By: Michael Teeter, Principal
Managed trade was an inevitable outcome of the softwood lumber dispute and the way forward for the U.S.-Canada trade relationship is more agreements, not less.
Respect for the needs and desires of the host country, and managed trade outcomes have been a consistent reality of my trade experiences. Successfully finding common ground between export and import interests, within the framework established by the host country, has been a hallmark of many Canadian export success stories.
This paper argues that managed trade was an inevitable outcome of the softwood lumber dispute and that the way forward for the U.S.-Canada trade relationship is more agreements, not less. The Canadian Government should consider crafting a U.S.-Canada trade position that looks to the future and once again institutionalizes a special and unique trade relationship between our two countries.
There are a number of key principles alluded to in this paper that some Canadians may consider challenging. Some of these are:
- It is critical to be pragmatic about the U.S.-Canada relationship. Despite Canadian negative perceptions of U.S. political and defence priorities, the Canadian US trade relationship is beneficial. It is possible to segregate business from politics and create economic and political benefits by doing so.
- Large markets, on which others depend, tend to make the rules at the end of the day.
- The benefits of NAFTA have essentially been nullified by multiple new trade agreements, the new softwood lumber deal and the passage of time. It is now time to consider new options that restore Canada's special position in North America. A selected common market approach is recommended.
- Managed trade is an opportunity, not a threat. It is possible and highly desirable for Canada to seek win-win sector-based outcomes with the U.S.
Some Perspectives from experience
I left Prime Minister Trudeau’s office in late 1980 to join the Canadian Food Processors Association. I was responsible for the international trade activities of the association. In that capacity, I organized member companies to participate in trade shows in the Far East, particularly Japan. Japan was increasingly prosperous and dependent on imported agriculture and food products; however, in the early 1980s, Canada’s share of the Japanese food market was negligible. Through the efforts of the Canadian government, the national associations and the Canadian industry, today, Canada is the second largest supplier of processed foods to the Japanese market. Brands like McCain’s, Maple Leaf and others are well known and understood by the Japanese consumer.
We entered the Japanese market as guests of Japanese companies. Our food companies entered into partnerships with Japanese importers or Japanese food companies. There was no other way into the market. We were correctly conditioned by the Department of External Affairs to enter the market as “guests”. The logic was that you would prosper by accepting the fact that this was the Japanese market; that the Japanese government worked hard to maintain the distinctive nature of that market; that the distribution system allowed entry only to imported products which had appropriate Japanese partnerships; and that the key to success was to honour and respect the Japanese way - not to impose your values of systems onto it. By following these principles, Canadian companies have done extremely well in this part of the world.
I left the food industry in 1985 and joined the Canadian Apparel Manufacturers Institute. Managed trade has been a reality of the apparel and textile industries for decades. In this case, Canada was the "demandeur" of the import restraint systems and the "low-cost" exporters were restrained under an internationally-sanctioned restraint system. Exporters and importers learned to live with managed trade and there seemed to be an institutional acknowledgement that the country receiving the goods had a right to control market entry, when that entry had the effect of hurting domestic business and employment.
Managed trade was present but never considered a dominant part of the US-Canada apparel and textile trade relationship. The Free Trade Agreement (FTA) changed that.
During the FTA negotiations, I was a member of the Apparel Sectoral International Trade Committee (SAGIT). Given the difficult nature of the apparel and textile negotiations, I was one of a few industry people that actually participated directly with US negotiators and US industry on some of the more difficult parts of the negotiations. For the U.S., the FTA afforded them an opportunity to impose rules of origin on Canadian-made apparel and textile; rules that most closely matched their domestic interests. While the Canadian industry fought very hard and took overt political actions to address its plight, we always understood that we were positioning ourselves to the “fall back” position. In other words, we raised the political bar high in Canada by aggressive political action, but in doing so; we set the stage for major U.S. concessions within the trade framework that the US demanded. We took an overt line against the US imposed “triple transformation” rules, while building consensus for an aggressive fall back position based on duty remission programs and large Tariff Preference Quotas. (Quotas that allowed “non-qualifying” Canadian apparel to enter the US market at FTA rates.)
In meetings in Washington, we were allowed to document preference levels based on historical access to the U.S. market for certain classes of Canadian-made apparel goods. The fact is - we had better data than they did. We were able to establish preference levels for Canadian products that allowed certain classes of Canadian apparel to make strong gains in the U.S. market. Today, Canadian-made men’s suits, jackets and pants are the dominant supplier to the U.S. market. This is a direct result of our acceptance of their framework while negotiating historical market access rights and privileges.
In 1989, I entered the consulting field as an associate of Gordon Ritchie and Lang Michener. Our focus was trade policy consulting. One of our first clients was the Canadian lumber industry. Since then, I have been a consultant for the Forest Sector Advisory Council, the Ontario Lumber Manufacturers Association, the Ontario Forest Products Association, Tembec, Green Forest Lumber and others. In all cases I represented Canadian industry.
Much of the work had something to do with one or more of the U.S.-Canada agreements. We were either trying to marshal our arguments and prove our innocence or we were attempting to mitigate the negative consequences of a managed trade outcome. In some cases, the major work was striving to seek maximum benefits for our clients relative to other Canadian exporters. (Managed trade can create relative winners and losers and this is an important challenge that must be managed effectively.) At the end of the day, once the managed trade outcome was in place and companies had learned to live within its parameters, it was infinitely better than the uncertainty of a protracted and costly trade dispute. This is particularly the case when one understands that there will be no permanent end to the dispute without negotiations.
What I learned from my experiences was that successful export regimes always acknowledge, respect and learn to live with the needs and requirements of the host country. If one believes that win-win outcomes are desirable in the bilateral trade context (as I do), one would approach U.S.-Canada trade disputes from a much different perspective.
Softwood Lumber: An issue where the outcome was predetermined
The battle with the U.S. on this issue has gone on for over 20 years. Many in the U.S. fundamentally believe that some provincial timber pricing creates subsidies for the Canadian lumber industry, thereby resulting in an unfair advantage for Canadian lumber in the U.S. market. Due to this perception, the U.S. industry has been consistently seeking a market share limitation for Canadian lumber - typically the outcome sought by countries and industries seeking managed trade outcomes.
Canada has fought all cases brought forward by the U.S. industry over the years under the valiant belief that complete and unfettered free trade would emerge as the various national, bi-national and multinational dispute bodies ruled in Canada's favour.
In all cases, true free trade never emerged, at least not for long. The stable outcome has always been a managed trade regime. The differences between the two previous managed trade regimes and the one emerging today will be marginal. The U.S. has consistently achieved its objective of effectively capping Canadian market share, either through an export tax or a Quantitative Restriction approach (The most desirable Quantitative Restriction outcome is what is known as a Voluntary Restraint Agreement (VRA). A VRA works to ensure that the export country (and companies involved) recaptures the "economic rents" (e.g. tariffs or monetary quota values) associated with a managed trade regime.)
Canada has kept up the good fight because it believed it is right and the U.S. is wrong. The U.S. had a similar conviction. There was no room for middle ground. Canada believed that our position would be sanctified by the binding results of a dispute settlement panel under the FTA or NAFTA.
With the benefit of hindsight, we were doomed to defeat. Countries, particularly large countries with rich markets, will always find ways to effectively express ownership over their own markets, particularly where the balance of power in the relationship is weighted in the importer's favour.
Another reality is that our dispute settlement victories have become redundant and effectively meaningless. Victories can last for a few years but they are continuously open to new charges and complaints. Despite our attempts during the FTA negotiations, the U.S.’s ability to launch dumping or countervail suits will never be sacrificed to a bilateral or multilateral agreement. The US did not like the dispute settlement mechanism at the time and has succeeded in diminishing the value of this mechanism over time.
Also, today's softwood lumber outcome may have effectively nullified any remaining benefits of the NAFTA dispute settlement regime. It is likely that any future protracted disputes will not be resolved by a dispute settlement panel.
From a practical trade perspective many of our dispute settlement benefits were marginalized a number of years ago. As soon as NAFTA was fully operational and all tariffs were removed, the need for and the exercise of dispute settlement was dramatically reduced.
Additionally, the U.S. has signed a number of new bilateral and multilateral agreements with many other countries thereby reducing our margin of preference to a point where it is almost meaningless. We gained advantages from our first-mover position but, now, these advantages have been effectively eroded by multiple "free trade" regimes. Again, in this context, the protections afforded by the NAFTA dispute settlement provisions become increasingly less important.
The latest softwood lumber outcome was inevitable. In 2000, well in advance of the expiry of the 1996 softwood agreement, we should have been working hard to negotiate an extension on the 5-year 1996 agreement. We could have corrected some of the deficiencies in that VRA-based regime; however, but extended the managed trade principles enshrined in it. This was the only way to effectively preserve our position in the U.S. market.
These views were not shared by industry and government leaders. At that time, there was a peculiar confluence of Canadian government and industry leadership that supported the belief that NOW was the time to fight and this fight would yield tremendous long term benefits. Additionally, many in the industry confused their battles over relative benefits (in relation to their domestic competitors) with the bigger issues around the U.S.-Canada trade relationship. Effectively, many key Canadian lumber exporters lost sight of the forest for the trees.
Some thoughts on the way forward
The time has come to realize that our natural advantage is our close relationship, proximity and integration with the U.S. Perhaps we should embrace this relationship by striking up as many agreements as practicable and realistic. Who would ever make the case that the Auto Pact or the U.S.-Canada Defence Sharing Agreements were bad deals for Canada? We take these things for granted yet rarely acknowledge that managed relationships can be extremely beneficial.
In the post 9/11 environment, we should be striving for more managed relationships - not less. We should be striving to be "inside the tent" wherever and whenever possible. We should be embracing our biggest trading partner as our natural best friend and colleague, with an eye to the advantages to be accrued by this relationship. Canadians may want their own government to keep its distance from some U.S. foreign policy initiatives; but they will never fault a Canadian government that negotiates great economic relationships with the biggest market in the world!
We should be considering a common market approach with the U.S., particularly in areas where our interests completely converge. Anything to do with North American security, for example, should be completely integrated. Our trade positions in respect of the emerging powers and markets of the world, particularly China and India, could easily be harmonized and more effective as a result. There are other industrial areas where a common market approach could be beneficial to Canada and to the U.S. In these areas, the Canada-U.S. external relationships and trade rules with the rest of the world should be the same. We should create a common market wherever and whenever possible.
Just as the U.S.-Canada Free Trade Agreement was a "leap of faith", Canadians today would benefit from a forward-thinking and innovative common-market initiative with the U.S. This would afford us the opportunity to once again craft a special and unique economic relationship with our best friend and neighbour. The fact that this is the biggest market in the world and one that we mightily depend on for our standard of living should help to focus the mind and firm up our resolve.