11 July 2003

Customs union the next hot button

The following article is excerpted from the “globeandmail.com” edition of 10 July 2003.

… A customs union, it will emerge in the months ahead, is the locus of the most contentious debate now emerging in Ottawa. Everyone is thinking about it. Virtually no one, at least in the Liberal Party, is talking about it publicly. The reason is that the debate encapsulates, in one neat package, all the risks, opportunities and contradictions of the emerging North American economic space. As such, any discussion of it is guaranteed to inflame Canadians' passions like nothing else since the war in Iraq, or the free-trade debate of 1988.

From an economic point of view, a customs union is almost a no-brainer. Harmonize external tariffs, thus creating a common Canada-U.S. foreign trade stand. Reduce friction at the border. Eliminate trade remedy penalties. Most important, abolish costly and devilishly arcane rules of origin, by which it is determined which trade goods qualify for NAFTA tariff exemptions and which don't. Did your computer originate in North America? Only if the motherboard did. Monitors and TVs? Sure, as long as the picture tube was made on this continent. Clothing and textiles? Only if they contain North American yarn.

On go the rules, for 200 pages in the North American free-trade agreement book. The cost of maintaining them has been estimated at between 2 and 3 per cent of NAFTA gross domestic product. And because the levels of Canadian and U.S. external tariffs are already very close in many sectors -- agriculture being the biggest exception -- deleting them makes some sense. The administrative savings for Canadian exporters alone, according to estimates from C.D. Howe policy analyst Danielle Goldfarb, could be as much as $18-billion a year.

But then, there's politics. As recently as two years ago, a majority of Canadians might have been happy to yield some sovereignty over external trade to a joint Canada-U.S. customs union committee. But that's only because most Canadians are, in U.S. terms, Clintonian Democrats -- fiscally conservative free traders, but liberal in many other respects. Post Sept. 11, 2001, the U.S. government has become markedly more protectionist than it was under Mr. Clinton. It has imposed tariffs on Canadian lumber and wheat and European steel. It has closed its border to Canadian beef, long after it was obvious that the mad-cow "outbreak" in Alberta was an isolated event. And it has moved dramatically to the right in foreign policy.

At the same time, the White House has explicitly linked trade liberalization with its foreign policy goals. In May, Robert Zoellick, the U.S. Trade Representative, said that any country seeking a U.S. free-trade deal must promise "co-operation or better" on foreign policy and security.

Given this stand, and the ascendant America-first movement in the U.S. Congress, it's utterly unrealistic to expect the United States will cede any sovereignty whatsoever over external trade, to Canada or anyone else. And that means Ottawa can't hope to enter into a full North American customs union without effectively yielding all power over external trade, and some degree of foreign policy, to Washington. That's a hot button few in Ottawa, let alone the Liberal leadership hopefuls, are prepared to push. And yet, the issue won't go away: The country's economic future depends on some degree of North American integration.

The upshot is that we'll hear more about a customs union in the months ahead, but in tiny increments, and without identifying it as such. And the focus will be on practical measures -- such as eliminating rules of origin piecemeal in areas were external tariffs are virtually identical -- that yield some of a customs union's benefits, with none of its pitfalls.