LATIN AMERICA SPECIAL — Open trade policy a necessity

The North American Free Trade Agreement (NAFTA) is a step toward outlining a free trading area that might ultimately stretch from Alaska to the tip of South America, says the president of the Business Council on National Issues.

In a recent speech, Thomas D’Aquino said Canada cannot afford to be left out of this market. But he added that Canada should also pursue other possibilities, including trade agreements with Pacific Rim countries and the European Community, as well as global trade liberalization through GATT: For Canada, the principal advantage of NAFTA is the opening of the Mexican market to Canadian goods, services and investments on an equal basis with the United States. With a population approaching 90 million and an economy poised to grow two-to-three times faster than either Canada or the U.S., Mexico represents a significant market opportunity for Canadian business, particularly over the longer term. Under NAFTA, Mexico’s tariffs will be eliminated, other restrictions will be reduced, and many of its regulations will be liberalized over an extended period.

In addition, Canadian trade negotiators succeeded in essentially preserving within NAFTA the gains made under the Canada-U.S. Free Trade Agreement (FTA). Indeed, FTA has been improved in a few areas through the resolution of a number of problems that arose from the operation of that agreement . . . NAFTA also puts Canada and the U.S. in the position of having free and equal access to Mexico’s market. This will help Canada position itself as an attractive location for investors wishing to service the North American market.

Participation in NAFTA also paves the way for Canadian involvement in any broader trade liberalization over the balance of the 1990s.

We believe that the impact of NAFTA will be small in relation to the overall size of the Canadian economy and of our existing trade. Two-way Canada-Mexico trade, which is about $3 billion a year, represents less than 2% of total Canadian trade. Were Canada-Mexico trade to triple, the impact on the Canadian economy would still be modest. In fact, a quadrupling of Canada’s annual exports to Mexico would amount to about two week’s worth of our current exports to the U.S.

This is not to minimize the importance of trade with Mexico, but simply to stress the need for a balanced perspective in assessing the implications for Canada of having Mexico join the existing Canada-U.S. free trade area. Several Canadian industries and sectors stand to benefit from the expanded trade and investment opportunities created by NAFTA.

These include the telecommunications, aerospace, agri-food, financial services, energy, information technologies, urban transport and rail equipment, mining technology services, industrial machinery equipment and the professional services sectors.

Perhaps the biggest challenge to Canadian business stems not from the provisions of the agreement itself but from the increased competitiveness of Mexican-produced goods in the U.S. market. Mexico’s strengthened competitive position will increase the pressure on the number of Canadian manufacturing industries that sell heavily in the U.S. But it is important to recognize that Canadian manufacturers and exporters will face greater competition with or without NAFTA.

The Business Council is confident that Canadian exporters and manufacturers will rise to meet the challenge. Canada’s strong export performance in the early 1990s, despite adverse world macro-economic conditions, especially in Canada and the U.S., suggests that Canadian business is well positioned to take advantage of more open North American markets.

Free trade with the U.S. has been a positive step for many Canadian companies and industries, even though in some sectors it has accelerated the often painful but necessary process of industrial restructuring and adjustment. Overall, our merchandise trade surplus with the U.S. has grown since the late 1980s . . .

Canada’s position in terms of foreign direct investment flows has shifted from one of steady net outflows in the years prior to 1989 to three consecutive years of net inflows. Foreign investors have gained confidence in Canada, in part because of our favorable access to the American market, accelerated by the Free Trade Agreement. We believe that NAFTA should improve Canada’s investment attractiveness because we will have access to Mexico and the U.S. on the same basis as our two North American trading partners . . . Much of the increase in outbound Canadian investment is likely to occur, in our view, not in traditional manufacturing industries, most of which are not strong in Canada, but in resources, especially mining, financial services and in other service sectors.

Regarding Mexican labor standards, many critics have concluded that NAFTA will exploit Mexican workers. However, included in the agreement is a commitment that no NAFTA country should lower health and safety standards to attract investment. NAFTA should

encourage Mexico gradually to raise its standards.

Ultimately, in our view, the best way to upgrade Mexico’s labor standards is to work toward a global and North American economic environment that allows it to create better jobs, better-paying jobs, and prosperity through freer trade and a more open market . . .

Evidence suggests that NAFTA represents a significant advance in the fusion of trade and environmental policy. Included in the agreement is a recognition of each country’s exclusive right to set strong environmental standards. Also included is a commitment that no NAFTA country should lower environmental standards to attract investment.

While NAFTA as it stands should be positive for the environment, it is difficult to address environmental matters within the constraints of a trade agreement. Thus, it may be desirable to negotiate one or more parallel trilateral agreements to strengthen environmental standards and to ensure proper enforcement . . .

Looking to the future, we remain convinced that Canada should continue to press vigorously within the framework of NAFTA for the development of new trading rules in the critical areas of dumping, subsidies, countervail and safeguards.

The failure to agree to a substitute set of trade remedy laws was a disappointment at the time of the FTA, and we said so. It remains a source of disappointment to Canadian business as we evaluate the results of NAFTA negotiations. In particular, much of the Canadian business community would be supportive of replacing existing national anti-dumping laws by a common set of competition anti-trust standards that would apply to trade within North America . . .

Through the agreement’s accession clause, it is virtually certain that several other countries in the hemisphere will become signatories before the end of the decade. At the same time, NAFTA’s rules and institutional mechanisms could very well be changed or elaborated in the future, based on evolving goals and priorities. The fall of communism, in concert with the emergence of a more integrated and globalized marketplace, has encouraged many countries to pursue new and to deepen existing regional economic and trade arrangements.

The choice for Canada is clear. Either we adopt an open trade policy toward our own hemisphere or we will be left outside of a future trade arrangement that may eventually stretch from Alaska to the southern tip of South America . . .

The best strategy for Canada is to continue its multifaceted approach to trade liberalization and to aggressively pursue markets and strategic linkages outside of North America as well as within it. This includes not only seeking a wider trading relationship with other Latin American countries by building on NAFTA, but also by searching for ways to forge stronger and more formal trading relationships with other regions and countries as well.