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Free Trade Is Not Enough

Free Trade Is Not Enough

Posted by Bruce McDougall on April 28, 2014

Canada’s prosperity depends on international trade. Exports account for more than one-third of the country’s gross domestic product, primarily in the form of raw materials, while imported goods and services are equivalent to 36% of GDP. By value, though, Canada imports far more than it exports, by a ratio of 1.5 to 1, and the most important imports are products that Canadians consume every day, from bananas to DVDs.

About three-quarters of Canada’s exports go to the U.S., and the U.S. provides more than 60% of Canada’s imports. Canada ranks ahead of Mexico and China as the biggest importer of U.S. goods and services, while it ranks second to China as a source of products and services for the U.S.

Aware of its vulnerability to a single dominant trading partner, Canada has tried for decades to develop more productive relationships beyond the U.S. For 20 years, for example, Canada has maintained Free Trade Agreements (FTAs) with Latin America, starting with Mexico in 1994 as part of the North American Free Trade Agreement, followed by Chile, Costa Rica, Peru, Colombia and Panama. As Canada pursues further negotiations with the Dominican Republic, the Andean Community, CARICOM, and the C4 (Honduras, Guatemala, Nicaragua and Guatemala), the country will eventually have formal free trade agreements with 28 of 34 Latin American countries.

But as other countries open their borders to trade, Canadian companies hesitate to venture beyond their domestic markets, placing Canada at a growing disadvantage as a global competitor. “Our business sector is not as engaged in exports as it is in many countries,” says TD Bank Chief Executive Officer Ed Clark.

This means that, so far, free trade agreements have worked to the advantage of Canada’s Latin American trading partners. Mexico, for example, ranks as Canada’s fifth-largest export destination. In 2012, the value of Canadian exports to Mexico was more than $5.4 billion. In return, though, Canada imported products and services from Mexico worth almost five times as much. For Canada, the deficit in trade with Mexico was larger than its trade deficit with any other country except China.

Canada’s trade with Brazil has followed a similar pattern. Canadian companies export commodities and machinery to Brazil worth about $2.5 billion, but they import crude oil, aluminum oxide and cane sugar worth almost twice as much. 

Compared to their Latin American counterparts, who don’t hesitate to explore markets beyond their borders, Canadian companies resemble package tourists on vacation who would rather eat a peanut butter sandwich than get off the bus and sample the local cuisine. While companies in Latin America regard the world as their marketplace, many Canadian companies regard the world beyond their borders with fear, mistrust and anxiety. Fewer than 90% of Canadian companies get involved in exporting. And even those companies look first to the U.S., which remains the largest economy in the world and lies within a day’s drive of almost every company in Canada.

“While Canada consistently runs trade deficits with Latin America and the Caribbean, a good part of that can be explained by the private sector’s outdated perceptions of the region resulting in risk aversion as well as a lack of entrepreneurial drive on the part of Canadian exporters, particularly smaller firms,” argues Jerry Haar, a professor at Florida International University, in a column in Latin Business Chronicle.

Canadian companies may relax their attitude against the rest of the world as Canada welcomes a greater number of entrepreneurial immigrants. Change will also occur as social and economic conditions improve in Latin America. In countries such as Chile, Peru and Colombia, well-managed economies are attracting foreign investment while enabling their governments to address income inequality, creating a bigger middle class and a larger potential market for exporters from Canada.

All that remains in the future. In the meantime, Canada’s government may understand the importance of free trade agreements with Latin America. But it will take more than a bureaucratic handshake to drive Canadian companies beyond the security of their domestic marketplace.

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