Rough trade: the Canada-Chile Free Trade Agreement
From the September 11-24, 2006 issue of Canadian Business magazine
Rough trade: the Canada-Chile Free Trade Agreement
Christina Campbell
International Trade Day came and went in early June, but Ottawa didn’t exactly celebrate. In a much-reported speech marking the event, Minister of Trade David Emerson gave Canada a failing grade in one realm. "We have not been aggressive enough and focused enough on ensuring that Canada keeps up with the rapid, almost competitive, expansion of bilateral free trade agreements," he told a gathering of business people. Much was made of the fact that Canada has not signed a single free trade agreement in the past five years, trailing behind Australia, Mexico and, most importantly, the United States. But there was no mention that our pioneering agreement with Chile has not exactly been a poster child for these kinds of pacts. The Canada-Chile Free Trade Agreement (CCFTA), signed 10 years ago, has some discouraging lessons to offer would-be bilateralists. And lesson No. 1 would be: Don’t expect such agreements to boost trade.
This is not the message that you will hear from either Foreign Affairs and International Trade Canada or the Canadian Embassy in Chile. "Our agreement has been completely successful" is how Sylvain Fabi, the Canadian Embassy’s senior trade commissioner in Santiago, describes the agreement (which stuck closely to the NAFTA model, including a chapter on investment protection and two additional agreements on environment and labour practices). The International Trade Canada website touts the agreement, which immediately eliminated 75% of tariffs when it became law in 1997, as "a success story." The site also lists reams of business agreements signed by executives who accompanied then prime minister Jean Chrétien on his 1998 Team Canada mission to Chile to inaugurate the accord.
But the numbers, whether from Statistics Canada or the Chilean foreign ministry, tell a somewhat less-encouraging story. Since the CCFTA came into effect nine years ago, Canada’s exports to Chile have barely climbed. In 1995, two years before the agreement, Canada exported just less than $388 million worth of goods to Chile. In 2005, Canadian exports had increased only to $411 million. Trade in services during those years paints an even more dismal picture, shrinking to $159 million in 2004, $13 million less than the year the CCFTA came into force. Compare these numbers to Belgium, where Canadian exports grew to more than $2 billion, from $1.5 billion between 1996 and 2005—despite the lack of a bilateral free trade agreement.
Though experts caution that trade statistics can be unreliable, a survey of many of the Canadian firms that announced business deals as part of the 1998 Team Canada mission, paints a similarly dismal picture of the impact an FTA can have on exports. Take Toronto-based Aastra Technologies Ltd., which makes telephone equipment. Eight years ago, Aastra announced a strategic alliance agreement with a Chilean company that International Trade Canada boasted would generate $1 million in sales in the first year alone. But, CFO Allan Brett says, aside from that one-off sale of introductory cord phones, "[we] didn’t get a lot of business out of Chile."
Berg Chilling Systems, also based in Toronto, tells a similar story. Though the company announced more than $500,000 worth of agreements with Chilean fish processors in 1998, Berg president Don Bergren says that today his exports to Chile "hardly register." And then there’s Newfoundland and Labrador, which signed seven agreements. But nearly a decade later, not one of those ventures turned into a business opportunity. "I don’t know the free trade agreement meant anything to us," says Rex Philpott, president of Highland Homes, whose joint venture building houses in Chile quickly stalled.
Why didn’t the FTA with Chile create more export opportunities for Canada? James Callahan, president of Scotiabank’s subsidiary in Latin America, thinks the stronger loonie may be partly responsible. The short-lived downturn of the Chilean economy, in 1999, may have played a role as well. And Fabi at the Canadian Embassy in Santiago cites the Argentine currency crisis as a factor. "It made Argentinian goods very, very cheap," he says. "We can’t deny exporting from Argentina is cheaper than exporting from Canada."
But there are others who think our dismal trade numbers with Chile are due to the nature of the relationship itself. "To argue that there is this vibrant trade relationship with the Americas, excluding the United States, just waiting to be exploited is just not true," says Bill Dymond, a former Canadian ambassador and NAFTA negotiator who now teaches at the Centre for Trade Policy and Law in Ottawa. Danielle Goldfarb, senior analyst at the C. D. Howe Institute, also suggests that as long as we choose to negotiate trade agreements with minor partners, we will not see hikes in our exports.
The CCFTA was likely also diminished when Chile went on to sign 43 more bilateral pacts (if you count each European country separately). "It’s sort of a fool’s game," says Goldfarb. "You’re signing to get preferential treatment. But if the country goes off and signs other agreements, it’s eroding the access that’s been gained."
Fabi cautions against drawing negative conclusions about the CCFTA based on Canada’s trade stats. "In all honesty, I will conclude that without an FTA our exports would have gone down further than that," he says. Goldfarb agrees. "You don’t know what would have happened in the absence of the agreement, so it’s quite difficult to assess."
The Canadian Wheat Board was the one exporter contacted that strongly sided with Fabi’s argument that the CCFTA has benefited trade. Though wheat sales to Chile have tumbled over the past decade, the board credits the agreement for Canada’s continued lock on the Chilean durham wheat market. Spokesperson Maureen Fitzhenry says that Canada need only look at countries where it doesn’t have agreements to grasp the CCFTA’s contributions. "Brazil signed a free trade agreement with the U.S. in the late 1980s, and we’re almost right out of that market right now. [Not having a FTA] can kill you," she says.
Chilean exports to Canada are also part of the equation, and a CCFTA report card has to take them into account. Our growing trade deficit with Chile—$1.2 million last year—is not necessarily a negative. As Goldfarb says, "Imports are important to [our] economy, too." They’re certainly what government officials are referring to when they praise the growing trade opportunities created by the accord. But former Canadian ambassador Dymond doesn’t buy the argument that the cornucopia of Chilean fruit that now hits Canadian grocery shelves is a reason to congratulate ourselves on the CCFTA. "Whether you have a free trade agreement with Chile or not, we’re not going to charge ourselves tariffs on peaches that Canadians want to eat in January," he says. Dymond thinks the more than $1.5 billion worth of Chilean goods that entered Canada last year would have anyway, and that the same goes for exports to Chile. Says Dymond: "If I were giving a talk on the Canada-Chile Free Trade Agreement, my opening line would be, "What does it have to do with trade between Canada and Chile?"
A survey of the many Canadian companies operating successfully in Chile seems to back up Dymond’s point that negotiating FTAs is an exercise in irrelevance. With the exception of Nortel Networks, none of the companies contacted—which range from Scotiabank and Vancouver-based methanol producer Methanex Corp. to March Networks and the BC Bearing Group—credit the CCFTA for their success. "For us, the free trade agreement has very little in the way of direct consequences," says Bruce Aitken, president of Methanex. He says the large pools of natural gas in the south of Chile drew Methanex to the country 15 years ago. Bill Dix, a vice-president at BC Bearing, says his company was just following its mining customers. And Louis Jajam, Latin America sales director for Winnipeg-based Duha Group, says the CCFTA only helped exports of paint colour displays to Chilean factories "a little bit," adding that "without the FTA, we would have sold US$450,000 instead of US$500,000."
If there are voices in favour of the CCFTA, they speak toward the guarantees the accord provides to Canada’s investments in Chile, particularly in the mining sector. "It eliminates a lot of the uncertainty that would otherwise be there," says Scotiabank’s James Callahan, who also heads the Chile-Canada Chamber of Commerce. The turbulence of Chilean politics—starting with the leftist Allende regime of the early 1970s that nationalized many foreign companies, followed by the unsavoury Pinochet military dictatorship—left lasting uncertainties about the country’s dependability. Dymond says concerns about Canadian mining investments ($6 billion at last count) were the real motivation behind the CCFTA. "It’s not really a trade agreement at all," he says. "It’s an investment agreement."
"The success story of FTA is in investment," says Sylvain Fabi. According to him, Canadian investments in Chile have nearly doubled since the CCFTA was introduced. Fabi still holds out hope for Canadian exports. "We believe the agreement is still underused," he says. "We still have work to do in conveying to Canadian business the opportunities in Chile." To help foster this trade, embellishments to the agreement are still taking place. A chapter on government procurement is waiting to be ratified and discussions have started on a financial services agreement.
The agreement is also being used as a model for all the other negotiations that Canada is currently pursuing. But Dymond is not so sure that Canada is on the right track. "It’s nutty," he says. "The point is, trade is private sector-driven....Businesses don’t change their behaviour because the government has a policy objective in mind."
