Normile, Mary Anne

English

Research Papers in Economics

Agriculture  and Trade Analysis Division
Economic Research  Service
United States Department of Agriculture
Staff Report # AGES870928
1988
Trade  and  Development
Shane,  M., ed.
Proceedings of a Meeting  of the
International Agricultural  Trade  Research  Consortium
December,  1986,  CIMMYT,  Mexico City, Mexico
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searc  ConsrtkE ~CitvMexU.S.-CANADA  FREE  TRADE:  WHAT  ARE  THE  ISSUES?
Mary  Ann Normile1
The  current initiative  aimed  at producing  a free-trade  agreement  between  the  United  States
and Canada  is  the  most recent  in  a series  of similar efforts  over  history.  The  impetus  for the
current  talks  came from  the  newly  elected  Progressive  Conservative  government  of  Canadian
Prime  Minister  Mulroney,  and gained  momentum  at  the  March  1985  Montreal  "Shamrock
Summit"  between  Mulroney  and  President  Reagan.  The  negotiations  are  currently  proceeding
under  "fast track"  authority  in the  United States,  which  imposes  a January  1988  deadline  for
concluding  an  agreement,  and stipulates  that the  U.S.  Congress  must  approve  or disapprove,
but may  not amend,  the  agreement.  Teams  of  negotiators  have met  several  times  and  have  set
up  working  groups  on  specific  areas such  as  technical  barriers  (including  phytosanitary
restrictions)  and subsidies.
The  expected  outcome  of these  talks  is  an agreement  that results  in free  trade,  or,  what
politicians now  refer  to  as "freer trade,"  between  the  two  countries.  Such  an  agreement
would  reduce or eliminate  trade  barriers  between  the two participating  countries,  while
maintaining  existing  barriers  with  third  countries.  An  agreement  aimed  at  establishing  a
customs  union,  common  market,  or  economic/monetary  union,  which  would  imply  a greater
degree  of economic  integration,  is not being  considered.
Canada's  principal  objective  in initiating  the  process  aimed  at  obtaining  a comprehensive  free
trade  agreement  is to obtain  secure  access  to  the  U.S.  market,  which  accounts  for  between  70
and  80  percent of Canada's exports.  Many  Canadian  officials  believe  that secure  access  can
best  be  achieved  by  obtaining  relief for  Canadian  exporters from  the  increasing  number  of
protectionist  measures  being  applied  by  special  interests  under  U.S.  trade  remedy  laws
(countervail,  antidump,  and  safeguard).  These  officials  see  a bilateral  agreement  as  a
potentially  effective  way  of  restraining  U.S.  protectionist  interests.  A  secondary  Canadian
objective  is  to  use  a  bilateral trade  agreement  as  a means  of  imposing  better discipline  on
domestic  industries  in order to  make  them more  competitive.
The  probability of  Canada's  achieving  its  objective  in  the bilateral  talks  is  low  because  it  is
negotiating  from  a weak  bargaining  position.  The  probability  of success  is  low  because  of
strong  protectionist  sentiment  in  the U.S.  Congress,  which  is  directly  related  to  the  strength
of  the  U.S.  dollar and the  burgeoning  trade deficit.  There  are  high  political  stakes  to
achieving  a bilateral  trade  agreement  with  the  United  States,  and  the  importance  placed  on
achieving  a bilateral  trade  agreement  by  Canadian  politicians  has  put  added  pressure  on
Canadian  negotiators,  weakening  their  bargaining  position.  Relative  trade  dependence  is
unbalanced;  Canada  is far  more dependent  on  the United  States  for  trade  than  the  United
States  is  dependent  on  Canada and,  therefore,  has  more  to  gain  (or  lose)  in  a  bilateral
agreement.  An  added  problem  for  the Canadian  Government  is  that  it not  only has  to
negotiate  with the  U.S.  Government  but also  with  special  interest  groups  and provincial
governments  at  home.  Consequently,  the  United  States  is  more  likely  to  be  able  to  impose
discipline  on  Canada  than vice-versa.  As  a  result,  the  outcome  of negotiations  will  probably
be  much  less ambitious,  and  less  favorable  to  Canada,  than  was  originally  intended.
Canada's  strategy was  flawed  from the  outset.  The  policy  of coalition-building  and  lobbying
pursued  in  the early  eighties  was  more promising  of success  than  the  free-trade  negotiations
are  likely to  be.  The wisdom  of  the earlier  strategy  was  demonstrated  by  the Canadian
successes  in opposing  countervailing  duties  in the  Bombardier  subway  car case  and in  the
original  softwood lumber  decision.  Canada  could  improve  its  bargaining  position  by  building
1The author is  an economist, Agriculture and Trade Analysis  Division,  Economic  Research Service,  U.S.  Department
of Agriculture.
158consensus  at  home,  by  building  coalitions  with  groups  outside  Canada  (such  as  U.S.  consumers
likely  to  benefit  from tariff  reductions),  and  by  lobbying  to  alter  rules  of  the  game  so  they
are  less in  favor  of U.S.  protectionists.  Canada  could  also  attempt  to  impose  discipline  on
U.S. protectionists  in the  GATT by  forming  coalitions  with  other  adversely  affected  countries.
For these  reasons,  a  bilateral trade  agreement  is  not likely  to  be  Canada's  best  strategy  for
fighting U.S.  protectionism.
U.S. objectives  in the  negotiations  are less  clear.  The  United  States  is  responding  to  the
Canadian  initiative  and,  as  such, may  not have  had  the  advantage  of  preparatory  study  and
analysis that the  Canadians  had.  However,  some  general  motives  of  the  United States  in
pursuing  a freer trade  with  Canada can  be  inferred.  First,  the  U.S.  competitive  position  in
agricultural  trade  with Canada  is  worsening.  The  overall  U.S.  trade  deficit  with  Canada  is
second  only  to its trade  deficit with  Japan;  in agricultural  trade,  the  United  States  became  a
net importer  of agricultural  products  from Canada  in  1985,  reversing  a long  history  of
agricultural  trade  surpluses.  Second,  the United  States  would  like  improved  market  access  for
its agricultural  products  in Canada.  U.S.  producers  of wheat  and  live  hogs,  for example,  see
as unfair  a trading  situation  that permits  Canadian  products  to  move  freely  into  the  United
States,  while U.S.  products  are  denied similar access  to  the  Canadian  market.  There  are  also
compelling  political reasons  for the  United  States to  seek closer  economic  ties  with  Canada,
who is  not only the  U.S.  largest  trading  partner,  but also  an important  ally.  Lastly,  the
United States  may  want  to  achieve  successful  negotiation  of  reductions  of protection  and
assistance  to  agriculture  bilaterally  as  a  demonstration  of what  can  be  achieved  in trade
liberalization  talks to  serve  as  "inspiration" for  the  multilateral  trade  negotiations  (MTN).
In  this  connection,  there  are  several  parallels  between  the  bilateral  trade  talks  and  the  MTN.
Approximately  75  percent  of U.S.-Canada  trade  is  duty-free;  therefore,  substantive  work  will
have  to  be  done  in the  area of  nontariff  barriers.  There  is  a  widespread  perception  that  the
GATT  has  failed  as a means  of settling  trade  disputes,  and  current  settlement  procedures  for
settling  bilateral  trade  disputes  are  considered  inadequate  as  well.  A  bilateral  agreement  will
have  to  include  a  mechanism  for  adjudicating  trade  disputes  that could  serve  as  a  model  for
improved  dispute  settlement  procedures  in GATT.  However,  bilateral  talks  offer  an
opportunity  to  go  beyond  what  either  country  may  reasonably  expect  to  achieve  in  the  MTN.
159

U.S.-Canada Free Trade: What Are the Issues?

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