The Power of Canada’s Free Trade Agreements

Most Canadian business executives are aware of the USMCA, the successor to NAFTA, which opened the American and Mexican markets in 1989 and 1994, respectively. However, fewer are aware that Canada entered into similar free trade agreements with the European Union in 2017 and ten countries around the Pacific Rim in 2018. These three agreements together give Canada more international trading power than almost any country on earth, and far more than the United States.

The essence of a free trade agreement is that it removes tariffs on substantially all goods traded between the participating countries, and makes it easier for companies in one country to provide services in another. However, obtaining duty free access for goods that would otherwise be subject to tariffs requires time and effort, especially for the producer in the exporting country. The producer is usually the person who must ensure that the goods satisfy the Rules of Origin, which are often complex, and maintain documentary evidence to support its conclusions.

The European Union (EU) is a customs union of 27 countries, including Germany, France, Italy, Spain, Sweden, the Netherlands, Austria, Belgium and Ireland. All share the same tariff schedule. Once a good has been imported into one country, it may be moved freely into the other 26. On implementation in 2017 98% of the tariff lines became duty free for goods that satisfy the agreement’s Rules of Origin. A further 1% become duty free in stages ending in 2024, and 1% will remain dutiable. Canada entered into a separate continuing free trade agreement with the United Kingdom when that country withdrew from the EU at the beginning of 2021.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came into force in 2018 between Canada, Australia, New Zealand, Mexico, Japan and Singapore. Vietnam joined in 2019. Chile, Peru, Malaysia and Brunei have not yet ratified. Approximately 86% of the tariff lines for all countries collectively become duty free on entry into force. A further 13% of tariff lines become duty free on various schedules ending at various times over the succeeding 15 years. Tariffs will remain for approximately 1% of tariff lines. Each country has its own tariff reduction schedule.

Canada also has separate individual free trade agreements with Chile, Colombia, Costa Rica, Honduras, Israel, Jordan, South Korea, Panama, Peru and Ukraine.

The CPTPP is a successor agreement to the Trans-Pacific Partnership (TPP) signed in 2016 by the countries mentioned above plus the United States. However, in January 2017, shortly after taking office, President Trump signed an order declaring that the United States would not ratify the TPP. The remaining 11 countries renegotiated the Agreement, rebranding it as the CPTPP. Around the same time, the Trump administration suspended ongoing negotiations for a free trade agreement with the European Union. Trade does not appear to be a major policy initiative of the Biden administration.

In addition to the USMCA, the United States has free trade agreements with Australia, Bahrain, Chile, Colombia, Israel, Jordan, South Korea, Morocco, Oman, Panama, Peru, Singapore, Costa Rica, the Dominican Republic, El Salvador, Nicaragua, Honduras and Guatemala. The United States and Japan recently entered into a limited trade agreement regarding market access for certain agricultural and industrial goods.

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