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Canada Would Be Foolish Not to Join the TPP

10/06/2015 01:04 EDT | Updated 10/06/2016 05:12 EDT
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By Patrick Leblond

Last week, cows and their owners were marching in front of Parliament in Ottawa. They were protesting against the Trans-Pacific Partnership (TPP), which, they argued, would cause the demise of the dairy industry's supply management regime. Before that, it was Unifor's (the largest private sector union in Canada) turn to manifest its concerns about the TPP. It claimed that over 25,000 jobs in Canada's automotive sector were at risk because of TPP. Finally, in the recent Munk Debate on Foreign Policy, Thomas Mulcair and Justin Trudeau attacked Stephen Harper for not doing enough to protect Canadian interests in the TPP negotiations. Harper replied that he would only sign on a TPP deal that would be in the best interest of Canadians.

This week, it was announced that an agreement on the TPP had been reached, although few details were forthcoming. What are we to make of the debate around the TPP?

When Canada joined the TPP negotiations in October 2012 -- late in the game --Australia, New Zealand and the United States apparently made the opening up of Canada's dairy market to TPP members a condition for membership. This meant, at a minimum, that the Canadian government would have to increase the amount of dairy products that could be imported at a much lower tariff rate (under what is known as a tariff-rate quota, or TRQ) from other TPP members into Canada. For dairy products, the TRQ tariff rate is around seven per cent whereas regular tariffs tend to be above 200 per cent.

Behind this tariff wall (despite some TRQ cracks), Canada is able to operate a system of supply management whose aim is to offer milk producers a stable and adequate price for their investment and efforts. To do so, the federal and provincial governments, with the industry's cooperation, set the amount of milk that can be produced and the price that will be paid to the producer and ultimately the consumer.

Benefits from greater market access to TPP members would surely outweigh any loss that the Canadian dairy sector might experience.

According to basic economic logic, if more dairy products are imported into Canada under TRQs, then the overall supply of Canadian milk has to decrease in order for the price to be maintained. Alternatively, the quantity produced in Canada could remain the same, but the price would decline. Either way, Canadian milk producers would expect to see their revenues drop, which is why they oppose any increase in TRQs for TPP members.

It is not clear, however, what impact such an increase in TRQs would have on the industry and its producers. Offering higher TRQs is one thing, but making use of them is another. For instance, it is not a given that dairy products coming half-way around the world from Oceania would be cheaper than their Canadian equivalent once transportation costs were taken into account. And let's not forget that imports under TRQ still require the payment of a 6.5 to 7.5 per cent custom duty.

Moreover, the biggest users of TRQs are members of the Canadian dairy industry, so their decisions will be based on their overall assessment of the Canadian market. For example, Agropur, Canada's largest manufacturer of dairy products and one of the largest holders of a cheese TRQ, is unlikely to replace dairy products with imports, especially given that it is a cooperative owned by milk producers.

In the case of Saputo, another large player in the Canadian dairy industry, more imports could help it export some of its products abroad, by freeing-up Canadian milk. Until now, because the supply of Canadian milk has been controlled, Saputo has had to invest in Latin America and Australia to pursue its expansion strategy.

The second contentious issue involving TPP concerns rules of origin in the automobile sector. Rules of origin are crucial in a free trade area because they determine which products can, and cannot, enter a member state tariff-free. Under the North American Free Trade Agreement (NAFTA), a car can enter Canada, Mexico or the United States without paying the normal custom duty provided that 62.5 per cent of its content (e.g., parts, labour, etc.) comes from within the NAFTA region. Under the proposed TPP, which would supersede the NAFTA, this percentage would drop to 45 per cent.

Such a proposal has made many auto parts manufacturers in Canada and Mexico very upset. They fear that such TPP rule-of-origin provisions would threaten their profitability, if not their survival altogether, as a result of greater competition from lower-cost, non-TPP countries in Asia, namely China.

Although the Canadian auto parts manufacturers are right to be concerned, they effectively have no choice but to go along with the deal. A TPP agreement without Canada would put them in an even more disadvantageous position.

A TPP agreement without Canada would put Canadian auto parts manufacturers in an even more disadvantageous position.

Consider the following scenario. A Japanese manufacturer like Toyota or Honda wanting to export a car to the United States can have it assembled in either Canada or China. Under TPP rules, the China-assembled car can be exported tariff-free to the U.S. as long as it has at least 45 per cent of its content from within the TPP area. For the Canada-assembled car, it could enter the U.S. tariff-free only if 62.5 per cent of its content is from the NAFTA region. There is thus a high likelihood that Honda or Toyota would choose China instead of Canada to assemble cars for the U.S. market, which means Toyota and Honda could very well decide to close their assembly plants in Ontario.

For more than 10 years, experts on North American economic integration have been calling for a deepening of the NAFTA. The TPP offers such an opportunity. Canada would be foolish to miss it.

For the auto sector, staying outside the TPP makes little sense. For the agricultural sector, being part of this new club will allow the beef and pork industries, for example, to obtain an easier access to the Japanese markets as well as that of the other East Asian members of the TPP. Such benefits would surely outweigh any loss that the Canadian dairy sector might experience.

Patrick Leblond is Associate Professor, Graduate School of Public and International Affairs at the University of Ottawa.

This post originally appeared on the CIPS blog.

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