Why Canada Needs the Pacific Alliance

Carlo Dade on the many advantages of joining the common market comprised of Chile, Peru, Colombia and Mexico.
By: /
May 22, 2013
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Director of Trade Investment policy at the Canada West Foundation

The Pacific Alliance, a common market comprised of Chile, Peru, Colombia and Mexico, is the most important new economic opportunity facing Canada as it seeks to grow and diversify its trade. Joining the Pacific Alliance will position Canadian companies ahead of their competitors in a market composed of the fastest growing, richest, most dynamic, and like-minded countries in the Americas that together form the fifth BRIC power.

Chile, Peru, Columbia, and Mexico are in the process of seamlessly linking their economies to better trade with each other and Asia. These countries have a combined GDP of just under US$3 trillion, average per capita GDP of close to US$12,000 and average above 5 per cent annual growth compared to 1.7 per cent in the U.S. and negative rates in most of Europe. The block has over one third of Latin America’s population and would be the world’s ninth largest economy – it is essentially the fifth BRIC but without the political negatives and risks of India, Russia, and China.

Pacific Alliance countries are among the most attractive markets with sound macro-economic fundamentals and mature democracies – they all rank in the top 25 per cent of the World Bank Ease of Doing Business Index. Chile and Mexico are members of the OECD while Colombia will likely join soon. As other trade blocs such as the EU, Mercosur and NAFTA have faltered or gone backwards, the Pacific Alliance has progressed due to a pragmatic focus on competitiveness issues, not politics. The bloc is implementing a “platinum standard” agenda of regulatory reforms and economic liberalization that should make it among the most competitive trading areas globally. The bloc’s stronger long-term political and macroeconomic environment makes it attractive for Canadian firms to build or join regional supply chains and as a second platform, in addition to North America, for trade with Asia.

Canada’s major competitors in the region – Spain in banking, Australia in mining and mining equipment, and the United States in everything – also  have trade agreements with Pacific Alliance countries. Joining the Alliance will give Canadian companies important advantages over their main competitors. As an example, the Alliance countries have linked their stock markets creating a unified exchange; joining will bring unique new opportunities for the TSX and Canada. Being a member, as opposed to an observer, will also give Canada a say in rules for how the Alliance is structured and a seat in negotiations with other blocs and countries, especially in Asia.

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Entering the Pacific Alliance is as important for Canada as finalizing a new trade agreement with the European Union but for different reasons.  The Pacific Alliance offers a new set of opportunities for Canada to diversify its trade. A trade agreement with the EU is crucial to protect Canada from losing market share to American firms once the U.S. signs its own agreement, but in the end, Canada will still be only one of several countries with a trade agreement with the EU. Full membership in the Pacific Alliance will give Canada a “second NAFTA" – a market in which its companies enjoy privileges and access beyond those available to through simple trade agreements. This would include things such as regulatory harmonization and an Alliance “Beyond the Border” type agreement for facilitating trade and eliminating non-tariff barriers.

Devoting energy to negotiating with the Pacific Alliance should not detract from progress on other negotiations. Since Canada already has trade agreements with all Pacific Alliance countries, the hard work has been done. Negotiations will be limited to those things that the Pacific Alliance has recently undertaken and will yield immediate benefits as Canada will be joining a process that is underway and already producing results. The rapid pace of liberalization in the Pacific Alliance is in marked contrast to dealings with the U.S. on issues like Beyond the Border, which have stalled due to political dysfunction in Washington. No such dysfunction exists with the Pacific Alliance; in fact just the opposite is the case.

It is true that to join the Pacific Alliance, Canada will eventually have to make concessions on agricultural and dairy price supports, but not immediately. The Pacific Alliance is establishing an aggressive agenda to reduce all tariffs within the block to zero. But Canada has already, or is in the process of making, concessions in its trade agreement with the EU. The U.S., Australia, and New Zealand have made it clear that Canadian dairy and agricultural price supports will be on the chopping block with the Trans Pacific Partnership negotiations; cutting tariffs with Pacific Alliance countries will be easier on Canadian producers than with the EU or the TPP. Liberalizing these sectors within the Alliance will be a useful, less painful, first adjustment for Canadian producers.

The cost of joining for Canada will be minimal and will require similar types of resources as required for working with the U.S. on the full range of North American issues. This will mean designating personnel in ministries beyond International Trade to take part in technical working groups. It will require the prime minister to attend an annual summit and the trade and other ministers to attend annual or bi-annual meetings. It will also require education and outreach to Canadian businesses beyond those currently operating in these markets.

The fact that the Canadian private sector has to be educated about the markets of the Pacific Alliance should not be a deterrent to negotiations. An underwhelming U.S. recovery and negative growth in Europe are forcing Canadian companies to look beyond those markets. As the Pacific Alliance grows more Canadian companies, but also their competitors, will become interested. The government can move now while the entry cost is low and Canada has a privileged position thanks to its history, since 2007, as an observer with the Alliance and its predecessor. This has positioned the country ahead of its principle competitors in the region who are also seeking entry.

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One could argue that the TPP makes negotiating with the Pacific Alliance redundant, but to do so would miss the important differences between the two blocs. The Trans Pacific Strategic Economic Partnership (TPP) is potentially more rewarding because it is larger and more encompassing. But chances of it actually coming into being soon are remote. With 11 widely disparate countries from New Zealand to Peru to Vietnam, and with Japan and Korea as possible additions, consensus will be a long, tough slog. Most of these countries do not have trade agreements with each other which will delay and complicate things further. But the major impediment is political; once TPP negotiations conclude, the agreement still must be ratified and no one sees 67 votes in the U.S. Senate for this. The Pacific Alliance, on the other hand, is a coherent group of countries with a record for actually getting things done.  Canada can avoid a repeat of its failure to join the TPP negotiations early on when entry was easy only to wind up having to fight, and concede much, to join later. The Alliance has an active Business Council; membership and participation in this group would give the Canadian private sector an entrée into the region that it currently lacks.

The Pacific Alliance has an interest in Canada joining, even though the Alliance already attracts relatively more attention from Asian countries and trade blocs. Alliance countries and Canada share key qualities that are increasingly rare in the hemisphere – seriousness about trade in general and with Asia in particular, seriousness about becoming more competitive, and seriousness about good governance. Alliance countries and Canada also share a desire to diversify away from over-dependence on trade with the U.S., balanced by a desire to keep good political and economic relations with the U.S.

Detractors emphasize that Canada would have to grant unlimited entry to members of Pacific Alliance countries. While technically some form of “visa free” travel will be required, exactly what this is would be subject to negotiation and implementation would take at least a year. “Visa free” travel does not mean bypassing customs and immigration; travelers would be subject to the usual controls and procedures. Creative solutions to visa issues can include information sharing, departure airport screening, e-visas, and NEXUS type programs. If Canada is going to diversify its trade away from the U.S., than moving people expeditiously to and from countries other than the U.S. is critical. Visas are a factor in EU negotiations and will be an issue with TPP negotiations. Canada has already fallen behind all other Asia Pacific Economic Cooperation (APEC) countries in expediting business travel and the country cannot afford to fall further behind and remain competitive. This is one of the most important competitiveness issues for Canada and joining the Alliance offers an excellent opportunity to begin to develop new approaches.