International Trade Agreements and Agriculture

INTERNATIONAL TRADE AGREEMENTS AND AGRICULTURE

Abstract

The Canadian economy relies heavily on international trade especially exports; thus, agriculture and agri-food sectors play significant roles in the growth and development of the Canadian economy. Remarkably, the Canadian agricultural industry has achieved a competitive edge in the regional and global markets. This phenomenon is attributable to a number of factors including strong trade partnerships, high-quality and safe agricultural products, and its geographic proximity to the United States. In the past four decades, agricultural productivity have increased significantly due to the development of large farms, increased food processing and well-established distribution firms. However, it is evident that international trade liberalization has boosted agricultural productivity. Therefore, it is apparent that free trade agreements bear significant benefits to the Canadian agricultural industry. Some of the major benefits of the free trade agreements to the Canadian agricultural industry are the increase of agricultural exports, tariff elimination, opening of new markets, expansion of the agricultural industry, and the creation of employment opportunities for Canadians in the agricultural sector. Therefore, this paper provides a comprehensive overview on the benefits of free trade agreements on the Canadian Agricultural industry.

Canada is endowed with vast natural resources which are adequate to sustain the country’s small population. Currently, the Canadian economy relies heavily on international trade especially exports; thus, agriculture and agri-food sectors play significant roles in the growth and development of the Canadian economy. Remarkably, the Canadian agricultural industry has achieved a competitive edge in the regional and global markets. This phenomenon is attributable to a number of factors including strong trade partnerships, high-quality and safe agricultural products, and its geographic proximity to the US (Farm Credit Canada, 2014). As a result, the Canada’s agriculture market and trade have flourished in the past decades, especially after the Second World War when remarkable growth in the agricultural industry was recorded. It is reported that social changes and economic growth of the country have influenced food production, processing, consumption, and trade. In the past four decades, agricultural productivity have increased significantly due to the development of large farms, increased food processing and well-established distribution firms. However, it is evident that international trade liberalization has boosted agricultural productivity. It has also enhanced the global competitiveness of most sub-sectors in the Canadian agricultural industry. Evidence indicates that international trade has enabled Canada to increase its agricultural exports including oilseeds, pork, beef, grains, and livestock (Veeman & Veeman, 2014). Consequently, it is apparent that the approach by Canada to extend its trade links with other nations through Free Trade Agreements (FTAs) bears enormous benefits to the country’s agricultural industry. Therefore, this paper will provide a comprehensive discussion on the benefits of trade agreements to the Canada’s agricultural industry.

Over the years, the Canadian agricultural sector has been generating a significant percentage of the country’s gross domestic product. For instance, it was reported that the agricultural sector accounted for about 8 percent of the total GDP. This implies that agricultural exports serve as one of the Canada’s trade potential. As such, the country’s approach of entering into free trade agreements with other countries appears to be a step in the right direction which will lead to a significant increase in agricultural exports. Currently, Canada exports a wide range of agricultural products including oilseed, pork, beef, and other agricultural commodities to the US and other countries such as China and Europe. However, Canada has been facing significant challenges in increasing its agricultural exports to the international market due to tariff restrictions. Currently, the US serves as Canada’s largest market for its agricultural products which accounts for 30% of the country’s total exports. On the other hand, the European Union accounts for only 9%, whereas China and Japan account for 14% and 12%, respectively. Other countries where Canada exports its agricultural products include India and Mexico, which accounts for 2% and 6%, respectively. In addition, Canada exports 27% of its agricultural products to a number of developing countries which account for 27% of the total agricultural exports (Farm Credit Canada, 2014).

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Figure: Total agricultural exports (Farm Credit Canada, 2014)

On the other hand, agri-food export generates a significant percentage of the country’s agricultural sector in which most agri-foods are exported to the United States. Evidence shows that the US receives 67% of Canada’s agri-food exports. China has also become the second largest consumer of the Canadian agri-foods accounting for 9%, whereas developing countries account for 9%, as well. Other countries where Canada exports its agri-food products are Japan, Russia, EU, Mexico, and Australia (Farm Credit Canada, 2014).

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Figure: agri-food exports by different countries (Farm Credit Canada, 2014)

This data indicates that the signing of free trade agreement between Canada and the European Union and Korea will increase agricultural exports in the European and Asian agricultural markets. In the past, trade tariffs have been considered as significant hindrances to international trade including agricultural exports. This is the reason why the World Trade Organization (WTO) has been spearheading agreement on agriculture, in order to facilitate international trade of agricultural products. For instance, the 1994 Agreement on Agriculture sought to commit member states including Canada in reducing distortions in agricultural trade. Some of these measures included the reduction of tariffs, decrease of agricultural export subsidies and the introduction of tariff-rate quotas to replace non-tariff barriers. Canada responded to the WTO’s initiative by eliminating the Crow Rate Policy which dealt with transport subsidies including rail shipment of agricultural products such as grains to the export points.

The second benefit of free trade agreements to the Canadian agricultural industry is the elimination of trade tariffs. Ordinarily, international trade involves trade tariffs in which exporters pay taxes to the recipient country. Therefore, trade relations are significantly influenced by trade tariffs because some countries impose high taxes on imports from other countries (Veeman & Veeman, 2014).

Therefore, free trade agreements are designed to reduce the international trade barriers. In this case, Canada will be exporting its agricultural products to the European Union without export tariffs through the European Union Comprehensive Economic and Trade Agreement (CETA). The Government of Canada reports “When CETA comes into force, almost 94 percent of EU agricultural tariff lines will be duty-free and seven years later, and that number will rise to over 95 percent” (par. 11). This trade agreement has two-fold benefits to the Canadian agricultural sector. First, it will allow Canada to export its agricultural goods to the European Union trade block; thus, boosting its export volume to the EU. Some of the Canadian agricultural goods which will be exported to the EU market through the preferential access are beef, bison and pork, and this will benefit the Canadian companies dealing with the processing and distribution of pork and beef products. According to the terms of free trade agreement between Canada and the European Union, most agricultural products from Canada will have their tariffs eliminated. Some of these products, which are usually, imposed tariffs within the EU market; include grains such as oats, low to medium quality wheat and barley; durum wheat; oils, and processed goods such as pulse floor, baked goods, meal, and powder (Government of Canada, 2014).

The second benefit of the CETA is that the Canadian unrestricted access to the EU market will enable it to achieve competitive advantage over its competitors in the agricultural trade. It is perceived that Canadian agricultural exports to the EU market will increase significantly; thus, reducing the impact of competition from other producers of agricultural goods who have not yet established free trade with the EU.

Another benefit of free trade agreements to the Canadian agricultural industry is the opening of new markets. In trade, the expansion of market base serves as the most significant aspect for economic growth and development. Evidence shows that countries or companies with small market bases earn little returns in the international market than those with vast market bases. In general, it is imperative that entry into a new agricultural market, either regional or international, translates to an increase in the country’s competitiveness. In this case, Canada’s entry into the European Union and Asian markets through its free trade agreement with the EU and Korea will open its agricultural industry to new potential markets; thus, boosting agricultural production and investment. It is evident that the Canadian-Korea trade agreement will enable Canada to penetrate the Asian market. This agreement will reinforce the existing trade ties between Canada and some Asian countries such as China, Japan and India. As a result, Canadian agricultural goods will realize increased consumption in the Asian market leading to an increase in agricultural exports to Asian countries.

On the other hand, the Canadian-EU trade agreement and the Canadian-Korea agreement will enable Canada to break away from the US dominance which exposes its economy to vulnerabilities. The new approach bears significant economic roles in the Canadian economic prospects in the future, especially to the agricultural industry. According to the Council of the Federation, it is apparent that “strengthening Canada’s trade and investment linkages with the global economy will mean addressing challenges and taking advantage of new opportunities” (p. 4). This aspect is reaffirmed by Passaris (2013) who observes “International trade is both the heartbeat and the lifeblood of the Canadian economy; in fact, international trade has empowered Canada to side-step economic theory” (p. A10). Canada is known to rely on trade for the largest proportion of its GDP. This is why the Council of the Federation remarks, “With a large proportion of Canada’s gross domestic product linked to trade, international trade and investment are critical to the continued growth and success of the Canadian economy” (p. 2). Therefore, it is apparent that Canada’s effort to increase its agricultural exports in the past four years is attributable to its reliance on exports for economic growth.

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