A bad case of trade myopia

New Asia-Pacific pact will dwarf anything USMCA and TPP bring to table

While we’ve been obsessing about the decline of the American Empire, the Asian Century has gathered

pace.

Fifteen nations, including China, Japan and Australia concluded almost a decade of negotiations on Nov. 15 by signing the Regional Comprehensive Economic Partnership (RCEP), which will create the world’s largest trading zone once ratified, probably sometime next year.

RCEP covers some 2.3 billion people, double the combined populations covered by the new North American trade agreement and the 11-nation Trans-Pacific Partnership (TPP); and the countries involved are responsible for about 30 per cent of world gross domestic product, compared with the 28 per cent represented by the United States, Canada and Mexico.

The actual economic impact of the various tariff reductions is expected to be relatively modest because most of the signatories already have bilateral agreements that have reduced tariffs on merchandise trade. But those rules will now be harmonized, meaning goods will flow between Indonesia and Japan about as smoothly as they currently move from Mexico to Canada.

The RCEP bloc, which features a clutch of countries such as Vietnam that are surging toward middle-income status, will represent the most attractive market in the world for companies and investors searching for growth.

“It reinforces the message that East Asia is open for business,” said Omar Allam, a former Canadian diplomat and founder of Allam Advisory Group, an Ottawa-based trade consultancy.

Trade agreements are rarely “news,” especially ones that have been in the works since 2012, when the 10-members of the Association of South East Asian Nations (ASEAN) convinced neighbours with which it had trade agreements to come together to create a mega-regional compact.

But the RCEP kind of felt like it fell from the sky, given the depth of the Canadian public’s obsession with the U.S. election over the past month.

We should be embarrassed by our myopia. Lawrence Herman, a Toronto-based trade lawyer, used his Twitter account to scold the Canadian business press over the weekend for being asleep at the switch as the global economy’s centre of gravity moved a few more degrees toward Asia. Most of us will never set foot in RCEP countries such as Brunei and Laos, but we’ll suffer if we don’t soon get serious about the Pacific region.

The new agreement dilutes whatever advantage Canada had secured by sticking with the TPP, even after the U.S. dropped out shortly after Donald Trump took the oath of office in January 2017.

The TPP is seen as a more sophisticated document because it makes a greater effort to cover aspects of the digital economy, but that might not be enough to offset the allure of an Asian trading zone that features China, Japan and South Korea, rather than only Japan, which is the economic magnet of the TPP.

“China will have a dominant role in RCEP,” said Herman. “The global economy is shifting to that part of the world.”

That’s another complicating factor for Canada. The political class can’t decide how it wants to deal with China, which is on its way to becoming the world’s largest economy. Certainly, there is little room for positive diplomatic engagement while Michael Kovrig and Michael Spavor remain under arbitrary detention by Chinese authorities. It also has become impossible for democratic countries such as Canada to ignore the Chinese government’s imprisonment of millions of Uighurs in the northwestern region of Xinjiang.

Canada isn’ t the only smaller Western trading partner that China has sought to punish. Australia also is getting a rough ride lately. But Australia, along with New Zealand, is a member of RCEP. So, while politicians and diplomats fight at the highest levels, antipodean companies still might be able to exploit the Chinese market under the cover of their governments’ new trade agreement. That will give them an advantage in the region over Canadian and American rivals.

“Our allies have figured out how to engage China,” said Carlo Dade, director of the Trade and Investment Centre at the Canada West Foundation, a Calgary-based think-tank. “Australia and New Zealand now have another way into China,” he added. “We are going to have to learn how to take a beating (from China) in some areas and how to make money in others.”

The sight of Asia’s most important economies advancing freer trade without help from North America and Europe is latest reminder of how little headway Canada has made in the region.

Canadian officials have been talking seriously about diversifying trade away from the U.S. since the Great Recession, when China and other emerging markets led the global recovery, while America struggled to regain its momentum.

But Canadian business can’t — or won’t — fight the gravitational pull of the world’s largest economy next door. The best example is South Korea, an advanced economy with which former prime minister Stephen Harper agreed to a trade pact in 2014.

Despite lower barriers and more market intelligence, merchandise exports to South Korea represented about 0.9 per cent of Canada’s total in 2019, about the same as 2010.

“I’ve been quite concerned that Canadian business hasn’t taken advantage of the (South Korea agreement) to the extent that it could,” said Herman.

Prime Minister Justin Trudeau set aside $1 billion in 2018 for programs meant to nudge Canadian exporters into riskier markets, and yet the trade department said in its latest Sate of Trade report that Canada will struggle to achieve Trudeau’s target of increasing overseas exports by 50 per cent by 2025.

Trudeau might have been asking too much of Canada’s exporters.

“The risk appetite isn’t there,” said Allam. “They want quick wins and there are no quick wins. In international business, quick wins don’t exist.”