NAFTA negotiations—Canada should not object to increased domestic competition

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Appeared in the Financial Post, August 15, 2017

Congressional rules in America being what they are, the U.S. administration has already tipped its hand ahead of this week’s NAFTA negotiations in Washington, D.C.

The report released by the Office of the U.S. Trade Representative last month set out, in broad strokes, the administration’s negotiating strategy.

Not surprisingly, the overriding objective is clear: To improve market access for U.S. exports in the agriculture, manufacturing and services sectors, and to do away with what the administration sees as trade and investment barriers maintained by its NAFTA partners. From Canada’s perspective, U.S. demands will likely include scrapping restrictive dairy industry protections and, perhaps, other agricultural supply management programs. They will also include better access for U.S. companies to Canada’s telecommunications, culture and financial sectors and non-discriminatory treatment of digital products transmitted electronically across borders, along with unrestricted cross-border data flows.

In making these demands, the U.S. administration is actually acting as a champion of the Canadian consumer, whether it knows it or not. For example, it is estimated that the elimination of restrictive dairy industry protections could lower dairy costs for Canadians by as much as 40 per cent. More competition in other sectors, from finance to data storage, can also be expected to lower prices and improve the quality of services for Canadians.

But while there are gains to be made for Canadians, there are also potential threats in what the U.S. is likely to ask for and Canadian negotiators will need to be firm in some places—like dispute resolution, for example—to protect the investment environment in Canada.

Politically, opening up key Canadian industries to more competition is no easy task. Those industries affected will, or course, argue that meeting the U.S. terms would do great damage to the Canadian economy. One can also anticipate any number of appeals to Canadian nationalism as the basis for rejecting the U.S. demands.

Industry participants in free trade debates are usually successful in positioning the public discussion around the issue of improving access to foreign markets. Economists would certainly agree that multilateral trade liberalization is more advantageous for the economies involved than trade liberalization by only one country. But this preference for multilateral trade liberalization does not negate the fact that increasing competition by lowering domestic trade barriers directly increases the real incomes of domestic consumers and also promotes improvements in efficiency by domestic producers.

The pronouncements of the Trump Administration suggest that it sees gains to the U.S. only from increased exports with no benefits to Americans deriving from increased imports. One hopes that the Trudeau government does not share this view as a basis for Canada’s negotiating position. Indeed, Canadian negotiators should seize upon opportunities to reduce border barriers wherever possible. In this regard, the U.S. objective of reducing the harmful effects on trade flows of regulatory inconsistencies is an opening that Canadian negotiators should seize upon, as is the U.S. objective of streamlining customs procedures. Canada should also push for easier cross-border movement of workers by, for example, expanding the categories of workers eligible for the TN program.

Perhaps the most problematic issue facing the Canadian negotiators is the ostensible U.S. demand to get rid of the NAFTA dispute resolution process and to have U.S.-initiated complaints about trade law violations adjudicated in U.S. courts. This was a “red-line” for Canada in the Canada-U.S. free trade negotiations, and the demand should be strongly opposed by Canada in the upcoming NAFTA negotiations. In taking the competition high-road, Canada should push for circumscribing the application of trade rules (most often by the U.S.) that are primarily invoked to protect inefficient domestic producers. Eliminating anti-dumping provisions is an example, as predatory pricing, both domestic and international, is rarely a profitable strategy for the alleged predator, at least in the view of most economists.

In short, Canadian negotiators should not object to measures that increase domestic competition. If red-lines are drawn, they should be to expand and enhance competition on a North American-wide basis.

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