Why Canada dug in its heels over the TPP11 in Vietnam
After a confusing week at the APEC Summit, Hugh Stephens breaks down Canada’s strategic ‘Da Nang Moment’ and what’s next for the revised Trans Pacific Partnership.
Distinguished fellow, Asia Pacific
Foundation of Canada
It was a confusing 24 to 48 hours at the APEC Summit in Da Nang, Vietnam, last week, when Canada was first accused by the Australian media of sabotaging the revised Trans Pacific Partnership (now known as the TPP11) negotiations by boycotting a scheduled leaders’ meeting. The meeting was supposed to announce an “agreement in principle,” followed by a midnight announcement that an agreement had been reached on “core principles,” with more negotiations to follow.
Then there were the confusing explanations as to why Prime Minister Justin Trudeau did not attend the scheduled meeting, with the reason given that his discussions with Japanese Prime Minister Shinzō Abe “went long.”
After the conclusion of the extended Trudeau-Abe meeting, Abe announced to the waiting leaders that the TPP meeting was postponed. The Australians were not happy, claiming that Canada “screwed” them.
The actual details of the postponement do not matter but it seems clear that there was some miscommunication and mixed signals. Canada clearly was not ready to simply sign on to a TPP11 agreement in principle, for both optical and substantive reasons. But this message did not seem to have percolated down to the Japanese and Australians in particular.
Both countries have been strong advocates for the resurrection of the TPP agreement after the abrupt exit of the United States when Donald Trump took power (and the number of countries involved went from 12 to 11). Canada, once a reluctant convert to the TPP, seemed prepared to go along and explore what a revised TPP might look like. However, it was not until just a couple of days before the leaders gathered in Vietnam recently that Canada started to publicly signal its concerns with the agreement; there were reports that Canada was not happy with the provisions dealing with supply management (where the original TPP opened the door to Canada’s restricted dairy industry just a crack), intellectual property (where critics once complained that Canada “sold out” to the US), and culture (where Minister of Canadian Heritage Mélanie Joly has been having a rough time lately, especially over the way she has handled the Netflix file).
There was also a desire to brand the agreement with “progressive” elements, given that this is the new trade mantra of the Trudeau government. This could mean specific language on gender and Indigenous peoples, not part of the original agreement, or retaining and possibly beefing up language around issues such as labour standards and the environment.
In the face of this apparent backpedalling, the Canadian agricultural industry (except the protected dairy sector) spoke out, urging Canada not to derail a train that promises to bring them big benefits in terms of improved access to the Japanese market, with Canada given preferential access not accorded to the industry’s US competitors. In fact, a study by the Canada West Foundation demonstrates that all of the remaining TPP11 partners are better off economically with a TPP11 as opposed to no TPP, and five of them (Mexico, Canada, Peru, Chile, and Singapore) are actually better off under a TPP11 than under the original TPP12. This is because of preferential market access to TPP markets without the US having the same benefits, plus preserving existing preferences in the US market without added competition.
The APEC meeting in Da Nang represented a rare opportunity for the Leaders of the TPP11 countries (Japan, Canada, Mexico, Australia, New Zealand, Chile, Peru, Singapore, Brunei, Malaysia, and Vietnam) to push the negotiations forward by expressing political support and endorsing the principles of the agreement. Timing and momentum are always critical in such negotiations and for the Da Nang meeting to have passed without leaders sending positive signals would probably have put the TPP11 in the freezer for a long time to come. But as important as forward momentum is for the new TPP, it is important to remember that this regional agreement is not being negotiated in isolation.
Where NAFTA and China fit in
Both NAFTA and an impending Canada-China trade negotiation are relevant to Canada’s position not to charge forward on TPP at all costs. It is anyone’s guess where the NAFTA negotiations will end up, but the next few months will clearly be critical. Why lock in positions in the TPP that could tie Canada’s hands or undermine its negotiating posture in NAFTA? And let’s not forget that the original TPP was based on the premise that all the partners would benefit from improved or at least protected access to the US market, an outcome that Trump demolished.
Given that Canada accepted rules of origin in the original TPP, particularly in the auto sector, that were weaker than those currently in force in NAFTA, and the fact that it had agreed to implement certain reforms in the area of intellectual property that were high priority objectives for the US, why should it bind its hands by accepting outcomes now that could undermine its negotiating position at the very moment when the NAFTA negotiations are entering their end game? Once a card is on the table, it is hard to take it back.
The emphasis on ensuring that “progressive” elements are included in the agreement is also important from the perspective of a likely announcement in the near future that Canada and China will begin the negotiating process. Canada needs to make it clear that elements such as labour and environmental standards, as well as disciplines on state-owned enterprises, are critical elements for Canada to be able to support a negotiation. This then plays back into the domestic environment, where the Liberals have worked to support trade liberalization while distancing themselves from the Harper government, which was in power when the original TPP was concluded.
Recall that after the Liberals came to power, they conducted a series of cross-country meetings to hear concerns about the TPP and to identify ways to “improve” it. Had the US ratified the original agreement, any changes were most unlikely to happen whether Canada decided it wanted “improvements” or not as this would have involved re-opening what had already been agreed by all 12 negotiating parties. However, the TPP11, or to use the new name invented in Da Nang, the “Progressive and Comprehensive Trans-Pacific Partnership,” is a new ball game. Canada can actually exercise some influence in bringing about changes, although to pick apart too much risks unravelling the basic fabric of what has been agreed.
Assessing Canada’s concerns
What are the changes that Canada would like to see, and how valid are the concerns? Press reports indicate that there will be three working groups set up, to review auto rules of origin, intellectual property (IP) and culture. In addition, the core principles announced in Da Nang reaffirmed the importance of both environmental and labour standards, which reportedly both Malaysia and Vietnam were trying to roll back.
On rules of origin for the auto industry, the looser rules in the TPP work to Japan’s advantage as they allow it to source components from its Asian supply chain in non-TPP countries. This is clearly not to the advantage of Canadian parts manufacturers. A bilateral deal will have to be reached on these rules between Canada and Japan, likely including Mexico.
On intellectual property, the IP chapter in the TPP is to be “suspended.” Press reports have talked about this chapter long being a concern of the Canadian high-tech sector, but despite all the bluster from critics, they seldom actually identified anything specific in the IP chapter that they objected to. There were other changes in the copyright area that some have criticized, such as the extension of the term of copyright protection and enshrinement of anti-circumvention rules (that are currently part of Canadian law) in the agreement. While there are good reasons from a Canadian perspective to extend the term of protection to bring it into line with the US, the EU, Australia and a number of other countries, extension has vocal opponents in Canada. These critics would also like to roll back the existing law on anti-circumvention of technological protection measures.
These and other issues will be reviewed next year as part of the mandated review of the Copyright Modernization Act, so on the one hand the government is keeping its options open by making no TPP commitments at this stage, and on the other, it has retained these measures as possible bargaining chips for the closing phase of the NAFTA negotiations.
With respect to culture, it is difficult to see what the substantive concern is. In the original TPP agreement Canada fully retained its ability to protect and subsidize its cultural industries by taking chapter-by-chapter exceptions. This was a different approach from that taken in the original Canada-US Free Trade Agreement (FTA) or NAFTA where there was a “cultural exemption” clause (although if Canada took measures that violated the FTA, if not for the exemption, the US could retaliate with measures of equivalent commercial effect).
A key issue today is what constitutes a cultural industry or a cultural measure, as is well illustrated by the debate about whether offshore content companies like Netflix that supply content to Canadian households over the Internet should be regulated by the CRTC and be required to contribute to Canadian production. Canada is unlikely to get much pushback on this from its current TPP partners as both Australia and New Zealand take proactive measures to promote their own cultural industries, and if a cultural exemption clause is inserted into the agreement, the Trudeau government will be able to proclaim that it has strengthened protection for Canadian culture. Substantively there is no difference; optically this will look like a win.
Finally, one issue on which currently there is little clarity is that of supply management. Both the US and New Zealand pressed Canada for more access to its closed dairy market, and the US continues to do so in the context of NAFTA. In the original TPP, Canada agreed to open 3.25 percent of its market to dairy imports from TPP countries. Even this limited and long overdue reform came with a hefty price tag as the then-Conservative government promised over Cdn$4 billion in compensation to Canada’s 12,000 dairy farmers (plus chicken and egg producers) to offset this minimal opening.
The Trudeau government, like all previous governments, has signed on publicly to the myth that supply management is good for the Canadian economy. More realistically, it does not want to pay the political or financial price for opposing this powerful lobby. While New Zealand, the world’s largest exporter of dairy products, will push for some opening, they will have less clout than the US. In any event, NAFTA discussions on this topic are still ongoing so nothing is going to happen regarding supply management until the NAFTA angle is sorted out.
So, while there are valid substantive reasons for Canada to “slow walk” on the TPP 11 negotiations, without sinking or derailing them, there are also important domestic optical reasons to be seen to be “standing up” for Canada.
It was important for Trudeau to signal at this juncture that Canada would not be stampeded into endorsing an agreement prematurely, as the Japanese clearly seemed intent on doing. When the time comes to explain to Canadians what has been achieved in a new “progressive” TPP11, assuming it is concluded sometime next year, this will greatly increase the chances of its public acceptance. Getting the details right and sending the right messages now are important steps to bringing home the successful negotiation of the TPP11, or whatever new moniker is attached to it. This will be an agreement that promises to position Canada well for future trade opportunities in the Asia Pacific and bring significant benefit to important elements of the Canadian economy.
Positive signals have now been given on the TPP11 and the hard bargaining will begin on some of the finer details. In the meantime, the NAFTA negotiations will play out while Canada and China decide whether or not to proceed on negotiations. If the stars align, the new TPP11 agreement should be ready for conclusion in 2018. That is a good outcome from Canada’s “Da Nang Moment.”