Transcript - Why Free Trade Agreements Matter
What would Canada be without free trade? It’s hard to even imagine.
Consider this: In Canada today, one in five jobs is related to exports and over 60 percent of our gross domestic product relies on trade.
That is why the Government of Canada is pursuing the most ambitious trade expansion plan in our history – one that focuses on opening new markets so Canadian small and medium-sized enterprises can succeed around the world.
I’m Michael Mancini, Editor-in-Chief of CanadExport, the official e-magazine of the Canadian Trade Commissioner Service, Canada’s most comprehensive network of international business professionals.
Free trade agreements are the cornerstone of the expansion I just referred to and with me to talk about why FTAs matter is Laura Dawson, president of Dawson Strategic, a firm specializing in international trade and market access issues.
Laura, thanks for speaking with me today.
Laura Dawson: You're very welcome.
Michael Mancini: So Laura, we've seen the benefits of NAFTA for Canadian companies. As you know, the Government of Canada has also negotiated free trade agreements with smaller markets like Jordan, Chile, Colombia, Peru, Panama, Israel, and Costa Rica, as well as the EFTA countries of Lichtenstein, Norway, Iceland and Switzerland. Will Canada see the same kind of success as with NAFTA in the short and longer term with these agreements as well?
Laura Dawson: I think that there are clear benefits out of all of Canada's trading arrangements, but not necessarily the same benefits. NAFTA, for example, is kind of the gold standard of Canada's trade agreements. But when we go and do trade agreements with other countries in other parts of the world, it opens the doors for new trade opportunities, it gives Canadian investors sort of a green light to go ahead and try to establish linkages in these markets.
Michael Mancini: Can you tell me about what some of the specific benefits would be for Canadian companies, particularly SMEs, in these smaller countries?
Laura Dawson: Well, it's sort of like having additional protection or additional guarantees when you're going into new markets. If you're a big investor, if you're a big company, a big trader, you can pretty much manage trade with any country in the world because you can afford big legal staffs, you can afford administration that, if you decide you want to go off and trade in, you know, someplace in Africa, the Middle East or Latin America, you just go ahead and do that. But if you're not one of the larger companies, you need assistance in the form of guaranteed legal protection, which is one of the things that free trade agreements provide you with, market access, market knowledge. A free trade agreement lowers the barriers to trade, both the tariff levels, the customs duties, but also in the regulatory and red tape burden. So basically, a free trade agreement makes it cheaper to do business in another country, and that definitely is an advantage for an SME.
Michael Mancini: Now, you just talked about legal protections. Can you give me an example of what kind of legal protection a company would benefit from?
Laura Dawson: Well, for example, if you are exporting a product to another country, maybe your product is seized at the border. By having a free trade agreement, there would be clear rules that could be followed in order to determine whether or not that product was lawfully seized. Also, if there's a dispute, a free trade agreement often has a dispute settlement mechanism built right in. So if there's a dispute between the traders, between the companies, you can then go to this dispute settlement mechanism and say hey, I think I've been wronged, I need an arbitral panel to adjudicate this. Otherwise, in the absence of those kinds of rules, you're either left to the whims of the domestic port system in the country that you're trading in, and some of them might not be that good, or you have to look for international arbitration panels like those provided by the UN, which can be a big hassle, especially for a small company.
So a free trade agreement provides certainty, it provides legal protection, and it provides transparency as well. Transparency is a word that means a lot in trade agreements, but basically it just means that the rules have to be accessible; that you, as a Canadian exporter have to be able to find the rules that apply to your product, and they have to be understandable, and they can't be changed overnight. So that sort of transparency and certainty is also very important to a trader.
Michael Mancini: So really, FTEs go far beyond simply tariff barriers.
Laura Dawson: Absolutely. And in fact, tariff barriers were really an issue that was much more prevalent in the 1960s and 1970s. And the sort of things that trade agreements deal with now are non-tariff barriers, which can be actually much more expensive and difficult to root out. For example, labelling requirements, testing, certification, inspection requirements - all of these things can be imposed on a Canadian product, and pretty much effectively prevent that product from getting into the market.
I did a project for a client who wanted to export to Brazil a while ago. And they were having a terrible time because they couldn't send their sample products to Brazil. The sample products were being classified as used goods, and the used goods tariff was huge. And if they misclassified them, they were subject to a $100,000 penalty. So it was a huge hassle for this Canadian trader. And if we had an agreement with Brazil, some of this uncertainty would probably be reduced.
Michael Mancini: You know, given that many other countries are also negotiating these kinds of free trade agreements, how do the ones that we've negotiated give Canadian firms really a leg up over companies in other countries?
Laura Dawson: Well, Canada is actually pretty nimble when it comes to negotiating free trade agreements. We actually get in fairly quickly. We're pretty good at negotiating these agreements because Canada is a trading nation. We have a lot of products and commodities that we produce, but we have a relatively small population. So we do need to sell our stuff abroad. And so we're actually one of the world leaders in negotiating free trade agreements, in designing the rules for FTAs. So because we have that kind of experience under our belt, we tend to have more agreements with other countries, we tend to be better able to enforce these agreements and utilize the rules for our advantage.
Michael Mancini: How big an impact do you think a Canada-EU agreement will have on a typical Canadian SME?
Laura Dawson: Well, I think it will have a pretty good impact on a Canadian SME. Having the agreement will provide greater opportunities because it will reduce barriers, it will create better knowledge on both sides of what the rules and obligations are in our two territories, and it will build some momentum in terms of shared supply chains, investment, etcetera. So for a Canadian SME, the European Union agreement is pretty good.
And what I think makes the agreement more important even for Canada than the market size - because again there's not a lot of Europe that we're not really already trading with. But with this agreement, we're going deeper into new kinds of commitments that weren't previously covered, either in the NAFTA or the WTO. Because both of those agreements have some kind of a template of what we've been doing elsewhere in the world. And with the European Union, we're going deeper and negotiating new kinds of commitments for things like labour mobility, recognition of professions, services, some new things on intellectual property, agriculture, some new areas in terms of pharmaceuticals, even our supply managed sectors. We may see some movement there.
So what that agreement is, it's a deeper agreement than what we've had previously. And the result of that agreement may then serve as a template for some of our future generation agreements such as the Trans-Pacific Partnership. So that I think that not only Canada but our other trading partners in Asia, in the United States, are waiting to see what that Canada-EU agreement looks like because there's going to be some provisions there that are probably going to be exported, if you will, to other trade agreements.
Michael Mancini: Interesting. So we really are ahead of the game, ahead of the curve, when it comes to negotiating free trade agreements.
Laura Dawson: Absolutely. And in fact, there's a fairly common dynamic that happens, is if a country or a region wants to negotiate an agreement with the United States, they tend to go to Canada first. So sometimes Canada's a good test market. And I think you'll see that following a Canada-EU agreement, that there will be closer trade relations between the US and EU as well.
Michael Mancini: Now, the Government of Canada has also negotiated many so-called Foreign Investment Promotion and Protection Agreements, or FIPPAs. Why are they important?
Laura Dawson: FIPPAs are very important because they are sort of the getting-to-know-you agreement that we sign with a new market or a new country. We have these with, I think, almost 40 countries around the world. And they first of all help to signal that Canada has an interest in doing business with this country. And not only do they signal the interest, but they help to establish a level of basic protection should a Canadian investor wish to invest in that country.
The biggest disincentive to investing in a new market, especially for an SME, is the level of risk involved. If something happens to your investment, say you acquire a candy factory in China. If the Government of China suddenly expropriates your factory or declares candy to be illegal, well, you want to be able to find a way to recover your assets. Now, maybe you can get adequate protection in a Chinese court. I don't know, I'm not a Chinese law specialist. But it would be helpful if there was also some guarantee of legal recourse in another environment that you also agreed on, like an international court, an international tribunal, someplace that you were sure, as a Canadian investor, was going to be fair and impartial, just in case your investment was expropriated or damaged.
Michael Mancini: Laura, thank you for your time today.
Laura Dawson: Oh, it's been a great pleasure. Thanks, Michael.
Michael Mancini: Well, that's all for this podcast edition of CanadExport. For all the latest information on Canada's free trade agreements and our Foreign Investment Promotion and Protection Agreements, visit international.gc.ca.
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