Thank you for the opportunity.
My comments today address the question of whether the Government of Canada should ratify the Trans-Pacific Partnership in the case that the United States also ratifies it. If the U.S. were not to ratify, the TPP would effectively be dead, so there's no need to discuss what Canada should do in that case.
If the U.S. ratifies then Canada is faced with a choice between two outcomes. The first is Canada being in the agreement, with the U.S. in; the second is Canada being out, with the U.S. in.
This means that there are certain issues of importance that are outside Canada's decision space. For example, some might argue that the TPP dilutes the privileged access to the U.S. economy that is currently enjoyed by Canada and Mexico under NAFTA. If the U.S. is in, however, Canada does not have the power to change that situation. Expanded access to the U.S. market occurs whether Canada is in or out. So I think it's more constructive at this point to discuss outcomes that depend on Canada's ratification decision.
There has been a lot of discussion around the rules of origin in the automotive sector, where the current requirement of 60% or more of NAFTA value content will be replaced with a requirement of only 35% to 45% of TPP content. This places more competitive pressure on Canada's automotive industry in both parts and assembly. However, consider what happens if Canada is out while the U.S. and Mexico are in. Cars and parts could receive national treatment in the U.S. and Mexican markets with 45% or less TPP value content, while they could only receive national treatment in the Canadian market with 60% or more NAFTA content.
In these circumstances, automobile assemblers with plants in the U.S. and Mexico wanting to sell cars into Canada would have three options. They could pass up the TPP rules and continue under the NAFTA rules. They could run separate production lines for cars destined to Canada, or they could adopt the TPP rules and pay the MFN tariff on cars exported to Canada. The third option seems the most likely.
Canadian auto parts manufacturers will continue under NAFTA rules of origin, with Canada out and the U.S. in. Parts production in the U.S. and Mexico will source under TPP rules, so their costs will almost certainly be lower. Furthermore, auto assembly in Canada would be subject to NAFTA rules of origin, while U.S. and Mexican assemblers could take advantage of the TPP rules, creating a competitive disadvantage for Canada. Thus, it's hard to see how either the Canadian automotive industry or the Canadian automotive consumer will benefit from Canada's staying out of the TPP if the U.S. and Mexico are in.
I want to stress once more that the point I'm making is, what's the situation if the U.S. and Mexico are in and Canada is out? That is different from the issue of having no TPP and having a TPP? That's a very important point.
I want to turn broadly to the potential for the TPP to open up new markets for Canada's international trade. For context, it's frequently noted that the potential TPP members account for 40% of world GDP—but bear in mind that 62% of the combined GDP is in the U.S. alone. Combining the U.S. and Japan brings us up to over 78%. Canada is actually the largest of the remaining potential members in terms of GDP, so when you add Canada to the U.S. and Japan, you have 85% of the TPP area GDP, which leaves only 15% of the TPP GDP, or 6% of the world GDP, in countries other than the U.S. and Japan that Canada can trade with.
At least in the short run the two most important questions are whether ratifying TPP will be beneficial to Canada's trade relationship with the U.S., and whether there are substantial benefits to liberalizing trade with Japan via the TPP. Given the limited time I'm just going to focus on the second question.
While Japan is now a slow-growing economy, it's very large, and its potential for trade expansion with Canada is great. Canada's trade relationship with Japan is currently based on Canadian exports of resources and agricultural goods, and Japanese exports of manufactured goods, with a substantial deficit for Canada.
Some of the largest tariff reductions in the TPP are in agriculture, so TPP membership could help Canada increase exports to Japan and reduce that deficit. There may also be potential for trade expansion outside the traditional pattern of Canadian resources for Japanese industrial goods. A recent report by McKinsey highlights that Japan is an important market for Canadian aerospace and financial services. More generally, Canada, with its more open immigration policy, has a comparative advantage in terms of the stock of skilled labour, thus sourcing from Canada may benefit Japanese businesses that are struggling with a contracting labour force.
Finally, while rapidly growing countries such as Malaysia and Vietnam make up a relatively small share of current TPP area GDP, their importance will increase in the future. This is the case not only because they will grow faster than the U.S. and Japan, but also because their number is likely to increase as more countries join the TPP. For example, the leader of Indonesia, with a population of 255 million, has expressed interest in eventually joining the TPP. The point is that it would be much easier for Canada to gain access to the Indonesian market as a TPP member than by negotiating a bilateral trade agreement.
To sum up, while there are elements of the TPP that are not especially favourable to Canada, under a scenario where the U.S. ratifies it, I believe it's in Canada's economic interest to ratify the TPP.
Thank you.