Trading partners – Why are bilateral deals trumping multilateral pacts?
The last twenty years have been marked by the extensive proliferation of regional and bilateral trade agreements. The United States alone has ratified ten such pacts since 1985. These ten agreements cover 15 countries and most have come into force since 2004. Over the last fifteen years, Mexico has entered 17 bilateral trade agreements; besides its extensive integration with the U.S. and Canada through NAFTA, it also has bilateral pacts with the European Union, European Free Trade Association (EFTA) and with most of its fellow Latin American countries.
Even countries that traditionally eschewed regionalism and bilateralism in their trade relations are now increasingly embracing them: since 2005, for example, Japan has signed nine trade agreements.
Economists have viewed the explosion in regional and bilateral trade agreements with some unease. Many worry about the global welfare effects of these agreements. In addition to worrying about the trade diverting effects and associated inefficiencies, they are troubled by the costs generated by the patchwork of trading rules that inevitably results from multiple bilateral agreements. The more pragmatic, however, recognize that these bilateral and regional trade pacts are capable of achieving deeper trade liberalization than multilateral agreements; the latter, of course, are hampered by having to balance exponentially more competing claims.
Canada is no stranger to regional trade agreements. The Canada-U.S. FTA is one of the most important trade agreements in the world, and has been a transformative event in our history. What has passed relatively unnoticed, though, is that Canada has ratified several additional free trade agreements.
Since enacting NAFTA in 1994, Canada has ratified seven free trade agreements. The Canada-Israel and Canada-Chile agreements were signed in 1997 and the Canada-Costa Rica pact in 2002. In 2008, Canada has ratified four agreements, with Peru, Colombia, Jordan and the European Free Trade Association (EFTA) (Norway, Liechtenstein, Iceland and Switzerland); those with Colombia and Jordan have yet to enter into force. Canada is also engaged in free trade negotiations with Panama, the Dominican Republic, CARICOM, the Central America Four (El Salvador, Guatemala, Honduras and Nicaragua), Singapore and South Korea. The latter two have floundered somewhat: the Singapore negotiations have been ongoing since 2001, and a number of important issues remain unresolved between Korea and Canada.
What are the likely effects of the recently signed free trade agreements? Will these pacts or those under negotiations yield significant gains for Canada? This question is especially important given the recent failure of the Doha round of multilateral trade negotiations: for the foreseeable future, the multilateral system is unlikely to open up significant new trading opportunities for Canada.
The extent of the benefits generated by a given bilateral or regional trade agreement depends on the breadth and depth of the agreement, the economic prospects of the partner nation, as well as the degree to which Canadian comparative advantage complements the strengths and weaknesses of the partner country. The agreements signed since NAFTA have generated bilateral trade growth that is substantial in relative terms, but small in absolute terms.
In the ten years following the Israel-Canada free trade agreement, bilateral merchandise trade between Israel and Canada grew from $646 million to $1.13 billion; in real terms, this translated into a 75% increase. In the decade after the signing of the Chile-Canada pact, bilateral merchandise trade increased from $700 million to just over $2 billion; in real terms, this constituted a 186% increase. By comparison, Canada’s total real merchandise trade increased by just 13.4% over the same period. Even so, given the low initial levels of trade between Canada and Chile and Canada and Israel, the increases following the respective free trade agreements constituted only about 2% of the overall expansion in Canadian merchandise trade between 1998 and 2007.
As for the agreements signed within the last year, here is little doubt that these pacts will have important implications for particular sectors within the broader economy. The Canada-Peru Free Trade Agreement, for example, will likely provide significant opportunities for Canada’s mining services’ sector; an agreement between Panama and Canada would do likewise for the petroleum services’ sectors. Nonetheless, the overall, economy-wide impact of these agreements is debatable. For the most part, the recently concluded pacts, and those currently in negotiation, are with small countries, or countries where Canada has had relatively little commercial engagement.
In 2006, Canada’s merchandise trade with EFTA, Colombia, Peru and Jordan was $14.4 billion; this was less than 2 percent of its total merchandise trade. Merchandise trade with prospective partners CARICOM, the Dominican Republic, Korea, Singapore, El Salvador, Guatemala, Honduras, Nicaragua and Panama was about $13.0 billion, of which nearly $8.4 billion was with Korea. Indeed, with the exception of the agreement with Korea – which may not be concluded for some time – the remaining pacts are likely to have very modest impacts on Canadian trade flows, and on the economy as a whole.
That the effects of these trade agreements are fairly small does not, of course, mean that we should eschew them. In an age where multilateral trade reform has ground to a halt, these trade agreements do have a role in opening up new, albeit modest, opportunities for Canadian business. These trade agreements also serve important political ends.
While the free trade pacts with Jordan, as well as the spate of agreements with small nations in Latin America, will have negligible effects on our economic fortunes, they do, though, enhance our influence in two politically sensitive regions. If, however, we are to use bilateral trade agreements to significantly enhance economic opportunities for Canadians, we will have to reorient our energies to negotiating trade agreements with larger economies. Negotiating these agreements will not be easy. Because of the stakes involved, our government will have to balance many competing interests in crafting its negotiating positions. The magnitude of gains and losses resulting from these pacts will also mean considerably more obstacles to agreement between the parties. However, both China and India are actively pursuing free trade agreements and the EU is showing an increasing willingness to enter into bilateral trade pacts. The task, therefore, may not impossible.
Azim Essaji is the program leader of the Trade and Finance Group at The Centre for International Governance Innovation and Assistant Professor of Economics at Wilfrid Laurier University in Waterloo.