour, environment, consumers, human rights – in order to democratize the WTO and make it more inclusive. These variants of the liberal approach are often the strongest critics of free trade, but they share the non-statist approach of their enemies, the advocates of free trade.

My own view is that neither individual companies, nor various interest groups should have standing with the WTO precisely because it is a specifically-focused judicial body that enforces an agreement for the regulation of trade between states. It is not a global chamber of commerce, nor is it a forum for interest groups – many of whom have questionable credentials when it comes to representing given constituencies – seeking to institute humanity’s general will. Rather than open itself to various non-state groups, the WTO relies on states to represent the various elements within their own countries. Further, as noted, the WTO does make provision for exceptions to enforcing trade provisions if a reasonable exception can be shown to exist based on labour, health, environmental, and other legitimate concerns.

It is on this precise point, the point that so animated Senators Obama and Clinton, that free trade as a primarily regional or bilateral arrangement is so important. It is all too often convenient to condemn free trade as such; to see it as a globalizing force pillaging the environment, gutting domestic manufacturing and lowering safety standards. In this vein, very different entities, such as the WTO and NAFTA are painted with the same brush. They should not be. Only NAFTA is a free trade agreement, and any problems with that agreement should not be ascribed to the fundamentally different structure that is the WTO. Moreover, NAFTA too makes certain provisions for exceptions to free trade based on environmental and safety standards, provided these standards are justifiable and equitably implemented.

What must be remembered here is the regional nature of these agreements. Free trade can be a somewhat daunting undertaking for governments and for various sectors of society. It is for this reason that they are usually bilateral and highly specific, based upon the needs of the particular nations involved. The enemies of free trade need to understand this reality, but so do the supporters of free trade.

And this brings me to my central point as regards Canada’s bilateral relationship with the US. By far, the area where Canada and the United States share the most is in our trade relationship. Whatever our agreements or disagreements in the realms of defence, foreign affairs or culture, it is in daily trading that our two nations have the most in common. Supporters of free trade, just like its detractors, need to understand that free trade is, and remains primarily vested in agreements between a small number of nations, often only two. This allows for both nations to deal with what is specific to the particular nations involved, assessing both risks and benefits. As noted, NAFTA already makes provision for non-trade concerns, while allowing individuals to seek compensation when wronged by the policies of one of the states party to the agreement. But NAFTA covers three countries, and in many cases, the concerns expressed by Senators Obama and Clinton are more properly directed to Mexico than the US, both in terms of jobs lost to cheaper modes of production in Mexico and as regards environmental concerns. As such, Canadians must remind Americans about the benefits of free trade between our two countries, but we must also continually foster the relationship with the US, using NAFTA provisions as a means to deal with non-trade issues rather than issuing vague threats without clearly understanding the nature of free trade, the state parameters within which it operates or the options provided by NAFTA itself.

As a final point, it is worth noting that this defence of free trade within its bilateral or regional context is not to suggest that trade is an unmitigated good. It can produce both unfettered dedication and inveterate hostility, and often for political reasons as much as for economic considerations. But this opportunity for highly opposed judgments on trade is itself further justification for a free trade that is not global, but regionalized, operating within an international trade regime that enforces a contractual agreement among member states while allowing states to take account of, and represent non-trade interests.

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