COVID-19 and CETA’s third birthday

COVID-19 and CETA’s third birthday

Does this anniversary bring hope for better outcomes on the other side of the current maelstrom?

Hard to believe that it has been three years since the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) came into effect. Maybe that has something to do with the political and economic climate since. And then there’s COVID-19. Large and significant trade deals almost seem like part of another era. So, does this anniversary bring hope for better outcomes on the other side of the current maelstrom?

CETA’s successes speak for themselves. An excellent report from the economists at Global Affairs Canada spells it out: after the deal came into effect, there was a massive increase in exports to the Netherlands (75%), Ireland (65%), Germany (37%), Italy (36%) and a less-dramatic but significant increase to our top EU customer, the United Kingdom. 

Tariff cuts were a big driver of this new growth. Where the deal cut tariffs between 5% and 10%, average growth in the recent two-year period was 40%. Where tariffs decreased 10% or more, the average increase was 20%. These are impressive numbers, but there’s more: goods that were tariff-free saw a 28% jump, likely a signal of the power that a free trade deal has to profile and promote Canadian exports in the European market. 

At the same time, imports from the EU to Canada also increased sharply—at virtually the same rate as exports. Key import growth was seen in autos and parts and organic chemicals (Belgium), aerospace (France) and machinery (Germany and Italy). Overall, import growth was somewhat more broadly distributed across EU members than exports.

Notably, the bilateral trade balance has deteriorated in the post-deal period. Some critics bad-mouth this as evidence against doing deals like this. Nothing could be further from the truth. As already mentioned, growth in both directions was virtually identical. The issue is that imports from the EU were greater from the get-go, and it would be virtually impossible to close the gap in three years without lopsided results. And it’s abundantly clear that lopsided results undermine trade deals. The point is that net trade is up—trade that might not have occurred without a deal. 

The outcomes argue that the deal is working well, from both the European side and ours. But is it the last of its kind? Is COVID-augmented political upheaval a death-knell for large and comprehensive trade deals? It’s really hard to say in the middle of the mayhem. Cut through the bombastic anti-trade rhetoric and it seems that the bulk of the acrimony is really aimed at levelling tilted trade tables. Let’s face it, if one side feels that the dice are loaded, the game is over—at least until trust is restored. 

Is that possible? Well, the United States and China did come to a Phase 1 Trade agreement last fall, against expectations of this being impossible. The U.K. and Continental Europe do seem to want some form of trade agreement. Other nations seem to want into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) agreement. However, for the moment, attention has been diverted to getting through the pandemic. What happens afterward remains to be seen.

At that point, there are two broad possible outcomes. The struggle to restore trust and global trade’s supporting institutions could resume, clearing a path for the resumption of some form of post-COVID-19 globalization. The alternative is to retreat into an acrimonious, regionalized and ultimately higher-cost backwater. Efficiency suggests the former will prevail, but generalized antagonism to this outcome cannot be ignored.

The bottom line?

CETA is a fine example of what a well-crafted free trade deal is designed to achieve: increased bi-directional trade, relatively even growth in both, leveraging of regional comparative advantage, and lower overall costs. There are downsides to freer trade, but the era of trade deals has given us longer growth cycles, contained inflation, some of the lowest unemployment rates that we’ve ever seen, and that across many nations. Let’s hope that in regard to global trade, a reversal doesn’t have us lamenting that we don’t know what we’ve got till it’s gone.

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