Evidence of meeting #71 for International Trade in the 41st Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was brazil.
A recording is available from Parliament.
Conservative
The Chair Conservative Rob Merrifield
I want to call the meeting to order.
I want to thank our witnesses for coming here today to join us in person and not by video conference. We're studying the benefits for Canada in regard to whether to join the Pacific Alliance as a full member.
We have with us two witnesses in the first hour: Mr. Pablo Heidrich from The North-South Institute, and Laura Macdonald from Carleton University.
Laura, I believe you're going to start. We'll yield the floor to you.
Dr. Laura Macdonald Professor of Political Science, Director of the Institute of Political Economy, Carleton University
Thank you very much.
Honourable members, thank you so much for the opportunity to speak with you today about the Pacific Alliance. I am a Latin Americanist with a background in trade and regional integration in the Americas. Today I want to speak a little bit about the broader political and economic context in which the Pacific Alliance has emerged.
Slide 2, please.
My main argument is that Canada is confronting—
Conservative
Professor of Political Science, Director of the Institute of Political Economy, Carleton University
We're trying.
Professor of Political Science, Director of the Institute of Political Economy, Carleton University
My main argument is that Canada is confronting a very complicated and rapidly shifting situation in the Americas, and that it has to be very careful and strategic about its policy choices. We have limited resources for engagement in the region, and we face a situation in which I believe we could easily be marginalized.
In evaluating prospects for closer ties with the Pacific Alliance, I think it's extremely important for the committee to have an understanding of broader trends in the region.
The Americas strategy seeks to promote Canada's involvement in this dynamic region. I think there are a number of challenges that Canada faces, one of which is the decline of the role of the United States in the region, not just because of the end of the cold war but because various recent administrations in the United States have taken less of an interest in the Latin American region. Also, the rise of China of course is always on our mind these days.
Canada itself increased its role dramatically in Latin America when it signed the NAFTA that included Mexico. Subsequently, however, and I'm going to expand on this point later, attempts to deepen integration in North America in the form of the security and prosperity partnership of North America have failed, partly because Canada felt that the inclusion of Mexico would sort of drag down progress toward harmonization of regulations and standards. Of course, since then Canada and the United States have been advancing toward a bilateral security perimeter.
Another major shift in the region has been the election, as you know, of new left governments in a majority of the countries, notably Brazil, Argentina, Uruguay, Venezuela, Bolivia, Ecuador, Nicaragua, and El Salvador. I would argue that this has important implications for understanding what's going on in terms of regionalism.
We have also seen, to some extent, some moves toward greater unity in the Latin American states, and at the same time the marginalization of Canada and the United States with the formation of a group being called UNASUR, the union of South American nations, and also CELAC, the community of Latin American and Caribbean states.
The increasing divide between Canada and the U.S. on the one hand and Latin American states on the other was perhaps first sparked by the failure of the FTAA, the Free Trade Area of the Americas. The FTAA project was designed to promote a free trade agreement between all states of the region, except Cuba, based on WTO-plus standards, and was promoted heavily by the United States and Canada.
The initiative failed, however, because of opposition from Brazil and other Mercosur countries that were rejecting the so-called Washington consensus policies that the FTAA was seen to embody. There was also strong civil society opposition. Since the failure of the FTAA, Brazil has used its regional alliances to promote what has been called a ring of encirclement around U.S. influence in the region.
I just want to mention a little bit more about what we call post-neo-liberalism, or the nature of these new left regimes. Some people, like Jorge Castaneda, for example, have sort of simplistically divided them between bad new left governments and good new left governments, the bad left being, of course, Chavez, Morales, and maybe Correa, and the good left being governments like Lula's in Brazil, and Bachelet's in Chile. I would argue that we need a much more nuanced analysis of what's really going on in those governments because they do in fact share a lot of characteristics, including respect for democracy, commitment to sound macroeconomic policies, a stronger role for state intervention, and strong social programs. They also mostly reject old-style protectionist policies, and seek external trade linkages, but they are looking for a different type of regional integration.
On the next slide, I put up a categorization of these new left governments as made by two scholars, Levitsky and Roberts. It just gives you a sense that there's something more going on there than just bad left and good left. It's more complicated than that and it has to do with the history of each country.
Politically, the most recent OAS summit illustrated the growing divide within the region, as Latin American and Caribbean states seem to reject, to some extent, U.S. and Canadian roles and their positions on such issues as drug policy and the membership of Cuba. We do see some growing unity among Latin American states in organizations such as CELAC. I think this is a warning sign that Canada has to tread carefully when we go into the region, because we could become further marginalized. We also see Mexico seeming to return to the region, because it's a member of CELAC.
We also see two kinds of competing models of regionalism, one led by Brazil and to some extent Venezuela, and the other the Pacific Alliance, made up of governments that remain closer to the U.S. economically. On the slide, those are the countries in red on the map.
Economically, the scene is extremely complex, with the proliferation of bilateral and regional alliances both inside and outside the region. I'll show a couple of pictures of what's going on. The picture on the screen shows the situation in 1994, where there were five fairly self-contained regional groupings. The next slide shows the situation in 2008, where we see what Bhagwati calls the spaghetti bowl situation with innumerable regional and bilateral trade agreements involving actors both inside and outside the region. It's extremely complicated.
That brings me to the Pacific Alliance. How do we evaluate this recent regional formation?
First, it seems to me that Canada already has FTAs with all four member states and we do not stand to gain very much in purely economic terms. We also have investment agreements with them.
Second, the Pacific Alliance is not just a free trade area, the first stage of regional integration, but aspires to and already has moved to a deeper and more challenging form of integration, perhaps more similar to the EU, more like a common market. The goals of this group are free movement of goods, services, capital, and people. The member states are rapidly moving towards such goals as integration of stock markets, visa-free travel, harmonization of regulatory standards, security cooperation, and so on. If we were unable to achieve deeper forms of integration with Mexico in the SPP, my question is whether it is very likely we could do this in the Pacific Alliance, which adds three even more distant Latin American states in a grouping which I would guess virtually no Canadian has heard of.
Third, although members have described it as a pragmatic and non-ideological grouping, the Pacific Alliance clearly represents a political response to the rise of Brazil as a regional leader, an attempt of these states to balance against the other groups of Mercosur and ALBA. My question is whether this is a fight we really want to get involved in.
Finally, the Pacific Alliance also represents an attempt to position the member states vis-à-vis the Asia-Pacific to facilitate ties with it and perhaps to strengthen their position to enter into ASEAN or the TPP.
I won't say very much about the TPP, except to say that this is a very complicated and ambitious trade agenda based on very high trade and investment standards. They've been called platinum trade and investment standards, even above the gold standard of the FTAA, and very different types of countries are involved. I think it's quite likely we're going to see very long and slow negotiations and considerable civil society opposition, and it could descend into another FTAA type of experience.
To conclude, I want to raise a few cautionary notes regarding the prospect of Canadian membership in the Pacific Alliance. What would membership entail, especially in areas such as mobility of people, harmonization of standards, and stock markets? It's too soon to tell, given the lack of an accession clause. What would the members expect from Canada? Is it really very likely we'd get a different deal than the members already have with each other? I don't think so. If we couldn't achieve deeper integration in North America with Mexico, how would this be possible if we were to add in three even more distant Latin American states?
Perhaps more importantly, and this is probably my main point, how would membership in the Pacific Alliance affect our relationships with Brazil, the economic powerhouse in the region? Could we be foreclosing on options for closer ties with Brazil and Mercosur if we were to align ourselves so closely with their regional competitor?
Finally, and I don't want to expand on this point too much, Canada's role in the region is already increasingly controversial, given our growing identification with extractive industries, particularly mining. Would the deepening of ties with these four states result in even greater marginalization for Canada?
Thank you very much.
Conservative
The Chair Conservative Rob Merrifield
Thank you very much.
We'll now hear from Mr. Heidrich.
The floor is yours, sir. Go ahead.
Pablo Heidrich Senior Researcher, Governance of Natural Resources program, North-South Institute
Honourable members, good afternoon. My warmest thanks for giving me the opportunity to speak with you today about the Pacific Alliance.
My field of work at the North-South Institute is on international trade and investment, particularly on aspects that relate to Canada and Latin America. Before coming to Canada I worked as a researcher at the Latin American Trade Network in Argentina, where I provided policy advice and research to various Latin American governments particularly on economic integration issues.
My presentation is highly complementary to that of Professor Macdonald, but I would rather focus it more from an economic policy point of view. My presentation will focus on what it would mean for Canada to join the Pacific Alliance, emphasizing the main aspects of this initiative in the context of Latin American regionalism. I will draw my arguments from knowledge of how those topics are being discussed there today and what that might mean for Canada.
We know already that economic integration schemes follow a pattern of increasing levels of intensity. You choose different patterns. You go for free trade agreements, custom unions, or economic unions. The Pacific Alliance claims to move to the highest one, but in fact it has a discourse of something much less ambitious, even less than a free trade agreement, namely of being a negotiation platform to bargain better with Asian countries and even the largest Asian firms seeking to invest in those Latin American countries.
That discourse is important for Canada to listen to in order to decide whether to join the Pacific Alliance. In terms of the reasons that countries choose these different paths for economic integration, again, from the literature and what we know from practitioners, from economic trade negotiators, there are three grounds for why countries choose economic regionalized initiatives. One is signalling. Another is investment seeking. We are seeking more for indirect investment, or we are seeking to enlarge our markets.
First, let me go over signalling, which I think matches most closely what we have seen so far from the Pacific Alliance. These four countries are signalling that they want to continue liberalizing their trade with each other, unlike others in the region of Latin America. They're also determined to increase their relationship with Asia. They also see complementarities among the four of them to do that. They will not wait for others if a slower pace is preferred, as in the TPP.
This is an entirely accepted practice in Latin America. Countries follow simultaneously, or concurrently, different paths of integration. We actually have an expression for it, and it's sometimes used in other parts of the world. It's called “variable geometry”. Variable geometry means that one chooses different partners to do different things at the same time. They are in the Pacific Alliance; they are in the Andean Pact; they are in the Group of 3; they are negotiating in UNASUR and in CELAC, but they pursue different things in different agreements. It also means that they join with like-minded countries, depending on the issue, but in a very pragmatic manner. What counts the most is the signalling.
The second reason, which is relevant perhaps, is investment seeking. They are seeking more investment from Asia, but they're also aware that the investment could come from other parts of the world, even if the market for those exports would later be in Asia. The stated goals of the Pacific Alliance, such as labour mobility, education equivalency, integrated financial markets, and freer movement of capital among those four countries, are very clear indicators of that approach: investment seeking.
Market enlargement for their own domestic firms, in my view, is only a cursory interest for them. Since most of their largest firms are export-driven anyway, they are grounded on commodities, and there is not much of a market for commodities in each one of those four countries. The markets for them are in Asia and other parts of the world.
Now, let me mention something else. I have been reading the presentations made so far in front of this committee. Some of them mentioned that up to 90% of the trade inside the Pacific Alliance would be free of duties immediately, or very soon. In my view, today this is something of relative importance; it's not of great importance. Most tariffs around the world are already very low. In most emerging countries they're around 5%. In most developed countries they're around 3%. So when we say we're going to have duty-free trade, it doesn't really mean a big difference in prices for businesses or for customers.
In fact, for most goods except services and electronics, transportation and customs costs are about 10% to 15% of the final price, or even the intermediate price of inputs.
Fluctuations in currencies for commodity-exporting countries such as these, or even Canada, have represented increases in domestic prices, in U.S. dollars, of up to 30% in the last 10 years, so a reduction in tariffs of 3% to 5% is highly inconsequential.
However, I do understand that for certain industries there are very significant tariffs, as is the case of traditionally protected pockets, such as cereals in Chile and Peru, certain manufactures in Colombia and Mexico, and poultry and dairy industries in Canada. In most cases, those tariffs are within the lines that are exempted from trade liberalization and therefore are left alone.
It seems that the Pacific Alliance would do just that, because the four members have agreed to eliminate 90% of their tariff lines and others will be negotiated later.
In trade economics, when we hear those kinds of announcements from governments, we know that what they have managed to do is to group the relevant stuff into the 10% of the lines that will not be negotiated right now. We do understand politics and we understand the difficulties of reaching 100% free trade between any two countries.
If you wanted to increase trade with the Pacific Alliance—and that is what Asia really wants most—the work to be done is in trade facilitation, harmonization of standards, and liberalization of trade and services, particularly of professional services. Liberalization in the movement of people, as they are doing it, is another key element.
Those are the things that economists and policy-makers have more recently found to be of the most consequence when you are trying to liberalize trade and investment across countries, and now that tariffs are very far down, you have other issues such as currency misalignments.
I would like you to think very carefully about what Canada actually wants to do.
The Pacific Alliance has clearly said what they will be doing, which is harmonizing their production and health standards, establishing quick and easy systems for academic and professional equivalencies, and liberalizing movement of labour, which means migration.
These countries have roughly the same levels of income per capita when you adjust them for purchase parity. They have similar educational attainment levels and other relevant indicators, so that approach is most sensible for them. In my opinion, it would be an effective manner to increase economic integration among themselves, and from there to negotiate with Asia, but will Canada be ready to do the same?
As a recent immigrant to Canada, I have to respectfully share with you my skepticism. As someone who frequently travels to other provinces and speaks with Canadians trying to provide professional services across provincial borders, I am even more skeptical.
I am not saying that this approach to increase attractiveness to foreign investment, in this case from Asia, or to be more successful in trade with other countries, will not succeed for current Pacific Alliance members; it might well do so. It might even be very successful for Canada too, but will Canada do it now with the Pacific Alliance and for the goal of negotiating together with those countries in Asia? I am in doubt, but that is the real issue for you to decide.
Finally, I would like to give you an alternative perspective on the value of trade negotiations themselves.
Just like those negotiations which are done in business or even in domestic politics, international trade negotiations are more often than not left unfinished. They are not necessarily seen by practitioners, by negotiators, as a failure but as a way of learning about others, socializing internationally, and fixing other countries’ diplomatic assets in one’s own country for a certain period of time. In fact, there are many other reasons to negotiate other than to actually sign anything.
Many in Latin America believe that the U.S. is very clearly doing this with the TPP negotiations. It's not negotiating to sign, but to signal, to engage, and to lock their partners’ diplomatic assets on itself and to learn from what others are doing.
You should know that three of these four countries in the Pacific Alliance are just as experienced as the United States in negotiating and signing FTAs, except maybe in the case of Colombia. So the diplomats from Peru, Mexico, and Chile know exactly what they are doing when they are supposedly duplicating efforts from the TPP negotiations in this other initiative. In fact, they are creating their own platform to engage Asia.
Thank you very much.
Conservative
The Chair Conservative Rob Merrifield
Thank you very much.
We'll now go to questions and answers.
We'll start with Mr. Davies. The floor is yours for seven minutes.
NDP
Don Davies NDP Vancouver Kingsway, BC
Thank you, Mr. Chairman.
Thank you to both witnesses for very cogent and well-informed perspectives.
I want to go over a summary of the high points. Canada already has free trade agreements with all four countries that are members of the Pacific Alliance. All four members of the Pacific Alliance already have free trade agreements with themselves. Four of the five countries are already participating in the Trans-Pacific Partnership.
Many editorialists in the Spanish-speaking world, including El Tiempo, have noted that this alliance covers countries that are ideologically very similar.
We know that in 2007, talks in the Pacific Alliance were aborted because of ideological reasons that pushed Nicaragua and Ecuador to leave the table.
The assistant deputy minister, speaking for the department, testified here a few weeks ago. In her document she noted that these four countries are strong proponents of economic openness, and they are among Canada's most like-minded partners in the region.
I think it's a fair comment to say that when we say “like Canada”, what we mean is that all five countries occupy the right side of the political spectrum.
Professor Macdonald, you've said that we don't stand to gain much in economic terms. We've learned that 90% of the goods and services among the Pacific member countries were slated to be tariff free April 1. It excludes Brazil, which is the economic powerhouse of the region.
Is this about economics, or is this about politics?
Professor of Political Science, Director of the Institute of Political Economy, Carleton University
I think it's about politics primarily.
The four current member states may find some economic advantages among themselves if they can harmonize more, but I see the Pacific Alliance as primarily a political move to band together as a group of like-minded states to find reassurance in each other's company, and as I said, to balance against the more left-leaning regional trade groupings.
Goal number one is to group together against Brazil and Mercosur and ALBA. On the other hand they are interested in opening up to Asia Pacific as well.
On the Canadian side I find the idea puzzling, but I would venture a guess that the government wants to find ways of signalling, in Pablo's terms, that we have friends in the Americas, which is good. But as I said, I worry that politically that might isolate us vis-à-vis other countries in the region we might also want to be friends with.
Senior Researcher, Governance of Natural Resources program, North-South Institute
I agree. I will add something very briefly.
Yes, it has strong political content, but I think the leaders of these four governments know they have to perform, that they have to show results.
Some of the initiatives are very concrete, integrating their stock markets, for example. As well, to provide a comparison with Canada, once they integrate these four stock markets, they would be almost as big as the TSX. The TSX is the seventh largest stock market in the world.
NDP
Don Davies NDP Vancouver Kingsway, BC
Perhaps we could move to that.
We had some of the ambassadors from these countries come to testify, and this is quite clearly not about tariffs; it's about integration of our economies. I think that was a fair characterization of their testimony.
I'm trying to figure out whether it's in Canada's interest to integrate our society with that of Peru or Chile or Colombia. I find myself wondering if this is good for our country. In what areas do those countries have superior standards? Do we want the labour standards of Colombia? Do we want the human rights standards of Peru? Do we want the environmental standards of these countries?
Without having studied, I would venture to say that in most areas those standards are lower. I don't think we're going to see those four countries bringing up their standards to Canada's.
Where is integration of Canada's economy and society with these selected countries? Let's face it, they have been selected for their politics. How does that benefit Canadians and our country?
Professor of Political Science, Director of the Institute of Political Economy, Carleton University
As I said, I'm kind of puzzled by the idea that we would gain economic advantage. The advantage, I guess, would be to say to ourselves that we are closer to a few Latin American states politically, but I don't see the argument about the advantage economically.
I agree with your concerns about how we could possibly harmonize our regulations with these states, with their extremely different societies, cultures, economic conditions, much higher levels of inequality, much higher levels of poverty. As well, migration is a politically sensitive issue. We're seeing this now in the discussion about temporary foreign worker programs. We've had enough trouble—I mean, we haven't even been able to raise that issue in the context of NAFTA—with opening up liberalization of migration from Mexico, so I find it puzzling to think that we could do that with Mexico and these other Latin American states.
Senior Researcher, Governance of Natural Resources program, North-South Institute
I'd like to add that to some extent, the difference between the Pacific Alliance and other groupings, such as Mercosur or even UNASUR, is that the Pacific Alliance is very determined to provide an expert-led model. They want to trade as freely with the world as possible, particularly with Asia. Brazil, leading UNASUR and Mercosur, is turning more to import substitution, substituting very systematically many of the high technology and medium technology inputs that they have to maintain their industrial competitiveness when they have an overvalued currency.
On the question of standards, I think once you look into the standards in detail, you'll be surprised to find that the standards in most of these Latin American countries, in labour, environment, and other issues that concern us all, are not that different from Canada's. It's the quality of the enforcement, the political will put into the enforcement and the policy capacity to enforce, that is much less than in Canada, but their laws are beautiful.
I should add that—
Senior Researcher, Governance of Natural Resources program, North-South Institute
Yes.
Conservative
The Chair Conservative Rob Merrifield
The time has gone. Maybe we'll pick up on this during some other questions.
Mr. Shipley, the floor is yours for seven minutes.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
Thank you, Mr. Chair.
To the witnesses, welcome to our committee.
I'm not sure what the North-South Institute is. Could you help me with that a little bit?
Senior Researcher, Governance of Natural Resources program, North-South Institute
The North-South Institute is a research policy institute. We are registered as an NGO. Most of our funding comes from the Canadian government, from CIDA and IDRC. We provide advice to the Canadian government, to Canadian society in general, and to Canadian businesses on Canada's relations with developing countries.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
Great. Thank you very much. I just wasn't familiar with it. When we see mining companies or agriculture or whatever, we kind of know, but that one I wasn't as sure about.
To Madam Macdonald, I think your comment was that you find it puzzling that Canada would enter into the Pacific trade alliance. When we've entered into trade agreements, nine of them now, have you seen them as being beneficial or puzzling at all, or is it just because of what I think you might have called, which maybe I'll get into, the “complexities” of this one?
Professor of Political Science, Director of the Institute of Political Economy, Carleton University
Yes, I'm really focusing on the complexities, or on the form of deep integration, as we've referred to it, that we're talking about.
I can certainly see why Canada would sign trade agreements with these countries. I think there are some clear economic advantages to that. Moving beyond that, to the type of deep integration that we're talking about here, is the source of my puzzlement.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
Because we're trying to learn a little bit here, if it is about the complexities or what you called the deep integration of it, is it better to seek out and understand those complexities and have those discussions, or just say that because it's deep and complex we shouldn't?
Part of that, I would suspect, is that it is not just about the political component, but it has to be a lot more than that. If it is just political, then I think that would have to be assessed.
In all the agreements there is always a component that is political because it's about raising relationships and building a continuity across a globe that has become very small, but the big prize is always about our industries, whatever those may be, as they seek out markets. We sometimes take our product to other countries, or we invest in other countries and bring that raw product back and then we add value to it. It's always about bringing jobs, or helping to create jobs, or helping our industries here.
I'm getting the sense that you don't see any of that second part, that it is all political. Am I hearing that correctly?