Canada and TPP: A Pyrrhic Victory?

Canada and the remaining members of the old Trans-Pacific Partnership agreed Tuesday (January 23) to a revised trade agreement.  Last fall, participants rebranded the pact as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Rebranding the treaty was perhaps in order after the ignominy of both US presidential candidates coming out against the old TPP on the campaign trail in 2016.  Notwithstanding the rebranding, the deal is still referred to by most observers as the TPP.

Supporters of the deal in Canada point out that it will open up access for Canada to Japan’s economy, the third-largest in the world. This should certainly benefit Canada’s agricultural, seafood and forestry sectors.

In addition, with respect to the automotive industry, Canadian government officials tried to strike a hopeful note, emphasizing that their companies can compete anywhere on a level playing field and access to Japanese automakers will be a great opportunity for Canadian manufacturers of auto parts.

However, Flavio Volpe of Canada’s Auto Parts Manufacturers’ Association, criticized the deal harshly.  “This could not be a dumber move at a more important time,” Volpe said in an interview.

Canada begins NAFTA negotiations with Mexico and the US this week.  Canada is facing US demands to increase the North American content of autos from the current 62.5 percent.  However, the new TPP deal is at cross-purposes to this in that it would allow the duty-free import of parts which contained a maximum of 35 percent of components from member nations.

Jerry Dias, head of private sector union Unifor, stated, “The simple reality is what happened with the TPP completely undermined what’s happening in Montreal over NAFTA. They have just cut the legs off of the entire Canadian negotiating team here on NAFTA.”

The U.S. buys three-quarters of Canada’s exports and Detroit’s location across the narrow Detroit River from Canada has resulted in the automobile industries in the two countries being joined at the hip.

Critics contend that the Canadian government was more concerned with announcing a trade deal to the world than carefully considering its terms.

Jerry Dias stated, “Canada was in such a rush to show Trump that we can trade with others that we completely undermined ourselves…. This shows that we have no strategic vision. It makes absolutely no sense.”

Flavio Volpe agreed with this assessment, “We’re trophy hunting.”

The TPP deal does give Canada trade rights with respect to the Japanese auto market.  However, many observers are skeptical about how much this will actually help Canada given that the domestic Japanese auto industry is very well established and insular.  While keiretsu are no longer legal realities in Japan, one would ignore their influence on Japanese business culture at your peril.

In any event, it would be hard to imagine Canadian auto parts makers taking the Japanese market by storm.  It is not hard at all to imagine Canadian auto parts makers struggling to match costs with Chinese manufacturers.

On the bright side, beef and salmon should be less expensive for Canadian auto executives on fruitless trips to Tokyo and exporters of wood to Asian chopstick makers should enjoy the best of all possible worlds.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

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