Canada has little to gain, much to lose from a customs union with the U.S.

April 15, 2004

OTTAWA--Among the proposals for closer economic ties between Canada and the United States is a call for a Customs Union, which would entail a common external tariff, a common trade policy, and the elimination of "rules of origin" alleged to impose heavy costs on exporting firms.

In a new CCPA study of the proposed Customs Union--which is favoured by many Canadian business executives, politicians, bureaucrats and academics--economist Marc Lee concludes that the economic and political costs for Canada would far outweigh the benefits.

"The principal benefit of a Customs Union," he says, "would be the elimination of rules of origin, which ensure that exports from one country to another in a trade agreement originate in the exporting country. But their elimination would not confer major economic benefits. Some exporters would save money, but this would do little to ease congestion and delays at the border."

Lee warns that in any reopened trade negotiations for a Customs Union, politically sensitive sectors now protected from the full force of NAFTA--public services, Crown corporations, the Canadian Wheat Board, cultural industries, telecommunications, banking, etc.--would have to be put on the table. "Many of these have been targeted for dismantling by Washington."

He also noted that Canada has deviated from the U.S. in developing trade ties and political relationships with other countries, such as Cuba and Iran, with which the U.S. has banned trade relations. "Reconciling these differences would be complicated and difficult," he concludes.

"A common trade policy with the U.S. would foreclose on all kinds of independent policy initiatives for Canada. If anything, what Canada needs is a more multilateral trade policy. A Customs Union with the U.S. would not only be a shift away from multilateralism, but would mean giving away the very tools needed to pursue a multilateral trade diversification strategy."

The study also warns that, in any set of negotiations with Washington, Canada would be expected to make concessions to seal a deal. "The history of such negotiations is cause for concern. There is a great danger that Canada would have to give up a lot to get little in return. Canadians would have no real idea what the final package would look like, or what unpleasant surprises might be in store, such as the disastrous investor-state dispute settlement mechanism that came with NAFTA."

Lee predicts that, because of its likely negative effects on Canada's public services and sovereignty, a Customs Union with the U.S. would be more likely to lower Canadians' living standards than improve them.

"Let us hope," says Lee, "that good sense will prevail and that Canada will choose to chart a different economic course than deeper integration with the U.S."