Opinion: What went wrong with free trade?

Drew Fagan is a professor at the Munk School at the University of Toronto and a former assistant deputy minister for foreign policy.

Canadians have been stirred to anger and even patriotism by President Donald Trump’s trolling, but it’s a recent tweet from Texas Governor Greg Abbott that should leave us shaken, because it’s actually accurate.

In response to Prime Minister Justin Trudeau’s retaliation plans, he wrote: “Careful Trudeau. The Texas economy is larger than Canada’s. And we’re not afraid to use it.”

It was also a dangerous time in 2003, when a map of the 50 states circulated amongst public service leaders in Ottawa, with the name of each replaced by a country with the same GDP. The point might seem outrageous now: Canada should focus even more on the U.S. market. U.S. GDP was one-quarter of world GDP then, as now. Canada was Texas on the map.

This was after the Sept. 11 terrorist attacks, which had led to the “thickening” of the border. North America was feared to be decoupling. Not much was done in response and bilateral trade growth slowed.

In the years that followed, the United States underwent significant changes, and today, its friends now seem to be viewed as adversaries. Meanwhile, Canada, and its economy, is mostly the same. The Texas economy is now 20 per cent larger than Canada’s, although the population is one-quarter smaller.

More broadly, Mr. Abbott’s tweet, and the escalating talk of a trade war, raises the question: How did things get to this breaking point?

The prime years politically for Canada-U.S. free trade didn’t last long: only four years. Americans didn’t take notice of the deal, signed in 1987, but they did take notice of negotiations with Mexico a couple of years later. Washington wanted a deal with Mexico alone. One wonders if we erred by asking to join in. Perhaps we should have kept our quiet pact with the United States and negotiated one with Mexico later. For this is when the trouble began.

Over the years, Canada has vacillated on Mexico. We want closer ties but not if their problems become ours. This was manageable until Donald Trump lumped us together over fentanyl smuggling, despite the evidence.

In any case, the trilateral NAFTA deal faced significant opposition in Congress in 1993. In Canada, free trade was becoming holy writ. In the United States, it was mostly game on, but we were on our way to becoming collateral damage. The “China shock” of low-priced goods in Western countries boosted anti-trade sentiment.

To this day, the only U.S. free trade deal of consequence is with Canada and Mexico. The U.S. economy’s size means it is much less trade dependent. We are the United States’ largest export market, but this trade makes up approximately 1.5 per cent of U.S. GDP. Canada’s exports to the United States represent around 22 per cent of ours.

Economics must matter more than politics for free trade to work. But U.S. politics is now controlling the agenda.

The change is apparent in the nomenclature. It was the “Canada-United States Free Trade Agreement” to president Ronald Reagan. The NAFTA renegotiation in 2018 resulted in three new monikers, with each country putting its name first. Mr. Trump wanted no part of the North American Leaders’ Summit.

Our challenge raises the question of alternatives, especially trade diversification and interprovincial barriers. Our trade with other countries has grown faster than Canada-U.S. trade recently. Deals took effect with the 27 countries of the European Union and the 12 countries of the Trans-Pacific Partnership, including Japan and Australia. There is opportunity abroad, but it can be limited by distance and development.

A timely example is the Philippines, a country we are in free trade talks with. Its economy is the size of Colorado’s. Tariffs are low already. Canada-Colorado bilateral trade is around twice as big and our exports to Colorado are almost five times the size.

Modest expectations also should apply to interprovincial trade. We already have tariff-free trade. What exists are non-tariff barriers – restrictions on workers, products and companies. It’s similar bilaterally. Studies suggest interprovincial barriers act like a 10-per-cent tariff and Canada-U.S. barriers 30-per-cent.

Despite these hinderances that bias domestic trade over bilateral trade, our exports to the United States have grown five times since 1988. The U.S. market isn’t easy. The reason trade has flourished is mostly due to its proximity and size.

But this might not help us anymore. Former prime minister Stephen Harper put our dilemma in stark terms recently, saying he’d prefer to see the country impoverished than annexed. It needn’t come down to one or the other. Canada remains robust enough, with the world’s ninth-largest GDP. But if Mr. Trump goes all the way, the pain Canada feels will be intense and widespread.