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1 Introduction

The end of the Uruguay Round of Multilateral Trade Negotiations in 1994 brought to conclusion a decade of creative policy making which included the Canada-US Free Trade Agreement (CUFTA) and the North American Free Trade Agreement (NAFTA). Since then, Canadian trade policy has been stuck in neutral, multilaterally pivoted on the protection of the dairy and poultry sectors from further trade liberalization at the expense of any other objective and bilaterally trying to find a winning formula for the negotiation of bilateral and regional free trade agreements.

American scholar Robert Reich once observed that “[i]n the life of a nation few ideas are more dangerous than good solutions to the wrong problems” (1992: 243). This article will argue that multilateral trade negotiations and the bilateral option are good solutions for yesterday’s problems but could produce perverse economic outcomes in the rapidly emerging international trade paradigm.

Part one of this article examines the state of the Doha negotiations. Part two analyses Canada’s interest in bilateral agreements. Part three examines the fundamentals of the new international trade paradigm. Part four considers the policy choices open to the government.

2 State of the Doha Negotiations

The Doha Round of negotiations, formally launched at the WTO’s fourth Ministerial Conference in November 2001, was conceived at the first conference held in Singapore in December 1996. Still flush with the success of the Uruguay Round, which formally concluded in 1994, the conference adopted a declaration aimed at preparing for the launch of a new round of multilateral trade negotiations. The new round would embrace not only the built-in agenda on agriculture and services agreed as part of the conclusion of the Uruguay Round but would also tackle new issues, specifically investment, competition policy, trade facilitation, and transparency in government procurement. The second Ministerial Conference, held in Geneva in May 1998 – chiefly noted for the first appearance of anti-trade demonstrators who, colorfully if ineffectually, chained themselves to the front gate of the WTO building – set in motion the process to prepare the negotiating mandate for adoption at the third conference. If the first two conferences could be counted as solid successes, the third, held at Seattle in December 1999, was an unmitigated disaster. The preparatory work following the Singapore meeting had produced an indigestible total of 802 proposals on various elements of the negotiating mandate. Four days of ministerial discussions failed to reach consensus and the meeting broke up in disarray. The popular pathology of Seattle emphasized the noisy role of anti-trade demonstrators outside the meeting as the principal cause of the failure. More fundamentally, there was a breakdown in the consensus on the object and purpose of multilateral trade negotiations. The developed countries brought an agenda to extend and deepen the reach of international trading rules; the developing countries in contrast, largely rejected the new agenda on the grounds that they had yet to reap the benefits of previous rounds of multilateral trade negotiations.

In November 2001, the fourth WTO ministerial conference convened in Doha, Qatar, and adopted a ministerial declaration launching the ‘Doha Development Round’. More artful drafting than productive compromise, the Doha Declaration resembled the kind of bold declarations that launched the Tokyo Round in 1973 and the Uruguay Round in 1986. It defined objectives, set goals, and created negotiating machinery. In fact, far from setting out a comprehensive negotiating agenda like its predecessors, the Doha Declaration was in part a negotiating agenda, in part a work program, and in part a series of promises made by industrialized countries to developed countries. In it were reflected the disagreements about the object and purpose of this new round, disagreements already evident in Singapore and in full flower at Seattle.

The negotiating agenda comprised agriculture, rules (trade remedies and regional trade agreements), services, tariff and non-tariff barriers on industrial goods, the notification and registration of geographical indications for wines and spirits, dispute settlement procedures, and trade and environment issues. The work program revolved principally around the four issues identified in the Singapore Ministerial Declaration: investment, competition policy, trade facilitation, and transparency in government procurement. Each was about rule making; none was about trade liberalization; and none fitted easily into the time-tested model of mercantilist bargaining that had driven all previous multilateral rounds. In each case, the Doha Declaration recognized the case for a multilateral agreement but reserved a decision on the launch of negotiations pending further preparatory work and “an explicit consensus” on the modalities of negotiations. The promises fell into three categories. The first was action on “implementation” issues reflected in paragraph 12 of the declaration and a separate decision that spelled out the measures to be addressed on a range of WTO obligations with a view to lightening the burdens on developing countries (Decision of November 14, 2001). These covered agriculture, including sanitary and phyto-sanitary measures, textiles and clothing, technical barriers to trade, trade-related investment measures, antidumping and countervailing duties, subsidies, rules of origin, and customs valuation. The second was a general commitment (paragraph 44) that all special and differential treatment provisions would be reviewed and made stronger, more precise, effective, and operational. In addition, no fewer than 27 of the 52 total paragraphs of the declaration contain references to special and differential treatment (Hart & Dymond 2003). The third promise was for technical assistance and capacity building set out in four paragraphs (38-41) and reaffirmed in provisions dealing with individual issues, for example, investment.

Between the November 2001 Doha and the September 2003 Cancun ministerial sessions, there were four meetings (called mini-ministerials) of ministers of major developed and developing countries designed to create a consensus on the negotiating modalities necessary to give effect to the Doha Declaration. With each of these gatherings, there was a corresponding rise in public expectations and concurrently in the risk of failure. By the time ministers from 148 member governments and a large number of candidate countries assembled in Cancun, the gap in positions between developed and developing countries had become unbridgeable. After four days of acrimonious discussion punctuated by grandstanding rhetoric, the chair of the conference, Mexican foreign minister Luis Derbez, declared that no agreement was possible and terminated the meeting.

Agriculture and the Singapore issues dominated the Cancun meeting. On agriculture, a few weeks prior to Cancun, the United States and the EU proposed a vague set of negotiating modalities that essentially deferred resolution of hard issues of domestic support and the reduction of export subsidies to the indefinite future, while seeking major tariff reductions by developing countries. The response was a counterproposal by an informal group of developing countries that sought to commit the developed countries to a major package of market-access liberalization and reductions in export subsidies and domestic support, while offering little in return.[1] Under intense pressure from the United States, appalled by the effrontery of resistance to its proposals and notwithstanding the presence of import and agriculture protectionists, such as India and China, within its ranks, the group held together. At the same time, four African countries, each highly dependent on cotton production (Burkina Faso, Benin, Chad, and Mali), proposed the rapid elimination of developed-country cotton subsidies together with financial compensation to be paid to them for losses incurred during the period of elimination. While there was progress on narrowing the gap on the main agriculture issues and none on cotton, it was the Singapore issues that were the ostensible cause of the breakdown.

From the outset of WTO discussion on investment and competition policy, the developing countries retained control of the progress towards the launch of negotiations by requiring that there be “an explicit consensus” to this effect (Singapore Declaration Par. 20). In the Doha Declaration, this language narrowed to the requirement for a consensus on negotiating modalities but its scope was widened to cover the other two issues, government procurement and trade facilitation. In the period between Doha and Cancun, it became evident that there would be no such consensus on investment and competition policy (see Hart & Dymond 2004: 263-287). The termination of the conference produced widespread finger pointing (WTO Insight, September 29, 2003; The Economist, September 18, 2003). The Mexican Chair was criticized for terminating the meeting prior to its official end, and for not concentrating on agriculture where there was some prospect for a compromise that might have opened the door for a modest solution to some of the Singapore issues. Some developing countries trumpeted their success at insisting on progress on their agenda and refusing once again to be yoked to the interests of developed countries. Major developed countries such as the United States and the EU blamed posturing by the developing countries for the breakdown. Non-governmental organizations, which played a prominent role as advisers to smaller developing countries and bear responsibility for pushing them to overplay a weak hand, were sharply criticized for their amateur presence. Wherever the weight of guilt lies, it was clear that the big losers in the Cancun failure were the developing countries. For all the arguments that developing countries had at last achieved a level of influence commensurate with their numbers, it remained true that nothing of importance happens in the WTO unless the EU and the United States are prepared to see it happen.

After Cancun, patient efforts out of the spotlight of ministerial meetings produced a “Framework Agreement” based on the negotiating text developed during the Cancun meeting. Adopted at the end of July 2004, the agreement purported to define the negotiating modalities on four issues: agriculture, market access for industrial products, services, and the sole survivor of the Singapore issues, namely trade facilitation. The optimists argued that the agreement signified a sense of realism and good will, which would in time bring the negotiations to a successful conclusion. The framework was yet another attempt at agenda setting and was neither binding on countries nor determinative of the results of the negotiations. Neither the post-Cancun blame game, nor the artful drafting of professional negotiators, however proved to be particularly germane (Bhagwati 2004; Sauvé 2003; Hoekman 2003; Cho 2004: 219-244).

The sixth Ministerial Conference, held in Hong Kong in December 2005, dashed any hope that the Framework Agreement had created the basis for bringing the Doha Round to a successful conclusion. Six days of non-stop meetings produced a declaration that in substance showed that little progress had been made since the Singapore meeting almost ten years prior. The core problem was agricultural trade. With no agreement in sight between these two giants of global agricultural trade, the declaration’s call to continue negotiating tariff reductions on industrial products, to open markets for trade in services, to impose new rules on the application of antidumping and countervailing duties, and to conclude the negotiations on all issues by the end of 2006 was essentially meaningless. Six months later, in July 2006 the WTO Secretary General formally suspended the negotiations after an appeal from the G8 summit that year for a final effort failed. Although the negotiations formally resumed later in 2006, there has been little to show for the renewed flurry of activity. The communiqué of the 2007 Summit confines itself to a tepid reaffirmation of faith in the Doha Round:

We stress the need for achieving an ambitious, balanced and comprehensive agreement on the Doha Development Agenda (DDA), which will enhance worldwide trade especially among and between developed and developing countries and reinforce multilateral trade rules. We take note of the Ministerial Communiqué of the G-6 Trade Ministers of 12 April 2007 underlining their belief that by intensifying their work convergence can be reached and thus contribute to concluding the Round by the end of 2007.

The Doha Round is suspended between two incompatible negotiating agendas. Developed countries are largely satisfied with the current rules and seek only minor adjustments and modest expansion of the WTO rules, and then only if they can be obtained at small political and economic cost. Developing countries, on the other hand, have been attempting obtain major market access gains from developed countries which could be politically highly difficult to grant, while claiming the development objectives of this round of negotiations should exclude them from offering reciprocal liberalization. Serious engagement has yet to take place and the most recent attempt in June 2007 by the US, EU, Brazilian, and Indian trade ministers to break the deadlock ended in failure and acrimony (Financial Times, June 22, 2007). There remain deep divisions on the substance of the negotiations and a growing risk that rather than strengthen the multilateral trade system, the current negotiations will in fact seriously undermine confidence in the system’s vitality and relevance. With the impending July 2007 expiry of negotiating authority granted to the US Administration by the Congress, prospects for progress in the negotiations are remote for several years.

3 Canada and Bilateral Agreements

For more than a century Canadian trade policy was based on the twin goals of protecting the manufacturing sector and seeking improved access to export markets for natural resources and most agriculture products. This policy gave rise to a fragmented and inefficient manufacturing sector that could neither compete in export markets nor, by the 1980s, sustain domestic market share. Falling world prices in real terms for natural resources and agricultural products combined with the rise of competitive suppliers to global markets in other countries substantially eroded the cushion on which Canadian economic performance rested. A national consensus grew that these contradictions could no longer be maintained, resulting in the construction of a new policy framework that would seek a major transformation of the Canadian economy (see Hart 2003).

There were a number of choices available to effect the transformation of the Canadian economy. One was to continue to rely upon GATT rounds of multilateral trade negotiations for the reduction of Canadian and foreign trade barriers combined with diplomatic efforts with major trading partners to resolve specific trade problems. Exclusive reliance on multilateral negotiations was both politically and economically unappealing because the long timeframes required for completing such negotiations and their multilateral character produced outcomes that were neither timely nor sufficiently ambitious in scope. Issue-by-issue problem resolution yielded meagre results. A second choice was to seek special arrangements with the EU and Japan offering unimpeded access to Canadian resources in return for commitments for market access for further processed Canadian resources and manufactured products. While Canada had succeeded in negotiating agreements for enhanced cooperation across a broad range of trade, industrial policy, and research and development issues, the weak private sector response in Canada, Europe, and Japan demonstrated that such a strategy would be unsuccessful (Sharp 1995; Hart 2002: 278-92). The third choice was the unilateral elimination of Canadian import barriers, which, while economically attractive were politically unacceptable. The only viable choice was an agreement with the United States to accelerate and essentially complete the elimination of cross-border trade barriers (Hart et al 1994).

The government initially considered negotiating agreements to eliminate Canadian and US trade barriers in specific sectors. The appeal of a sectoral approach arose from the success of the 1965 Canada-US Automotive Agreement, which had stimulated the cross-border integration of the North American automotive industry and led to substantial increases in investment, production, and employment in Canada (Holmes 2004: 3-21). The perceived economic advantage of sectoral agreements was the opportunity to target strong sectors and protect weak ones. Although the United States agreed to negotiate on four sectors (urban transportation equipment, steel, agriculture equipment, and information technology), it rapidly became apparent that the special circumstances that made the auto agreement possible could not be replicated. Without engaging a broad range of US economic interests, sectoral agreements would fall victim to powerful, if localized, protectionist interests (see Chapter 2, Hart et al 1994). The only valid choice was the negotiation of a comprehensive free trade agreement (CUFTA) with the United States.

The CUFTA reflected an effort by Canada and the United States to create a set of trade rules consistent with the reality of market-driven, cross-border integration, driven largely by the forces of proximity, consumer choice, investment preference, and firm behaviour. In embarking upon negotiations, both the Canadian and US governments were concerned that choosing some sectors for negotiation while excluding others would generate significant political opposition. To avert this risk the two governments decided to negotiate on the basis of the negative list approach; that is, the negotiations would proceed on the assumption that all sectors would be covered by the agreement unless a compelling case could be made for their exclusion. They also agreed to embrace new issues such as trade in services and limited commitments on the protection of foreign investment, to enlarge the commitments of both countries in the GATT Government Procurement Agreement, and to incorporate a dispute settlement system involving significant improvements to the GATT model. Sensitive to political controversy in Canada surrounding intellectual property issues, the United States agreed to exclude this area from negotiations on the understanding that Canada would separately change its relevant legislation in a manner that accommodated US objectives. The result was an agreement that, with a few exceptions in the agriculture area (and military goods), conformed in terms of product coverage to the initial negotiating plan. Overwhelming US Congressional approval of the free trade agreement and the convincing victory of the Canadian government in an election in which the CUFTA was the principal issue validated the negotiating strategy.

The CUFTA and its subsequent expansion to Mexico in the negotiations of the North American Free Trade Agreement (NAFTA) represented a departure from multilateralism as the bedrock of Canadian trade policy and its replacement by free trade as the default policy option. The policy issue was no longer the benefits and disadvantages of bilateral (or regional) free trade agreements versus multilateral trade negotiation but the countries that Canada should target in an aggressive free trade agreement strategy.[2] Canada subsequently launched and completed negotiations for free trade agreements with Chile, Israel, and Costa Rica. Canada also launched negotiations with the EFTA group (Switzerland, Liechtenstein, Norway, and Iceland) that took ten years to conclude, four Central American countries (Honduras, El Salvador, Nicaragua, and Guatemala), and Singapore and South Korea which have not been concluded. Attempts to interest the European Union in a transatlantic free trade agreement met a wall of impenetrable European resistance resulting only in an undertaking to consider the scope for bilateral initiatives following the conclusion of the Doha Round. Whatever the paltry record of achievement, Canada is determined to press ahead announcing negotiations with Peru, Colombia, and the Dominican Republic, in part to keep up with other countries and in part because the Doha negotiations offer slight promise of success in the foreseeable future.

4 The New Global Environment of International Trade

The architecture of the multilateral trade system and bilateral trade agreements reflects a mercantilist conception of international trade as a zero-sum game conducted between pairs of countries. Over a period of some fifty years - from its first deployment in the US Reciprocal Trade Agreements Program in the 1930s through the conclusion of the Tokyo Round of multilateral trade negotiations in the 1970s and into the opening of the Uruguay Round in the 1980s - trade negotiations grounded in mercantilist bargaining stimulated the growth of international trade, contributing to significant growth in productivity and prosperity. Such trade negotiations, however, were in fact pursued on the basis of pre-economic and pre-legal concepts: every “concession” granted by one party had to be matched by a “concession” from another. Political discourse was and remains based on the conceit that the strength of the nation requires a positive trade balance, an ability to do without imports, and the promotion of strategic advantage over all other nations.[3]

The multilateral trade rules embodied in the WTO regulate this mercantilist competition by defining the manner in which individual governments may regulate the exports to and imports from individual members of those agreements. The underlying principle of these agreements is that trade is essentially a bilateral economic phenomenon. Multilateral trade negotiations consist of bilateral negotiations based upon the perception of priorities and sensitivities of individual countries. Dispute settlement procedures involve pairs of countries and presume that the trade problem that provoked the dispute involves only the parties to the procedure. Moreover, the results of these procedures do not require a change in the multilateral rules at issue. The rapid growth of bilateral and regional trade agreements reinforces the mercantilist conception of international trade.

The problem is that mercantilist trade policy and the rules that govern it do not reflect the emergence of global value chains as the increasingly dominant model of international trade. Global value chains are not new. The rise of Venice and other Italian merchant cities in medieval times depended upon the operation of value chains linking the markets of Europe to those of the Middle East and beyond. In the 17th century, the Hudson’s Bay Company and its companion trading companies essentially operated supply chains procuring imports from North America and Asia to be manufactured in Europe and sold globally. High transportation costs and slow and uncertain communications limited the impact of early value chains. The fundamental change making value chains the dominant feature of international trade is the dramatic reduction in cost and equally dramatic rise in the efficiency of transportation and communication. (Sydor 2007: 47-70). The consequence is that the structure and organization of value chains surpasses the scope of trade rules and renders them increasingly irrelevant tools for governments. Multilateral and bilateral trade agreements do not capture, for example, the production of a Barbie doll designed in California, assembled in Indonesia or Malaysia, and quality tested again in California, made from plastic from Taiwan, nylon hair from Japan, and cotton clothing from China (Feenstra 1998: 31-50). They provide no guidance for policies aimed at attracting foreign investment in the production of a computer chip designed in one country with software originating in another, incorporated into components produced in several other countries, before finding its way into a final product assembled somewhere else (Friedman 2005: 512-20). A new paradigm is required.

One element of this paradigm is the displacement of trade between firms and individuals in one country and unrelated firms and individuals in another by trade among related parties, or within integrated networks. For example, over 70 percent of Canada-US merchandise trade consists of trade within the same industries (Govt Canada 2006: 45). The UNCTAD reports that by 2005 some 77,000 firms qualified as multinational in their activities, each accounting for an average of ten separate foreign affiliates. Worldwide sales by foreign affiliates had reached US $ 22.2 trillion in 2005, nearly double worldwide exports of goods and services at US $ 12.6 trillion (UNCTAD 2006). Many more goods traded internationally today are parts and components for end-products assembled by specialized firms. Capital and technology move between nations not only to promote import-substituting but also export-oriented production. Global competition, scientific and technological breakthroughs, and consumer sophistication are shortening the product cycle and placing a premium on quality, manufacturing fluidity, and innovation.

A second feature is the fragmentation of production through outsourcing and subsequent re-bundling within large and technologically sophisticated supplier networks (Arndt & Kierzkowski 2001: 2). Value-chain fragmentation is increasingly prevalent in industries from food processing, aviation, and motor vehicles to apparel, electronics, information technology, and household products (See Hildegunn et al 2007). The sophistication of the firms that constitute the fragments has made it easier to relocate specific nodes of production to take advantage of access to inputs, technology, and labour.[4] As the production of goods becomes ever more disaggregated, varied, and sophisticated, the cost of developing and manufacturing new products has increased exponentially, devaluing the labour content in many products and increasing the risk in producing it. MIT geographer Tim Sturgeon (2005) points out:

“In both manufacturing and service industries, (…) many companies have been shifting specialized activities out-of-house to an increasingly competent set of suppliers, contract manufacturers, and intermediaries.”

The Canadian economy is a full participant in the global transformation of production. A recent study by Danielle Goldfarb and Kip Beckman divides goods into three categories: entry, middle, and final. It finds that, while Canadian trade in all three categories shows steady growth, entry-level trade (once price fluctuations are removed) has been falling significantly and the share of both middle point exports and imports has been growing, implying integration in supply chains outside Canada. This rise is evidence of increasing specialization in Canadian goods production (cf. Cross and Cameron 1999; Cross 2002). Canada’s total imported inputs evolve in parallel with Canadian exports with middle and end point goods, implying that Canada supplies inputs for the exports of other countries and other countries are suppliers of inputs for Canadian exports. However measured, Goldfarb and Beckman (2007) conclude that there have been significant shifts in the structure of Canadian trade and a moderate-to-high integration into global supply chains.

From a policy perspective, governments must switch their focus from specific products, markets and trade barriers to trade agreements anchored in cross-border trade. In the mercantilist model, an import tariff or quota protects domestic production and employment against imports and assigns the cost to consumers. In the new paradigm, such a measure is more likely to result in the loss of domestic production blocked from gaining access to an international or cross-border value chain. A subsidy designed to promote exports seeks to convey advantage to domestic producers in international markets and assigns the cost to the taxpayers. In a value chain, an export subsidy effectively subsidizes all participating producers. The use of such instruments in the evolving international economy driven by global value chains yields often perverse economic outcomes.

The rise of integrative markets with TNCs and foreign investment as the principal drivers has profound implications for the governance of international trade. Since the Second World War, the GATT-based trade relations system has been the core of an increasingly successful effort to create a more open and competitive global economy. The central premise of this endeavor has been that the expansion of world trade through the reduction of barriers to international exchange and the elimination of discriminatory treatment in international commerce serves both national and individual interests. The scope for further rule-making and institution building along these lines, however, is eroding as the regime becomes less central to the issues that now define international exchange. The role played by trade and investment agreements in coming to grips with the emerging challenges of global exchange clearly no longer lies in the multilateral or bilateral trade liberalization agenda. The economic gains that flow from classic trade liberalization, apart from a few sectors of declining importance like agriculture and textiles and clothing, have been realized. The agendas on services, investment, and competition policy are clearly about more than trade liberalization, but include in particular the interface between the private economy and public regulation and the blurring lines between the domestic and global economies. The problem is not significant losses to global welfare arising from trade barriers, but rather that the global economy has surpassed the capacity of governments and the post-war order of rules and institutions to assure governance.

In the new dynamics of international trade, the critical factor is the intersection of firm-specific value and location-specific value. Governments, in the interest of attracting value-added activity to their location-specific jurisdictions, now compete in promoting policy settings that are congenial to increasingly mobile slices of production by removing barriers and providing incentives. Trade policies that focus on particular countries and the negotiation of multilateral and bilateral trade agreements may have been critical to providing the framework that promoted fragmentation and integration, but they are no longer sufficient and could lead to serious policy errors and adverse economic outcomes.

5 Policy Choices

There is growing evidence that Canadian ministers and trade policy officials understand the ground is shifting. The government’s November 2006 Economic Statement, Advantage Canada, recognized that the fragmentation of global value chains meant that countries had to be open to foreign investment and ensure open access to products and services. In his speeches, Trade Minister Emerson constantly emphasizes the importance of Canadian participation in global supply chains.

“In today’s global economy, supply chains and technology have taken us well beyond the mercantilist notion (…) where exports are good and imports are bad”.

June 7, 2007, Document no. 23

During his visit to China in January 2007, in a speech at the Hong Kong Chamber of Commerce given on January 15, Emerson pitched Canada as the anchor for North American-based value chains. “I urge you to work with Canada, work with Canadians and work with Canadian companies to create globally successful value chains.” (see above).

If the government’s instincts respond to the new paradigm of international trade, its policy preferences remain firmly rooted in the past and show little understanding of the new challenges facing international trade. The Conservative Party platform for the 2006 election promised to focus on diversifying both products and markets, to secure access to international markets through a rule-based trading system, and to establish trading relationships beyond North America. Emerson stresses that the successful completion of the Doha Round of multilateral trade negotiations is Canada’s highest priority. However, he asserts that Canada will not rely on the multilateral system alone; other countries have out-paced Canada in signing bilateral trade deals and Canada is being left behind. Accordingly, the Minister insists that Canada will be developing strategic partnerships with China, India, and Japan, and negotiating a free trade agreement with Korea. Buried deep in the 2007 Budget is CAN $ 60 million over two years for a Global Commerce Strategy. It has three elements: supporting an expansion of Canada’s bilateral trade agreements network, strengthening Canada’s competitive position in the US market, and extending Canada’s reach to new markets, starting with Asia. In fact, there has been little to distinguish these plans from those of the previous government. In 2005, Liberal Trade Minister Jim Peterson announced, with considerable fanfare, “Can-Trade,” to help Canadian companies meet the global challenge. If the Liberals were more generous – allocating CAN $ 440 million for the program – they had no better idea for shaping trade policy to fit the new realities driving Canadian trade (November 14, 2005 Press release).

The first element of the strategy, bilateral trade agreements, targets South Korea, Singapore, the Latin American countries of the Andean Community, the European countries of the European Free Trade Association, and countries of the Caribbean and Central America. “Success in these negotiations,” the Budget informs us, “will position Canada for further progress in opening markets for Canadian business.” The Budget does not explain how traditional Canadian market access agreements can make more than a marginal contribution to Canadian participation in global value chains. In circumstances where Canadian firms participate in value chains spread over many countries but do not produce the final product, it is the trade policies and trade agreements of other countries, not those of Canada that will be relevant. Theoretically, of course, Canada could negotiate free trade agreements with all countries hosting firms that participate in value chains in which Canadian firms participate but such a programme would neither be realistic nor timely.

The second element, reinforcing Canada’s US presence, is laudable but its connection to Canada-US trade and investment flows is hard to fathom. The NAFTA has accelerated the integration of the two economies. Much of cross-border investment is designed to create and sustain integrative networks. If Canadian firms are competitive enough to be players in US-anchored global value chains, they will succeed. It is highly doubtful that a greater Canadian government presence in the US market financed and directed by a global commerce strategy, will make more than a marginal difference to the evolution of the North American economy and Canadian participation in it. The third element, extending the Canadian reach to new markets starting with Asia, appears to have become a core value of Canadian governments whatever their political complexion. The economic results of past obsessions with Europe and Japan have been universally meagre. There is no reason to believe that a Canadian-Asian strategy will change private-sector decision making.

There remain barriers to realizing the full international trade potential of the economy. Some of them lie in foreign markets; more of them reside in Canada. In its recent report on Canada, the WTO observed that significant trade barriers still protect certain agricultural activities, and foreign investment restrictions remain in areas such as telecommunications, the cultural industries, and air and maritime transport. Reform in these sectors could lower costs to Canadian taxpayers and consumers while increasing productivity and competition in the domestic market. Ultimately, addressing remaining policy-induced distortions would help ensure that Canadians continue to enjoy one of the highest living standards in the world (WTO February 14, 2007). The US government’s annual report to Congress on foreign barriers to US exports provides a similarly helpful catalogue of policy measures that hamper Canada’s economic development (United States Trade Representative 2007: 61-69). The failure to address these issues diverts investment and increasingly short resources of skilled labour away from sectors and services that Canada can supply competitively in world markets, impede Canada’s participation in global value chains, and lock Canadians into the limited opportunities of the small domestic market. There may be good social and political reasons for these policy choices, but their negative economic effects cannot be ameliorated through trade and investment negotiations with foreign partners unless Canada is prepared to accept new rules disciplining these choices. A serious global commerce strategy would start hacking away at these barriers (Steger, June 15, 2007: A15).

6 Conclusion

The multilateral trade system, now embodied in the World Trade Organization has endured for more than half a century. It now involves a complex, multifaceted set of rules disciplining government regulation of the full range of international trade transactions. The rise of bilateral agreements, which total more than 300, has provided a robust alternative for advancing trade liberalization and rule making beyond the confines of the multilateral system. Governments now need to ask whether trade agreements in either format remain fit for purpose.

The emergence of a global economy has undermined a critical assumption supporting the multilateral trade system: that it is governments that are the prime players in determining the flows of international trade. The rise of global value chains, in which the prime players are transnational corporations, has created a yawning gulf between the expectations of governance and the capacity for delivery. The challenges facing the Canada-US economic relationship, the largest bilateral relationship in the world, illustrate the conundrum. The two governments, both in word and deed, manifest their continuing commitment to the multilateral system. At the same time, the problems that affect the bilateral relationship arise from a range of trade issues that are either beyond the scope of the system to address or cannot be addressed by conventional trade negotiations.

Both multilateral and bilateral agreements are the wrong answer to the wrong question: what can the government do to break down barriers in world markets to Canadian exports? The right question is what steps the government needs to take to make sure that Canadians can participate effectively in global value chains. The new paradigm of international trade – fragmented production strategies, the ability to disperse production much more widely around the world, and the reality of a much wider range of cross-border transactions – is generating a new set of policy challenges. Mercantilist trade policies, including multilateral and bilateral trade agreements, are wholly unsuited to respond to this agenda.