Good afternoon. Thank you for inviting me and for the opportunity to speak with you today regarding Bill C-20.
My area of research at the North-South Institute is on international trade and investment. I will be providing my testimony from that point of view. I have been working and doing research on trade between Canada and Latin America for the last six years here. I have been researching also the investment relations of Canada with different countries in Latin America, particularly those that have signed FTAs, or free trade agreements, with Canada.
My presentation is going to focus then on the possible benefits that these FTAs might bring to Canada and also to Honduras. I will cover first a little bit of theoretical but also empirical research that has been done in Canada and abroad that tells us under what conditions those agreements can bring economic growth and economic development to both countries. I will later talk about the Honduras economic and governance conditions from an economic point of view. Finally, I will suggest some policies or instruments Canada can use in order to build a more successful relationship with Honduras.
Let's begin with the free trade agreements. There are currently about 400 free trade agreements functioning in the world. Most countries have signed at least one. It is actually a practice that is more common among developing countries than among industrialized countries. There are quite a lot of studies already on under what conditions those agreements are actually successful for the purpose that they are intended. Most FTAs are actually signed among developing countries and only a very small percentage are signed between developing countries and developed countries and there are good reasons for that. In that regard, most developing countries sign FTAs with other developing countries because they are trying to emulate the historical experience of the European Union and to some extent the experience of NAFTA as well, trying to bring it to their own situation and their own geography.
The literature tells us there is a very highly variable degree of success. Developing country businesses in general tend to be too small and not technologically advanced to make use of the opportunities in enhanced market access that these FTAs give. For the most part, exporters from developed countries find the enhanced access to the market of developing countries, particularly when those countries are small, quite underwhelming.
What I would say is that the practice of north-south FTAs is actually more difficult than the one between developing countries. One of the main problems in general tends to be the average levels of governance and effective rule of law in the developing country party. Even when those conditions are met, the developing country gains are not going to be significant, they usually are around 0.1% to maybe 0.2% of GDP per year for the first 10 years after signing and then they decrease.
Other indicators such as improving the legal system, improving governance, public education, and public health, bring anything between 10 to 20 times more gains per year than executing an FTA. In other words, the policy measures that affect trade for an economist, particularly those related to development, are of secondary importance when we are trying to support the economic growth of a developing country. What is of primary importance is governance and access to public education and public health.
Now I'm going to direct my attention to the specific FTA that Canada and Honduras have signed. I read the text and what I can say in summary is that these agreements are very similar to the ones that Canada has already signed with other nations in Latin America such as Panama, Colombia, and Peru. The substantial preferential access that is given to Honduras in textiles and clothing, fresh fruits and vegetables, and some processed foods, these advantages that are given to Honduras align fairly well with the comparative advantage that Honduras has already demonstrated in the last decade.
However, UNCTAD, which is the United Nations commission for trade and investment, has an ongoing ranking for countries on what market access they have to their main partners; and Honduras is one of the countries that is highest ranked in the world. In other words, Honduras does not need enhanced market access in order to increase its exports to the rest of the world, in comparison with most other developing countries.
On the other side, Canada gains from the FTA increased access to agricultural goods, cereals, and also meats, and some technology-based manufacturing. More relevant for Canada is the enhanced general investment protection that Jennifer has already mentioned, and in particular, I would say, this is an argument that comes more from economists, because Honduras is a country that is ranked by the World Bank as having one of the worst levels of governance and that affects all kinds of investment, not only domestic but also international. That is a big handicap for Honduras to receive any further investment.
However, it is very concerning to me that in this agreement, the Honduran side has already carved out some very strong exceptions to the application of this agreement, such as, for example, investment in construction, oil refining, fuel distribution, casinos, and the possibility also of excluding any Canadian firms from any future privatizations that the Honduran government would do. I can later explain in the question and answer period why the Honduran government would go for that.
My simple calculation is that bilateral trade between Canada and Honduras, if this agreement were ratified, would increase; however, the increases would be minimal for Canada and they would even be fairly small for Honduras, and that would only be in the case that Honduras would perform as well as the other Latin American partners that already have an FTA with Canada. I'm talking about Chile, Colombia, Peru, Panama, and Costa Rica. I have to say, even very early on, that Honduras is a totally different country from those five. The exception and one of the best gains, I think, for increased trade is that there would be more access for clothing and for textiles. Most other Honduran goods already arrive in the Canadian market with very minimal taxes, very minimal or zero tariffs.
On the other side, the Canadian exports would gain market access, but again, those gains would be fairly small because the average applied tariffs of Honduras are already very low. They are among the lowest in the world and the lowest in the region. They are around 5% to 6%. It's already very much a free-trading nation. Besides, it's an economy that is very small. To compare it to Canada, the economy of Honduras is smaller than the Ottawa-Gatineau metropolitan area. And that is only at the aggregate level. Once you input the fact that Honduras is the most unequal country, by distribution of income, in the most unequal region in the world, Latin America, then that market is really much smaller than Ottawa-Gatineau.
So if we are expecting to have big increases in Canadian exports to that market, we should know that that market is structurally handicapped from providing those gains, because there is nobody to buy those goods. Canada is not a country that is specializing in luxury goods to sell to a very wealthy elite. Canada sells grains, auto parts, and goods that tend to be consumed by businesses or individuals from the middle class, or from the poorer working class.
Again, comparing Honduras with other Latin American countries that have signed these FTAs with Canada, Honduras is anything between 2 and 20 times smaller as a market, and that is without considering income distribution. The population of Honduras is 8 million, and two-thirds live in poverty and one-third in extreme poverty. That is according to the Honduran government. The UN says quite worse things.
So I also have to say that towards the future—