GRAIN-TRADE TRIUMPH
CANADIAN AGRICULTURAL PRODUCERS POISED TO REAP BENEFITS OF TPP DEAL
BY TYLER DIFLEY
After years of sometimes-tense negotiations, a tentative Trans-Pacific Partnership (TPP) agreement was struck in October, with Canada as a founding member of the historic trade pact.
The agreement encompasses a wide range of international policies, including everything from pharmaceutical patents to intellectual property law. Although the provisions in some of these areas are controversial, many farmers, especially in Western Canada, are welcoming the deal with open arms.
“The way I see it, we export more than 80 per cent of grains and 90 per cent of canola products offshore, so any deal anywhere in the world will only be of benefit to us because we rely so heavily on exports,” said Greg Porozni, chair of Cereals Canada and a farmer near Mundare, AB. “We are now back on the same level playing field with our main competitors, Australia and the United States, especially in Asia. That’s a growth market.”
One major advantage of the TPP agreement is its scale. Canada formally joined the TPP negotiations in 2012, but the partnership began when New Zealand, Chile, Singapore and Brunei signed its precursor, the Trans-Pacific Strategic Economic Partnership Agreement, in 2005. Since then, the number of TPP countries has grown to 12, including Canada, Australia, the United States, Japan, Mexico, Vietnam, Malaysia and Peru. Together, the 12 TPP countries have a combined GDP of $28.5 trillion—nearly 40 per cent of the world economy—and encompass almost 800 million people.
“Ninety per cent of farmers across Canada depend on trade, and having access to the TPP region is very critical,” said Claire Citeau, executive director of the Canadian Agri-Food Trade Alliance. “With the TPP, not only do we have access to Japan and other key, fast-growing Asian markets, such as Vietnam and Malaysia, but we’re able to maintain the North American platform as well.”
One of the major sticking points that had long prevented a deal from getting signed was Canada’s defence of its supply-managed dairy, poultry and egg industries. Several TPP members, including Australia, New Zealand and the U.S., criticized Canada’s supply-management regime throughout negotiations. In the end, the system was preserved, but some market access was conceded to foreign competition.
Dairy imports equivalent to about 3.25 per cent of Canada’s current annual dairy production will be permitted under the deal, while the numbers for eggs and chickens are 2.3 per cent and 2.1 per cent, respectively. Then-prime minister Stephen Harper pledged $4.3 billion in compensation for supply-managed farmers to offset lost income, to be paid out over the 15 years after the deal comes into force. Additionally, $450 million would be set aside for improvements to dairy, poultry and egg processing facilities and a $15-million market development fund would be set up to promote supply-managed agricultural products.
GRAIN GAINS
For Canada’s trade-dependent agricultural sector, the significance of the agreement cannot be overstated. The Canadian grain, oilseed and red meat industries all stand to see significant benefits from tariff reductions and less restrictive import quotas.
Canadian wheat and barley—which accounted for $2.8 billion per year on average in exports to TPP countries from 2012 to 2014—will both receive increased market access in the Asia Pacific region as a result of the TPP. Feed wheat and feed barley will both enter Japan duty- and quota-free once the deal is fully implemented. Japan currently has quotas for food wheat and food barley, but the Canada-specific quota for food wheat will rise from 40,000 to 53,000 tonnes over six years, while a new TPP-wide quota for food barley will start at 25,000 tonnes and increase to 65,000 tonnes within eight years. Japan’s tariffs applied to Canadian food barley and food wheat will also be reduced by 45 per cent for barley and 45 to 50 per cent for wheat within the same time frame. Finally, tariffs of up to five per cent on all wheat exported to Vietnam will be eliminated when the TPP comes into force.
Like wheat and barley, Canadian beef and pork—which accounted for more than $3.9 billion per year on average in exports to TPP countries from 2012 to 2014—will have improved access to TPP markets in Asia, and the benefits of such a development could also filter down to the grain industry.
“The tariffs are being dropped on the meat industry, which makes Canadian meat—hogs and beef—much more competitive to trade into those markets in Southeast Asia,” said Brian Otto, chair of the Barley Council of Canada and a farmer east of Warner, AB. “As they increase their market share in that trading area, it creates more demand for our barley here at home, because we all know that barley is a major food source for the feeding industry in Western Canada.”
The Canadian canola industry could also receive a boost as a result of the TPP due to reduced canola oil tariffs. Canola oil tariffs of up to 13.20 yen (C$0.14)/kilogram in Japan and Vietnam’s five per cent tariff will be phased out within five years. Currently, Japan is a key market for Canadian canola oil exports.
Across most Canadian agricultural sectors, access to the Japanese market is the big prize in the TPP. Previously, Canada did not have a bilateral trade agreement with Japan, while competitor Australia did.
“Japan is the most important country currently in the TPP because we export so much to them,” Porozni said. “They pay premium dollar for premium quality.”
DISASTER AVERTED
In the eyes of many in the industry, Canada’s involvement in the TPP is significant not only because of the benefits it could provide for agricultural exports, but due to the consequences that could have befallen the country if Canada was left on the outside looking in.
“Our major customers are in the TPP, but some of our major competitors are as well,” Citeau said. “So if we had not been in the TPP we would have fallen behind and that would have had devastating effects across the whole agriculture sector.”
According to Al Mussell, research lead for Agri-Food Economic Systems, Canada needed to be a member of the TPP to consolidate its existing access in TPP markets, while creating an even playing field between Canada and its trade rivals in the region. “The fear, of course, was that, as other countries negotiate bilateral-type trade agreements, they would get better access than we do, and that could really harm effective penetration into those markets,” Mussell said. “So some people would say it’s a bit of a defensive interest to be part of the TPP, and that’s true.”
Canada had already seen that fear become a reality when the Japan-Australia Economic Partnership Agreement came into force on Jan. 15, 2015, giving Australia a leg up in the lucrative Japanese market.
“In many ways, Australia looks a lot like Canada—grain-exporting country, red-meat-exporting country, and they are absolutely dependent on trade as well,” Mussell said. “If we hadn’t been part of the TPP, we would simply not have as good access to the Japanese market as Australia.”
In South Korea, a competitor once again beat out Canada for market access when the U.S.-Korea Free Trade Agreement came into force in March 2012. A Canada-Korea Free Trade Agreement followed three years later, but the damage was already done.
“In the case of Korea, the U.S. got in before us and that created disadvantages,” Citeau said. “Basically, we cannot see that repeated.”
A TALE OF TWO TRADE DEALS
The TPP agreement comes on the heels of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), a deal that faced similar challenges in its formative stages. Both the TPP and the CETA are undoubtedly significant for Canadian agriculture, but according to Mussell, the TPP will likely provide more value going forward for the industry.
“I don’t think we have the same trade relationships in the EU, broadly speaking here, than we do with countries in the TPP,” he said. “We just haven’t had massive trade with the EU, and also, of course, they’re pretty significant producers themselves. You look at some of the TPP countries and I think we’ve had longer relationships, larger trade volumes and we’re frankly counted on as a core supplier to some of those markets.”
The TPP and the CETA will also benefit Canadian agriculture disproportionately along regional lines, Otto said. “Transportation will always dictate where the benefit comes, because for Canada, that’s the one disadvantage we have when we’re trading: our cost of transportation,” he said. “The European free-trade agreement obviously benefits people all across Canada, but for those that are closer to that market, I see huge benefits for them. Whereas when you look at the TPP agreement, especially for agriculture in Western Canada, it’s definitely a benefit for us, because that’s our closest market when it comes to export trade.”
INVESTING IN INFRASTRUCTURE
According to Porozni, the TPP highlights the importance of continued investment in infrastructure for trade, especially when demand for Canadian exports is expected to rise when the TPP agreement comes into force. Canadian agricultural products need to be shipped across tremendous stretches of land and water to reach their final destinations. This process is only sustainable if there is enough shipping capacity to ensure exports reach their international buyers in the right quantity and on time. Unfortunately, this is not always the case. The railway system has already been under scrutiny in recent years for not being able to keep up with the high demand for grain shipping, a situation that could get worse if demand increases even further.
“Because we’re so heavily reliant on exports, we have to make sure we continue to lobby the railways to make sure that they can deliver our products, our commodities, on time to the West Coast,” Porozni said. “If you’re going to increase your production by two to three per cent on average, we need the infrastructure to make sure we can meet those demands.”
Otto said he’s not worried about the railways and other export infrastructure, because if there’s a market for it, businesses will pick up the slack. “As we increase our market share and demand for export facilities is needed, the free market system adapts to that,” Otto said. “If the business is there, of course the grain companies are going to build something to handle that business. That’s how they make money.”
NEXT STEPS FOR THE TPP
The TPP currently has 12 member countries, but that could change down the road if others are admitted into its ranks. Not only would this give Canada access to additional markets, but also, as a founding member, Canada would have tremendous leverage over any late entrants.
“If we’re in right from the beginning, it gives us an opportunity to negotiate the terms of entry for potential future entrants,” Citeau said, adding that countries like South Korea, Taiwan, the Philippines and Thailand have all expressed interest in joining the TPP.
Before any talk of adding countries to the agreement gets off the ground, the complete text of the deal will have to be ratified by each member country. This process could take years to complete.
“The expectation at this point is that it could be in place by January 2017,” Mussell said. “The new government is going to want to address this relatively quickly.”
During the 2015 federal election campaign, there were worries that a new government could derail the TPP agreement, especially if Thomas Mulcair’s NDP rose to power after campaigning on an anti-TPP platform. The Liberal government is in favour of free trade, but Prime Minister Justin Trudeau will need to further review the specifics of the agreement, which became public in November, before any formal decision is made.
Even though the agreement has yet to be ratified, Otto is confident that Canada’s participation in the TPP is not in question. “Certainly, we’ll have to wait and see how the new government perceives this agreement,” he said. “But we have a commitment to it right now and I think at the end of the day Canada will be part of the TPP.”
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