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No. 2: Broad Liberalization Based on Fundamentals: A Framework for Canadian Commercial Policy

by Randy Wigle, Wilfrid Laurier University, under contract with Industry Canada, 1998


Summary — The Challenge

The next 10 to 15 years will see dramatic changes in the world economy. As it becomes increasingly driven by information and as border trade measures continue to fall, we will observe further globalization of international commerce.

The shift toward an information society means many things to many people, but the most fundamental consequences of new technologies are:

  • the enhanced ability to integrate productive activities separated by distance;
  • dramatic enhancement of the technological capacity to trade some services internationally;
  • an increasing share of new business effectively driven by innovation; and
  • increasing complementarity between international trade, direct investment and technology flows in business.

One result of these developments is the emergence of enterprises with operations and ownership that are hard to describe in terms of nationality. A related development is the increasing interdependence of a number of domestic and international policy fields. Competition policy and innovation policy were once regarded as overwhelmingly domestic in orientation, but that assessment is less and less accurate. In short, world commerce is increasingly global in outlook and orientation.

As commerce takes on this global perspective, regulatory reforms in many areas need a more global orientation. Governments will be able to achieve domestic policy goals only by giving due regard to the global context. In the long run, as globalization truly includes parts of the world where integration has not yet progressed very far, the multilateral forum will be ideal for resolving international trade issues. For a host of practical reasons, however, the first steps toward solutions will often be taken in the context of regional agreements or negotiations.

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Canada's Commerce

Even with the proliferation of information technologies and the lowering of trade barriers, geography still matters for significant parts of commerce. This is particularly true for Canada, where geography, combined with shared elements of history and culture, have led the Canadian and U.S. economies to be highly integrated. The integration is the result not merely of recent policy but also of inherent cost advantages from proximity and the existence of widespread networks linking the two nations.

Faster growth rates in other areas of the globe, along with more fundamental structural and policy reforms, are likely to mean that the fastest-growing markets (in percentage terms) in the next 10 to 15 years will be outside North America. For example, overall trade by South and East Asia is predicted to grow by almost 10 percent per year over the next 10 years. The technological changes mentioned have reduced the importance of geography in many, but by no means all, sectors. As a result, the volume of trade and investment between Canada and the United States is still likely to dominate Canadian international commerce for the near future.

Broad Directions

This paper argues that Canadian commercial policy over the next 10 years should support liberalization on the broadest regional and substantive basis possible. The focus should be on identifying and devising solutions to fundamental problems rather than managing troublesome symptoms such as trade balances or market shares.

Liberalization or Retreat?

Canada has little real choice but to pursue open access to foreign markets through multilateral as well as bilateral negotiations. Some of the reasons are very simple:

  • Canada's domestic market is small.
  • Access to technology is crucial to Canadian economic growth.
  • Access to foreign investment is crucial to Canada.

Accordingly, Canada must continue to push for progressive liberalization in the foreseeable future. This course must be interpreted in light of new reali-ties of international commerce, specifically since liberalization now means more than simply reducing tariffs.

Improving firms' market access or market presence will often amount to extending national treatment to all firms, products and services in more and more areas of international commerce. Just as Canada was in the forefront of liberalization of border measures, it must take the lead in the effort to draft new international accords in areas such as investment, competition policy and product standards, and also in the reconsideration of existing remedies (such as anti-dumping and countervailing duties) in light of these reformulated international disciplines.

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What Focus?

For many reasons, negotiations oon new codes of conduct in areas such as competition policy, investment and domestic regulation are likely to take place in several forums. These include multilateral discussions at the WTO and OECD, discussions in regional forums such as APEC and the NAFTA, and broader discussions about more liberal trade in the Americas.

With the emergence of the United States as the sole political super-power, its dominant position is probably as great a challenge to Canadian policy makers as at any time in our country's history, and it is likely to remain so. For this reason, Canada should continue to give adequate priority to negotiations in the multilateral sphere as a natural counterbalance to the United States' pre-eminent economic power vis-à-vis Canada.

Further, the returns from further negotiations in the Americas have waned in comparison with those in the multilateral forum, partly because of the breadth of achievements in the NAFTA along with Uruguay Round disappointments.

While regional and multilateral discussions on new and traditional dimensions of market access are important, special priority should be given to discussions at the WTO, preferably in the context of a new round of multilateral negotiations. A pressing agenda already exists for a new multilateral round, which should be launched at the earliest opportunity. Canada's overall negotiating strategy should concentrate on the multilateral disciplines that could result as a long-term goal.

Back to Basics

In general, when pursuing solutions to the new challenges or reducing traditional border measures, wherever possible Canada should start by identifying the fundamental cause (in terms of an uninternalized externality or distortion) of an apparent problem and should proceed from there to a solution. In the area of competition policy, for example, Canada should seek elimination of anti-dumping as it is now used. It should also oppose proposals that target symptoms (such as trade balances or market shares) chosen in isolation from any underlying economic analysis. Canada should oppose any proposals involving such targeting except as transitional measures.

Environmental and Human Rights Issues

Over the next 10 to 15 years, the international community will determine how or whether international trade should be linked to environmental and human rights. Canada should clearly promote international efforts to improve the global environment and human rights in their respective primary forums.1 At the same time, Canada should be committed to making trade aspects of any international accords as consistent as possible with core principles of the trading system, and it should also support solutions that truly address the fundamental challenges of protecting the environment and human rights.

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Conclusion

Canada's commercial policy over the next 10 to 15 years should stress two key commitments:

  1. Commitment to liberalization on the broadest range of international commerce. This should include a renewed commitment to development of the multilateral system, even in our discussions in other forums.
  2. Commitment to achieving the fundamental goals of trade policy in the least trade-distorting manner possible.

The greatest challenges for Canadian policy makers in the next 10 to 15 years are likely to be reining in the public debt and improving the ability of the labour market to supply jobs and needed skills. While prudent commercial policy is an important ally in this task, it cannot replace sound domestic policy making. At the same time, it is quite clear that bad commercial policies (in particular, those that attempt to scapegoat trade) would certainly thwart the achievement of domestic policy goals.

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