Political Science 3170 The Politics of Canadian Trade Policy September 9, 2010 Introduction, Context for Canadian Trade Policies

Poli 3170 The Politics of Canadian Trade Policy Welcome back! Welcome back! Geoffrey Hale Geoffrey Hale Office – A-516  E-518 (sometime this month) – (easiest contact) Office Hours – 11:00 – noon or 3-4 (Tu / Th)

Introductory Class 1) Why trade policy matters? * economic* historical * contemporary 2) Context * a dynamic global economy * Canada’s integration within North America 3) Trade policy as “multi-level game” 4) Course outline / objectives

Why Trade Policy Matters I Canada is small, open economy Canada is small, open economy Trade, investment vital to econ. well-being Trade, investment vital to econ. well-being Exports – 35.3% of GDP (2008) (1 st or 2 nd among major industrial economies in most years since 1990) Exports – 35.3% of GDP (2008) (1 st or 2 nd among major industrial economies in most years since 1990) Two-way trade - 69% of GDP (2008) Two-way trade - 69% of GDP (2008) Most provinces export more to other countries than to other provinces Most provinces export more to other countries than to other provinces Not clear whether major drop in 2009 recession reflects mainly cyclical or structural factors. Not clear whether major drop in 2009 recession reflects mainly cyclical or structural factors.

Why Trade Policy Matters II Comparative Advantage Comparative Advantage Canadian market too small to support full range of internationally competitive industries Canadian market too small to support full range of internationally competitive industries Specialization (between AND within industries) contributes to greater efficiency, higher living standards Specialization (between AND within industries) contributes to greater efficiency, higher living standards Secure access to large markets facilitates economies of scale, efficiency, competitiveness. Secure access to large markets facilitates economies of scale, efficiency, competitiveness. Growing trend towards internationalization of production, distribution through continental, global “supply chains”, “value chains” Growing trend towards internationalization of production, distribution through continental, global “supply chains”, “value chains”

Why Trade Policy Matters III Legal factors shape trade and investment flows Legal factors shape trade and investment flows Politics of trade generally requires “reciprocity” to manage trade-offs between export expansion, greater import competition for domestic producers Politics of trade generally requires “reciprocity” to manage trade-offs between export expansion, greater import competition for domestic producers Rules-based trading system (regional or global) safer for small, trade-dependent countries than one based on power politics Rules-based trading system (regional or global) safer for small, trade-dependent countries than one based on power politics Large countries (U.S., EU, Japan, China, Russia) have greater freedom to engage in power politics at expense of neighbours unless constrained by int’l rules to which they have consented. Large countries (U.S., EU, Japan, China, Russia) have greater freedom to engage in power politics at expense of neighbours unless constrained by int’l rules to which they have consented. Technical details of rules heavily influenced by interest group politics, trade-offs (Colgin – “managed trade”) Technical details of rules heavily influenced by interest group politics, trade-offs (Colgin – “managed trade”)

Why Trade Policy Matters IV Long-term trend towards integration of trade, investment processes, capital markets with those of major trading partners, esp. U.S. Long-term trend towards integration of trade, investment processes, capital markets with those of major trading partners, esp. U.S. Growth of economic interdependence Growth of economic interdependence Trade and investment policies increasingly reinforce one another Trade and investment policies increasingly reinforce one another Canadian direct investment abroad (CDIA) greater than foreign direct investment (FDI) in Canada since Canadian direct investment abroad (CDIA) greater than foreign direct investment (FDI) in Canada since Canadian firms have major stake in openness, stability of international trade system. Canadian firms have major stake in openness, stability of international trade system. Healthy employment, social service, retirement income systems depend on profitability, growth of private sector Healthy employment, social service, retirement income systems depend on profitability, growth of private sector

Why trade matters - Historical Canadian economy historically dependent on foreign capital to finance economic development (net capital exporter since 1997) Canadian economy historically dependent on foreign capital to finance economic development (net capital exporter since 1997) Historic dependence on commodity exports to finance costs of foreign capital makes Canada “price taker” in global markets Historic dependence on commodity exports to finance costs of foreign capital makes Canada “price taker” in global markets Major domestic debates (regional, ideological) over competing strategies to enhance economic well-being, domestic political discretion / choices Major domestic debates (regional, ideological) over competing strategies to enhance economic well-being, domestic political discretion / choices

Why trade matters (21th c.) Canada increasingly integrated into dynamic int’l market networks for goods, services, capital, and technology – BUT Canada increasingly integrated into dynamic int’l market networks for goods, services, capital, and technology – BUT Canada not “unitary actor” in trade policy  competing regional, sectoral interests -- “fragmegration” (Rosenau) Canada not “unitary actor” in trade policy  competing regional, sectoral interests -- “fragmegration” (Rosenau) Challenges of economic adjustment Challenges of economic adjustment -- “creative destruction” of capitalism (Schumpeter) -- shifting dynamics of international markets Isolation not an option! Isolation not an option!

Economic Dynamics and Trade Shifts in macro-economic environment Shifts in macro-economic environment Major fluctuations in global commodity prices creates major uncertainties in global markets Major fluctuations in global commodity prices creates major uncertainties in global markets Major factor in economies, domestic political environments of Western provinces Major factor in economies, domestic political environments of Western provinces Exchange rate shifts affect “terms of trade” (prices of goods, services net of exch. rates) Exchange rate shifts affect “terms of trade” (prices of goods, services net of exch. rates) Affects competitiveness of many industries, distribution of economic activity, power within Canada Affects competitiveness of many industries, distribution of economic activity, power within Canada Impact on investment, corporate takeovers Impact on investment, corporate takeovers

Economic Dynamics and Trade II Canada, the United States and Mexico Canada, the United States and Mexico Asymmetrical trade relations / economic dependence Asymmetrical trade relations / economic dependence Extensive integration BUT Cdn. vulnerability to unilateral trade actions as by-product of US domestic politics Extensive integration BUT Cdn. vulnerability to unilateral trade actions as by-product of US domestic politics Dual bilateralism Dual bilateralism Limited Canada-Mexico relationship; U.S. relations with Canada, Mexico subject to different historical, contemporary trends, pressures. Limited Canada-Mexico relationship; U.S. relations with Canada, Mexico subject to different historical, contemporary trends, pressures.

Economic dynamics and trade III Rise of China and India Rise of China and India “outsourcing” “outsourcing” investment access investment access human rights & trade human rights & trade access to, price & supply of major commodities, especially energy access to, price & supply of major commodities, especially energy state trading companies / sovereign wealth funds / national security state trading companies / sovereign wealth funds / national security

North American Integration I Globalization || North American Integration CanadaU.S. Exports : GDP35.3% 12.6% (2008)(2008) Exports to US/Can77.6%20.5% (Goods & Services)

N.A. Integration: Dual Bilateralism Limited Canada-Mexico relationship Limited Canada-Mexico relationship U.S. relations with Canada, Mexico subject to different historical, contemporary trends, pressures. U.S. relations with Canada, Mexico subject to different historical, contemporary trends, pressures. % of Canadian, % of U.S Mexican Exports2008Exports US-Canada Trade78%20% US-Mexico Trade81%12%

Economic Dynamics and Trade III U.S. focus on expanding market access in global, regional markets, dealing with strategic economic threats (structural trade deficits, China, energy) U.S. focus on expanding market access in global, regional markets, dealing with strategic economic threats (structural trade deficits, China, energy) Result – North American trade, other cross- border issues often dealt with as subsets of U.S. domestic politics, increasing complications for Canadian governments, economic interests Result – North American trade, other cross- border issues often dealt with as subsets of U.S. domestic politics, increasing complications for Canadian governments, economic interests

Implications for Trade Policies Trade policies segmented Trade policies segmented Foreign and domestic Foreign and domestic Sectoral and/or regional (in Canada) Sectoral and/or regional (in Canada) Contributes to two-level game of policy development Contributes to two-level game of policy development Need to build complementary coalitions of domestic, international interests to legitimate trade policies, secure against external challenges. Need to build complementary coalitions of domestic, international interests to legitimate trade policies, secure against external challenges.

Implications for Trade Policies II Multi-level governance Multi-level governance growing feature of international economic relations growing feature of international economic relations the distribution of responsibility for policy development and implementation across more than one level of government, and often across national borders the distribution of responsibility for policy development and implementation across more than one level of government, and often across national borders often includes private sector and/or non- governmental actors often includes private sector and/or non- governmental actors Includes elements of “hard” and “soft” law Includes elements of “hard” and “soft” law

Framing the Course I i)Foundations for Canadian trade policies  economic / historical / political / international ii)Contemporary int’l / regional environment for Cdn. trade policies (WTO, NAFTA etc.) iii)Evolving structures, processes of NAFTA, WTO iv) Major sectoral issues (investment, procurement, climate change, intellectual property, agriculture)

Framing the Course: Assignments Five “mini-assignments” (30%) Five “mini-assignments” (30%) Weekly topics available from class website Weekly topics available from class website Research paper (30%) Research paper (30%) Suggestions on topics encouraged Suggestions on topics encouraged English requirement  English requirement  Due Dec. 7/10 Due Dec. 7/10 Take-home final (25%) Take-home final (25%)

Expectations Be here! (Participation – 15%) Be here! (Participation – 15%) Engage! Engage! Readings done before class will enhance learning experience Readings done before class will enhance learning experience

Getting to Know You 1) Name / Program / Year 2) Where are you from? 3) Why are you taking this course? 4) What would you like to get from this course?

Framing the Course - SHIFT DomesticInternational PoliticalDomestic politicalInt’l cooperation / competitioncompetition (bilateral, (national, regional)multilateral) SectoralDomesticMarket access, competitiveness int’l competitiveness -- overlap with other sectors -- sector-based case study analyses MicroFirm-specific;Intra-firm trade; Consumer impact dispute management.