Canada should resist the "big push" for deeper integration with the US

June 1, 2004

With Prime Minister Paul Martin about to make a major trip to Washington, many influential business leaders and prominent think-tanks are offering him advice on how to strike a new "strategic bargain" with our Southern neighbours.

It is understandable where these commentators are coming from. The potential shutdown of the Canada-U.S. border is a prospect that sends shivers down the spine of corporate Canada. These fears crystallized in the days after the September 11, 2001 terror attacks.

But Canadians need to think long and hard about the direction in which these influential business leaders want to take us. While safeguarding Canada's trade and investment relationship with the US is an important priority, there is no telling where a new, big negotiation with our neighbours to the South might lead, and whether it would really address our major concerns, such as access to the US market.

One suggested option is a Canada-US customs union, the next stage in economic integration beyond a free trade area. This would harmonize external tariffs in most sectors vis-a-vis the rest of the world, and eliminate rules of origin that ensure exports within the NAFTA region originate or are substantially transformed in North America.

The economic benefits of a customs union, however, are likely to be very small, if positive at all, and would do little to ease congestion at the border. In practice, the NAFTA certificate of origin that accompanies exports across the border is a one-page document, whereas the concerns of US authorities about immigration, drugs, arms, security and smuggling that consume most border resources would not go away if rules of origin were eliminated.

Another recommendation is to harmonize Canadian and American regulations and standards. This seems straightforward on the surface, and in some areas, it might even raise Canadian standards. But this would mean accepting that Canadian regulations could never exceed those in the US in the future. Under a common regulatory regime, Canada would not be able to use regulatory powers to meet, for example, its Kyoto Protocol obligations.

Other potential ingredients for a "new deal" include: greater labour mobility; harmonization of tax policies; a common defense policy; and, a common currency.

Whatever the pros and cons of such suggestions, a key question is what Canada, as the demandeur, might be asked to give up to secure a deal. Washington would surely be interested in opening up public services and Crown corporations to foreign competition, dismantling agricultural marketing boards and the Canadian Wheat Board, and the removal of foreign ownership restrictions in cultural industries, telecommunications and banking. The US would also like to stake a bigger claim on Canada's energy resources.

The history of Canada-US negotiations, however, suggests that even if we give up a lot, we may still not achieve our objectives. Canada failed to secure an exemption in the original FTA (and in the subsequent NAFTA) from US trade remedy laws, even though this was a primary objective of the negotiations, and a key selling point to the public. These measures continue to be source of much trade harassment for Canadian exporters, as the prolonged softwood lumber dispute attests to.

Barring a sea-change in attitude in the US Congress, negotiating an exemption from trade remedy laws is essentially a non-starter. That is, this potentially huge source of gain for Canada is, for all intents and purposes, off-limits. So forget about promises of more secure access to the US market.

Ultimately, the issue before Canadians is not whether we must take the next step, but whether this is the correct road to be on in the first place. Canada has reached the point of diminishing returns to further economic integration with the United States. Gains from trade are more likely to be realized by enhancing our trading relationships with Europe and developing nations -- moves that would reduce Canada's reliance on the US market.

Canada's concerns would be better addressed via multilateral institutions and international cooperation with other countries that share those concerns. This is the only way to get the leverage necessary with Washington to make changes on issues of real substance, like its punishing trade remedy laws.

Canadians could be headed for another great debate on integration with the US. But the potential benefits are elusive, while the pitfalls are significant (never mind the inevitable hidden surprises like the controversial investor-to-state dispute settlement mechanism brought in by the NAFTA). Hopefully, good sense will prevail, and the debate will not be necessary because Canada chooses to chart a different course.

Marc Lee is an economist with the Canadian Centre for Policy Alternatives.