The Troubled Economics, and the Curious Politics, of the Canada-Korea Trade Deal

There are many motivations to explain the Harper government’s rush to sign free trade deals.  Since coming to power, the Conservatives have implemented 6 FTAs, have “concluded” 2 more (with Korea and, purportedly, with the EU), and have fully 14 other FTA negotiations on the go.

To some extent Conservatives actually believe in these things. I doubt that even they honestly swallow the rhetoric about FTAs spurring major new jobs and growth here. But Conservatives clearly support the pro-business institutional framework that NAFTA-style deals help to permanently enshrine. And their backers in the business community are enthusiastic that more free trade commitments (including those dealing with services deregulation, intellectual property, liberalization of procurement, investor rights, national treatment, and other key non-tariff measures) will lock Canada into a business-dominated trajectory for many years after the Conservatives have been voted out of office.

However, I think that political factors are more important in explaining the Conservative rush to sign FTAs — more than any belief that would actually boost the economy. Given the consistently disappointing performance of the Canadian economy over the last 3 years, the government is concerned to “look busy”: that is, it must be seen to be moving forcefully to do something about the economy. These FTAs will have zero immediate impact on key indicators like employment, investment, and exports (and their long-run impact, likely negative in my view, won’t be dramatic in any event). But signing FTAs is a high-profile symbolic act, which makes the government seem competent and globally engaged (especially when cheered on by the breathless boosterism of most of the media).

More important, I suspect, is the Conservatives’ political calculation that a spate of new trade agreements would be a useful wedge issue with which to attack the opposition parties in the run-up to the 2015 election. They would like to stereotype the opposition as “anti-trade”, thus reinforcing their own (increasingly shaky) claim to be the best “economic managers.”  Unfortunately for the Harper government, the Liberals never play along: they back all the trade deals, despite token noises about various refinements or amendments. But the Tories’ line of attack does put the NDP in an awkward position.  The NDP is working hard to portray itself as a non-threatening, incrementalist, business-friendly, government-in-waiting. Being pilloried as “protectionist” and “anti-trade” by the Conservatives is very harmful to that effort. So the party endorsed the Canada-Jordan FTA (a deal that is economically meaningless to Canada — although it does contain similar objectionable structural features as the NAFTA). They hoped this would stop the Conservatives from claiming that the NDP always opposes trade. But unsurprisingly, that token act did not silence the Conservative guns. So the party (under leader Tom Mulcair and trade critic Don Davies) has been seeking other ways to defuse the “protectionist” label — and hopefully without fully alienating core supporters who have been opposing NAFTA-style trade deals for a generation.

My advice to the party in this regard has been to turn the tables on Mr. Harper. Show that he is the Prime Minister who has overseen the greatest deterioration in Canada’s international trade performance in the postwar period. If our goal is promoting trade (and Canadian exports, more specifically), then Mr. Harper’s record speaks for itself: Canadian exports of goods and services fell from 37% of GDP when the Conservatives were elected to 31% at present, and the current account balance melted down from a $30 billion surplus to a $53 billion deficit. The more free trade agreements we sign, the worse our trade performance becomes. The debate over FTAs is almost beside the point: Canada’s trade is failing painfully not because of foreign trade barriers, but because of the structural deindustrialization of Canada, the failure of Canadian firms to innovate and produce desireable high-value products, and our dangerous and growing reliance on exports of unprocessed natural resources. (I say “almost beside the point,” because of course existing FTAs clearly contributed to that structural regression.) I would love to debate Canada’s trade failures with any Conservative, and point out that their infatuation with signing still more FTAs is not addressing our true trade problem — and in fact will make it incrementally worse.

In the absence of a successful effort to reframe the trade debate, however, then whether you support an FTA or not seems to become (by default) a litmus test of whether you support trade.  The Korea deal, officially signed on September 22, is now before the House of Commons, and hence will be the first major test of both the Conservatives’ wedge strategy and the opposition response. Given debate within Europe about the CETA (and in particular growing European opposition to its investor-state dispute mechanism), it is questionable whether that treaty will make it to the Commons before the election. So how the parties position themselves on the Korea deal may indicate how the whole trade issue will play out in the next campaign.

We have been debating the economics of the Korea deal for a decade (since the Chretien government first opened negotiations). Canada’s trade relationship with Korea is very lopsided, both quantitatively and qualitatively. We import more than $2 from Korea, for every $1 we export there, and the resulting bilateral deficit (close to $4 billion in 2013) significantly contributes to Canada’s miserable current account performance — which anyone other than a died-in-the-wool Walrasian must acknowledge has sapped Canadian employment and income substantially in recent years. Canada exports primarily unprocessed or barely-processed resources to Korea (the top 4 exports in 2013, in order, were coal, copper, aluminum, and wood pulp). We buy back increasingly sophisticated value-added products (the top 4 imports in 2013, in order, were motor vehicles, computer circuits, auto parts, and smart phones). Our relationship with Korea is thus a fitting microcosm of the structural deindustrialization of our trade which has occurred since the turn of the century. Of course, that deindustrialization is due in significant part to the effect of NAFTA (and similar deals) in locking Canada into a resource-extraction pigeonhole, and hamstringing pro-active policy efforts to attain a more diversified, value-added development trajectory.

A punchy campaign against the proposed Korea deal, combined with the politics of minority government (which limited every government’s leeway from 2004 through 2011), put the deal on the back-burner. Opposition from the auto industry (including an active grassroots effort by my former union, the CAW, and influential opposition from auto companies and car dealers) was a crucial factor in sidelining the Korea deal for years. We all knew, however, that a Conservative majority would put pedal-to-the-metal on this FTA (like others).  So after winning its majority in 2011, the government moved quickly to finalize the deal.

The automotive features of the deal are inferior to those negotiated by the US in its deal with Korea (implemented in 2012). Yet under that deal, US auto imports from Korea have grown 22 times faster than US auto exports to Korea (causing a dramatic widening of the bilateral auto deficit). Overall US merchandise exports to Korea have actually declined under the deal. The US benefits from major direct investments by Korean automakers; this is not the case in Canada (Korean automakers have no production here at all).  The US also enjoys a services trade surplus with Korea that partly offsets its growing merchandise deficit — another feature absent from the Canada-Korea situation. So the effects of this deal will be inevitably worse for Canada than the negative outcome already experienced by the US.

Moreover, those negative effects will not be limited to Canada’s automotive sector. Many other industrial sectors will also be negatively affected, due to the same fundamental structural weakness which explains the automotive imbalance: namely, a very unbalanced starting point, an asymmetry of market presence, and weak technological and innovative capacity on the part of Canadian-based producers in these high-value-added industries. Our previous research at the CAW analyzed the likely impacts of bilateral free trade on 20 different merchandise sectors. Of those 20 sectors, 15 are projected to lose net sales as a result of bilateral liberalization, 4 are projected to gain net sales, and one (petroleum products) is expected to experience no change in net sales. The overall decline in net sales will drive corresponding losses in output and employment, which could be as high as 30,000 jobs across all the sectors considered. Computers and electronics manufacturing could experience the largest proportional decline in output and employment, followed by machinery, and then by automotive products.

Metal manufacturing (both primary metals and fabricated metal products) would also be very hard hit. Since the end of the recession in 2009, Canada’s metal exports to Korea have declined by half. But our imports from Korea have grown by almost 50%. The result is a primary metal and metal products deficit with Korea that reached almost $500 million in 2013 (accounting for one-third of Canada’s total global deficit in metal and metal products). Canada imports almost $3 in primary metal and metal products from Korea, for every dollar we export back there. So it is quite wrong to suggest that the auto industry is the only sector at risk from this deal; most manufacturing will experience a net decline in sales, output, and employment from the expansion of Canada’s already unbalanced bilateral trade flows with Korea.

Much has been said about the benefits of the deal for Canadian pork and beef exports, and I concur that they will likely expand as high Korean tariffs in these sectors come down. However the scale of those gains, as well as the argument that our meat exporters are being significantly undercut by U.S. competition into the Korean market (since Korean tariffs on meat imports are falling gradually under the US-Korea deal), must be taken in context. Canada’s meat exports to Korea have declined substantially since 2011. But exports that year were unusually high (twice 2010 levels) and hence should not be used as a benchmark to evaluate the effects of the US deal on Canada’s exports. Relative to longer-run export performance, the erosion in meat exports to South Korea has been modest — and certainly less severe than experienced by our exports of autos (down 82% since 1999) or steel (down by half since 2009). Imagine if the Canada-Korea deal allowed meat exports to bounce right back to that (unusual) 2011 peak. That would imply $175 million in incremental exports — enough to offset less than one-twentieth of Canda’s existing bilateral deficit with Korea (never mind the certain increase in that bilateral deficit under free trade). In fact, the potential upside to meat exports is more modest than this; for example, the Canadian Cattlemen’s Association has predicted that with the full elimination of the Korean tariff (which would take 15 years) Canadian beef exports would grow by $40-50 million from current levels. Those gains would be important, to be sure, to beef and pork exporters, but they do not constitute a significant benefit in macroeconomic terms. The “meat-for-cars” trade-off implicit in the federal government’s Korea strategy will produce far more losses than gains for Canada.

I recently appeared before the House of Commons standing committee on International Trade to discuss the deal. My speaking notes provide more detail regarding the economic arguments against this deal. I also recommend previous research from the CAW, Unifor, and the CCPA on the topic, including:

Canada’s Auto Industry and the New Free Trade Agreements: Sorting Through the Impacts by Jim Stanford (Ottawa: Canadian Centre for Policy Alternatives, 2014), 34 pp. (Describes Canada’s lopsided auto trade with Korea, and proposes ways in which a trade deal could be more balanced.)

A Case of Politics over Economics: Renewed Canada-Korea Trade Negotiations, Unifor Briefing Kit, January 2014, 8 pp. (Reviews impacts of free trade with Korea in the US and EU cases.)

Employment Implications of Trade Liberalization with East Asia by Daniel Poon and Jim Stanford (Toronto: CAW-Canada, 2006)), 33 pp. (Predicts up to 33,000 job losses from bilateral free trade with Korea.)

It is almost mathematically impossible that this deal could do anything other than widen our already damaging bilateral trade deficit with Korea, it will absolutely reinforce Canada’s structurally subservient role as a supplier of raw materials and importer of high-value products and services, and it further reinforces the negative structural features (investor rights, etc.) that are the most important elements of every NAFTA-style deal. I am willing to bet $500 of my own money with the trade minister or critic of any of the federal parties that Canada’s bilateral trade deficit with Korea will widen by at least $1 billion over the first 3 years after the deal is implemented: in other words, that the deal will spur more imports from Korea than exports to Korea, and hence that net demand for Canadian products (and the workers who make those products) will decline further under free trade.

I think the economics are pretty straightforward. This brings us to the politics, which are anything but. The NDP decided to support the Korea deal. Don Davies’ detailed speech in the House of Commons announcing this support is interesting to read. He acknowledges concerns in the auto industry, but argues that the auto industry itself is supposedly “divided” on the matter (claiming that every auto company except Ford has endorsed the deal). That is factually incorrect (Chrysler has not supported the deal, and its CEO has spoken publicly against it), and very misleading (Toyota and Honda were the companies most opposed to free trade with Korea, but they stood down once the Harper government promised to negotiate a parallel deal with Japan). Only GM (with its fully-owned export-oriented Korean subsidiary Daewoo) actually supports the Korea deal on its own merits, and even its public statements have been wishy-washy. This “divide-and-conquer” strategy by Mr. Davies’ was startling. He also invoked a repertoire of standard free trade arguments to support the deal: it levels the playing field, we must keep up with other countries who sign FTAs, it allows for accellerated dispute settlement, and so on. He claimed the deal was “essential” for Canada’s food industry (surprising, given that Canada’s total food exports to Korea in 2013, $250 million, equaled one-quarter of one percent of Canada’s total food industry shipments that year). He acknowledged the NDP would prefer to have a deal without the investor-state dispute settlement mechanism which is proving so controversial around the world, but indicated that his party would support the deal anyway. He dismissed concerns about other negative structural features (intellectual property rights, a significant liberalization of federal government procurement, national treatment and other investor rights, and a clear dergulatory bias in the provisions governing services industries) that are the key reasons why progressives around the world oppose these “trade” deals (which are not, as we have been saying for a quarter-century, actually about trade).

In my appearance before the Commons committee, Mr. Davies directed all of his questions at me, invoking similar themes as in his speech, and citing the evidence of long-time free trade boosters like Ian Burney (Canada’s chief trade negotiator). Here is the transcript of the whole session, which makes for some more interesting reading. He played off concerns of the auto industry against other industries (including some with Unifor members) that might benefit from more exports to Korea (more divide-and-conquer). I replied that most industries (not just auto) would lose net sales and jobs under the agreement. He cited a long list of business advocates from various sectors who support free trade (yes, we are aware that business lobbyists support free trade, and we think we know why). I believe I held my own in the debate (the hostile questions from the Conservative ranks were predictable and less well-informed than Mr. Davies’ well-researched questions). But I will admit that the experience was surprising and somewhat surreal.

I expected the NDP to endorse one of the big new trade deals (I suspected it would be the CETA), motivated by political positioning and an attempt to parry Harper’s “protectionist” thrust. What I did not expect was for the party to enthusiastically and uncritically take on board traditional arguments about the supposed mutual benefits of NAFTA-style “free trade”. It is one thing for the party to pick its battles, trying to avoid Harper’s demonization strategy. It is quite another for it to add its own endorsement to the dominant view that so-called “free trade” is a neutral, mutual, efficiency-enhancing evolution in the global economy. The NDP’s positioning will make it all the harder for anyone to raise concerns about any free trade agreement. I expect NDP partisans to soon begin denouncing free trade critics as “protectionist” (that’s already occurred on Twitter). And it makes it all the more likely, in my estimation, that the party will ultimately endorse the CETA. Right now they are buying time with the argument (which they’ve invoked for years now) that they want to “study” it. But the party’s silence on negative features which we already know are in the deal (drug patents, investor-state dispute settlement, liberalization of procurement, etc.) already speaks volumes. Mr. Davies tried to distinguish between CETA and the Korea deal, mentioning (among other factors) that the ISDS provision of the former are in force for 20 years, while the latter can be cancelled on 6 months notice. I doubt that will provide a sufficiently credible basis for the party to turn thumbs down on CETA, now that it has endorsed the broadly similar Korea deal. The most vulnerable aspect of the CETA is its investor-state provisions, which have sparked enormous and potentially decisive opposition in Europe; but by endorsing the Korea deal (with its ISDS), the NDP has thrown that card away.

In my judgment, the NDP decision to support the Canada-Korea FTA will likely be a bellweather moment in the evolution of that party’s politics, and its relationship to the traditional social constituencies (organized labour, NGOs, and social movements) which once formed its core base. It will set off further complicated dyamics within those constituencies themselves, as activists try to balance loyalty to the party with principled concerns over the anti-democratic and economically damaging features of neoliberal globalization. The Canadian wing of the UFCW (which at the time was campaigning successfully to become the new bargianing agent for federal NDP constituency workers) immediately followed the NDP in endorsing the deal, even suggesting (improbably) that it would actually benefit Canada’s auto industry. (The UFCW’s US parent organization also endorsed the US-Korea trade deal, along with the United Auto Workers, both motivated by political loyalty to President Obama’s Democrats. However, the United Steelworkers sharply opposed the US-Korea deal, and it will be interesting to see what that union, very close to the NDP but a vocal critic of FTAs, will now say about the Canada-Korea deal — especially given the damage being done to Canada’s steel industry by our lopsided bilateral trade in primary metals and metal products.) The two Green Party MPs were the only ones to vote against the Korea deal on second reading; Elizabeth May’s speech emphasized the anti-democratic nature of the treaty’s investor-state dispute settlement system.

Of course, the bigger challenge facing alter-globalization activists is how to change the overall political discourse around trade and free trade. If we were winning the broader ideological battle on this front, then there is no doubt in my mind that the NDP would have taken a more principled stand. To some extent, we can’t blame any electoral party for shying away from a battle of ideas that the social movements themselves cannot seem to win. In this regard, the challenge I outlined earlier about reframing the debate around Canada’s real trade problems, rather than debating yet another free trade agreement, should be our most important priority — all the more so in light of the now-near-unanimity in our House of Commons regarding the virtues of so-called “free trade.” Unifor’s recent discussion paper “Imagining a Fair Trade Future” is a good start in that effort. Let’s see what else we can do in our research, lobbying, and mobilizing to find new storylines to slow down the Harper government’s FTA juggernaut. The successful popular mobilization against ISDS in Europe over the past year should remind us if we get large numbers of people aware and concerned about what these deals really mean, then politicians (of any stripe) will trip over themselves to support our cause.