Is negotiating a Free Trade Agreement with Canada a priority at this time?
Norman Girvan is Professor at the Institute of International Relations of the University of the West Indies. He is a former Secretary General of the Association of Caribbean States.
Norman Girvan
Caricom negotiations with Canada on a Free Trade Agreement (FTA) have been proceeding since 2007. At their summit in Belize on March 12-13, Caricom Heads approved a ‘Negotiating Brief’ with the proviso that it may need to be re-examined in the context of the global economic situation. It sounds like they wish to keep their options open.
This would be a welcome development. There are several reasons not to rush into negotiating an FTA with Canada.
Canada wants an FTA to replace the present CARIBCAN arrangement when the latter expires in 2011. Canada’s policy is that bilateral FTAs will not only provide for reciprocal free trade in goods but will also cover ‘customs procedures, trade facilitation, non-tariff barriers, cross-border trade in services, temporary entry, investment, government procurement, dispute settlement and institutional provisions’ (Government of Canada, Canada-CARICOM Free Trade Agreement, http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/caricom.aspx ). These will constitute another layer of legally binding commitments on national and regional policies, on top of what has been agreed in the EPA with the EU.
However, less than 12 percent of Canadian imports from the English-speaking Caribbean enter Canada under CARIBCAN; and this is less than 1 percent of Caricom’s merchandise exports. Most of Caricom’s exports to Canada already enter duty-free under Canadian Most Favoured Nation (MFN) treatment, which is available without CARIBCAN (See data in a paper commissioned by the CPDC from Mr. Carlos Wharton, Trade Policy Specialist at the Caribbean Export Development Agency; available on-line at http://www.normangirvan.info/wp-content/uploads/2009/01/ carlos-wharton-canada-fta.pdf).
Furthermore, of the total C$115 million imports from the region benefitting from CARIBCAN treatment, 79 percent comes from Trinidad and Tobago and 65 percent consists of shipments of methanol from a Canadian owned firm in Trinidad. The preservation of market access for a single Canadian owned firm in one member would hardly be a compelling reason for all 14 Caricom member states to open their markets to Canadian imports. The Canadian MFN tariff on methanol is a modest 5.5%, and the General Preferential Tariff (GPT), available to developing countries, is 3%. It is not clear that such tariffs would be prohibitive.
After methanol, the main products entering the Canadian market under CARIBCAN treatment include ferrous products obtained by direct reduction of iron ore, rum, lobster and crawfish, fruit, condiments and seasonings, sauces and preparations, vegetables and biscuits. The MFN and GPT tariff rates are zero for ferrous products and canned ackees. On steel articles, the rates are 6.5% and 3% respectively. On condiments they are 11% and 5%, and on water 11% and 5%. On rum, the MFN rate is a punitive $24.56 a litre but the GPT rate is zero.
Jamaica is the second regional exporter to Canada under CARIBCAN— C$15 million in 2006—a paltry 0.6 percent of Jamaica’s merchandise exports, which excludes earnings from tourism and remittances. CARIBCAN imports from other Caricom countries were small: from Guyana, C$363,000 in 2006.
Thus, only a small proportion of Caricom exports would be affected by the nonavailabilty of CARIBCAN. As Mr Wharton’s paper point out; ‘… CARIBCAN beneficiaries are also increasingly trading under MFN duty free conditions than under the preferential regime offered by CARIBCAN. This means that an increasingly higher number of CARICOM firms are already exporting to that market and are competing with other firms from third countries.’ (p.11).
In addition
Enhanced opportunities for the export of services to Canada is held to be one of the additional benefits that Caricom might derive from an FTA covering services. This does not apply to tourism, which does not need an FTA; and Canada already has ‘temporary entry’ programmes in place in agriculture and the hospitality sector for several Caricom countries. In other sectors in which Caricom countries have a supply capability, migration from the region is already high and is facilitated by Canadian immigration laws. Export of business services is often hindered by regulatory barriers such as qualification and certification requirements.
The Wharton paper concluded that a Canadian FTA is likely to involve a shorter phasing of import liberalization (10-15 years), wider coverage and less flexibilities than those available in the EPA with Europe. This is based on the terms of Canadian FTAs negotiated with Peru and Costa Rica.
If Caricom agrees to such terms, the EU would be entitled to invoke the EPA’s ‘Most Favoured Nation Clause’ to demand similar treatment. Thus, the EPA 25-year liberalisation schedule and 13 percent ‘Exclusion List’, and other aspects of the Agreement, could be amended unfavourably to Caricom.
The U.S. would also be entitled to terminate the non-reciprocal duty-free treatment granted Caricom under the Caribbean Basin Initiative (CBI) and enhanced CBI arrangements and to demand an FTA. In fact the U.S. is already entitled to do this because of the EPA. A Canadian FTA would greatly increase the likelihood of this happening.
Thus, we could end up with the vast majority of Caricom imports becoming duty-free in 10-15 years. This would have major revenue implications for several Caricom countries, for the Caricom Single Market and Economy (CSME), and for the ability to foster local and regional agricultural and industrial development through tariff protection.
Canada expects substantial liberalisation of investment and service sectors as part of an FTA package. Critics point out that these provisions have deprived many developing countries of the policy tools needed to manage the effects of the global financial crisis on their economies; for example by means of controls on current and capital account movements, and preventing inflows of speculative investments. The Cariforum EPA is being used an example of these dangers. (See http://www.normangirvan.info/how-ftasbitswto-can-hamper-recovery-from-the-global-financial-crisis/)
It might be better to seek a review of these problematic provisions in the EPA; than to extend them to another developed country; which would further compromise Caricom’s negotiating position in bilateral agreements and the World Trade Organisation. Caricom could point to the massive state interventions in the banking and financial sectors in the EU and the US; and the resulting degree of ‘financial protectionism’, public ownership and tighter regulation in the developed countries. It could make use of the Mandatory Review clause in the Joint Declaration inserted into the EPA at the time of signing (at Guyana’s insistence).
The idea that a Caricom-Canada FTA will contain a substantial or meaningful ‘development dimension’ may just be pie in the sky. The Canadians are approaching these negotiations as a ‘Free Trade plus new Issues’ agreement. Canadian statements indicate that the existing Canadian aid programme for the region will be the source for any FTA-related development assistance. The recently announced aid program of C$600 million for 15 regional countries over 10 years, averages C$4 million per country per year.
Negotiations will require human resources, expertise and money; and could be prolonged. The opportunity costs vs. the likely benefits need to be carefully weighed.
Finally, as the Caricom Communiqué hints, the global financial and economic crisis has changed overnight most of the contextual assumptions on which policies in trade, finance and development policies have been conducted.