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Market News

 October 06, 2015
Canada to pay out $4.3-billion to farmers in wake of TPP deal

 Canada is joining a sweeping Pacific Rim trade deal that will open vast opportunities in Asia, but also expose the economy to more foreign competition at home, particularly in the dairy and auto industries.

Negotiators for the 12 member countries of the Trans-Pacific Partnership struck a tentative deal in Atlanta early Monday morning that will eliminate or sharply reduce most tariffs in a region spanning roughly 40 per cent of the global economy. China, the world's second-largest economy, is not part of the agreement.

From the start, Canada's strategy was more about protecting what it has than conquering new markets. The outcome is a tricky balance of preserving the benefits Canada now enjoys in the U.S. and Mexican markets through the North American free-trade agreement, while exposing itself to more foreign competition.

In the end, Ottawa was forced to make key concessions in two main areas that were better protected in NAFTA -- agriculture and autos. Farmers, however, will be subsidized for any lost income, according to government officials. Ottawa is promising $4.3-billion in compensation over 15 years to keep farmers "whole" for losses from both the TPP and the earlier Canada-European Union trade agreement.

In spite of the celebratory mood around the negotiating table in Atlanta, implementing the TPP could take a while. All 12 countries must ratify a final legal text, which hasn't yet been drafted. Pushing the deal through the Republican-held U.S. Congress could prove particularly tricky, with just over a year before the next election.

Likewise, the possibility of a minority government in Canada after the Oct. 19 federal election could complicate approval of the deal in this country.

Once in place, Canada will open its tightly protected dairy, poultry and egg markets, allowing in relatively small quantities of duty-free imports, while maintaining a steep tariff wall that protects the supply management regime. In dairy, for example, Canada will open 3.25 per cent of its market to duty-free imports -- mainly from the United States, Australia and New Zealand.

But it resisted calls by the United States and New Zealand to completely dismantle the supply management system, which controls prices and production in Canada. And Ottawa vowed to clamp down on persistent efforts by importers to creatively skirt the high tariff wall by blending high-duty cheese or chicken into lower-duty processed food products.

"We have come a long way from the threat of eliminating supply management," said Wally Smith, a B.C. dairy farmer and chairman of the Dairy Farmers of Canada.

Canada is giving on autos, as well. A 6.1-per-cent import duty will be phased out over five years. The deal also lowers the domestic-content rules for vehicles and car parts, overriding rules in NAFTA that have protected Canadian auto jobs for decades. Under NAFTA, the content rule was 62.5 per cent, the threshold will now be 45 per cent for cars and certain higher-value components, allowing more foreign parts to be used by auto makers in Canada, the United States and Mexico.

Union officials have warned that these concessions could put at risk some of the 80,000 auto-parts manufacturing jobs in Canada -- a fear rejected by Trade Minister Ed Fast.

"We certainly don't anticipate that there will be job losses," Mr. Fast told reporters in Atlanta.

Prime Minister Stephen Harper highlighted the costly downside of non-membership in the TPP.

"Ten years from now, I predict with 100-per-cent certainty people are looking back, they will say if we've got in it, they'll say that was a great thing," Mr. Harper told reporters in Ottawa shortly after the agreement was announced. "And if we haven't, they'll say that was a terrible error."

Canada simply could not afford to sit on the sidelines as the United States -- the market for 80 per cent of its exports -- and Mexico did a major free-trade deal with Japan and other fast-growing Asian countries, such as Vietnam and Malaysia, said Cam Vidler, director of international policy at the Canadian Chamber of Commerce. "We can't find ourselves in a position where we are locked out of regional supply chains," he said.

Canada's primary objective was not being left out of the TPP, pointed out Len Edwards, a former top Canadian diplomat and now a fellow at the Centre for International Governance Innovation.

"Our starting point was very defensive," he said. "Measured against that, we've done well."

The benefits of TPP membership may actually be smaller than what Canada would have lost by not joining. Dan Ciuriak, a former deputy chief economist at the federal trade department, has estimated that the TPP will boost Canada's economy by 0.1 per cent, while staying out would have cost it 0.5 per cent of gross domestic product.

The terms of the actual deal announced Monday are somewhat different than his model. Even with those details, Mr. Ciuriak insisted his net-benefit estimate would be "a similar number."

Beyond the new concessions granted in autos and agriculture, TPP and NAFTA rules will generally co-exist. For example, if Mexico has a lower NAFTA than TPP tariff on an item, the lower rate would apply to imports from Canada.

The big gains for Canada are in Japan, the world's No. 3 economy, as well as in Malaysia and Vietnam. All three countries have relatively high tariffs on key Canadian exports, including beef, pork, canola oil, barley, forest products and aerospace. Tariffs on these items will be eliminated or sharply reduced -- some immediately, and the rest over 10-15 years.

Although the TPP spans 40 per cent of the global economy, Canada already has free-trade deals with roughly three quarters of that envelope -- via agreements with the U.S., Mexico, Chile and Peru.

Mr. Vidler of the Chamber of Commerce said Canada also stands to make major gains in services, including digital commerce, where new rules will make it harder for countries to restrict the movement of data across borders.