Thursday, October 12, 2006

Canada-Chile FTA: 'Discouraging?'

Is the The Canada-Chile Free Trade Agreement (CCFTA) a flop? Christina Campbell, a contributor to Canadian Business magazine, says the CCFTA “has some discouraging lessons to offer would-be bilateralists.”

Detractors of the CCFTA have their reasons. Some focus on the fact that exports haven't received a major boost since the agreement was signed. Others say that Chile's collection of bi-lateral agreements makes the CCFTA meaningless, or that Chile simply isn't large of an economy to make an impact on Canada.
Others say the treaty meets its objective. This is a minority view in the CB article (although, for what it's worth, I have a suspicion that a technical glitch is preventing readers from viewing the final portion of the on-line article).

Christina Campbell, Canadian Business magazine:

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.

According to DFAIT's Web site, “investment has increased to a total of $5.69 billion, making Canada the third-largest investor in Chile.” I wonder if this figure speaks for Canada's motives.

Another argument is that the “failure” of the CCFTA in the trade arena could really be a reflection of a strong dollar and other economic conditions.
I'll admit to not knowing a lot about the historic success and failure of Canada's bilateral agreements, but the Chile-Canada example seems to say a couple things. First, the impact of a bilateral agreement isn't simple to isolate. Second, if Chile's lack of demand for Canadian exports is really a disappointment, perhaps our expectations were too high. What did we expect?


happyjuggler0 said...

I am always dismayed when I read an article on international trade where the presumption is that one needs more exports than imports for it to be a success.

This is especially true with regards to bilateral relationships. In perpetuity I personally am likely to have a trade deficit with grocery stores. This does not mean that I am in deep doo doo due to my "alarming" trade deficit with my local grocery store. I get my money from other sources, not from sales to grocery stores. Meanwhile, grocery stores use the money I trade with them to buy stuff elsewhere. It all works out nicely in the end.

One of the biggest benefis to international trade is what you can now buy, not merely how much more you can sell. Selling merely gets you currency, you still have to trade that currency for something worthwhile. View imports the same way you view your grocery store. Are you better off with more choices or fewer? If the grocery store has lower prices due to more suppliers, aren't you better off as in the long run you are likely to pay less as a result and thus have more bang for your money?

As far as Chile is concerned, both Chile and Canada are disproportionately natural resource countries. It is not clear to me that the impact to such trade will be all that significant. How much trade does one electrician have with another, restaurant with another restaurant, etc.? The biggest impacts will likely occur when countries are very different.

Finally, there is a signaling issue here which may get lost in statistical noise, but which is real nonetheless. If I were a businessman from Canada, or Chile, or the US, Mexico, France or anywhere else, I have a huge number of choices available as to where to locate my new investments. There is a huge laundry list of things to consider when deciding where to locate that investment, from taxes, regulations, labor costs, labor productivity, physical infrastructure, time to market, property rights, corruption etc.

The while list is both about conditions now and also my guesstimate of the future conditions in the country as well. One suchpart of the list is a country's openness to trade, and its future openness, which is only a guessable proposition. But this is where signalling comes in. Even a low impact FTA is a feather in the cap of any country from the perspective of a prospective business looking to make a direct investment. It means lower costs and more access in international trade, and the more such FTA's a country has or is working on the more likely it is to remain that way.

Thus, at the margin a country that has more FTA's will likely receive more foreign direct investment than a country that has a dearth of such agreements.

Like I said, I suspect it will totally get lost in the statistical noise, but the margin is nevertheless important.

happyjuggler0 said...

Oh yeah, it wouldn't just be more likely to receive foreign firect investment. It would also be more likely to have domestic direct investment, instead of that domestically sourced investment become located overseas somewhere more amenable to international trade.

The more and more countries have FTA's, the more and more that those countries stand on the sidelines and don't have such agreement the more they will lose out on investments. This is (in my head anyway) obvious with regards to zero sum investments (i.e. investments that are going to get made regardless). But it also will likely change, at the hard to see margin once again, the calculus of those thinking of making a new "real" (as opposed to financial via paper, such as stocks and bonds) investment.

For example, consider the situation of Royal Canadian XYZ Manufacturing Corporation. When it is calculating whether or not it is worth opening up a new factory, it will look at all the locations it may be able to sell its output. The fewer such locations, the less likely the factory will be built in the first place.

This RCXYZM corp. new investment is not zero sum like it is with multinational that has already predetermined it will open up a new factroy, but the only question is where. This new investment is a positive sum gain from FTA's.

true dough said...

My response is much later than I would have liked, however...

Thanks for your remarks. I can agree with all of that. I was surprised that the author has no qualms about stating that the FTA was 'diminished' when Chile went on to sign other such agreements (gasp!), and goes on to ignore the FDI-is-good credo. You make good points about signaling and transparency.

I've noticed quite a bit of the beggar thy neighbour, mercantilist-type views in the Canadian mainstream lately, or perhaps I'm just more aware. Either way, it's no wonder our policy makers are burdened with calls to shelter firms and entire sectors from market forces. But growing pains needn't be so painful! Although, perhaps even our big sister the U.S. suffers from a parallel media situation when it comes to things like outsourcing.
Enough griping. The quasi-solution: more economist/journos!