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Business Commentary TPP without the U.S.: a dangerous sideshow for Canada while NAFTA still in play

The North American free-trade agreement negotiations have been getting a lot of the attention in this country, and rightly so.

But in a little over a month another massive trade agreement could be finalized – the TPP 11. That's the Trans-Pacific Partnership minus the United States, which pulled out of the deal days after Donald Trump's inauguration as U.S. President.

Negotiators for Canada and 10 other Pacific Rim countries have been quietly meeting regularly since the spring in a bid to revive a deal that would create an $11-trillion (U.S.) trade area. The hope is to complete negotiations by the time trade ministers from the region meet Nov. 10 in Vietnam for the Asia-Pacific Economic Co-operation forum.

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Going ahead with TPP without the United States offers some advantages for Canada.

But it also could hopelessly complicate difficult NAFTA negotiations with the Trump administration.

With NAFTA talks apparently not going well, this country needs to get serious about diversifying its trading partners, and fast.Doing a deal with Japan and the other countries would be like flipping the United States and Mr. Trump the middle finger. You can't fire us. We fire you.

In some respects, doing a TPP deal without the United States would be even better for Canada than the original deal. That's because exporters of lumber and various agrifood items, such as canola, beef and pork, would gain a powerful tariff advantage over their U.S. competitors, mainly in the massive Japanese market, but also in Malaysia and Vietnam.

Next to Mexico, Canada would be the biggest winner in TPP 11, according to a recent Canada West Foundation study. Annual economic gains would be $3.4-billion (Canadian), compared to $2.8-billion under the original deal.

Doing a deal might also put pressure on the Trump administration to rethink the wisdom of its retreat from multilateral trade agreements.

But scratch a little deeper, and TPP 11 is fraught with danger for Canada.

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It's one thing for Canada to look beyond the U.S. market if the Trump administration abandons NAFTA or seeks to impose outrageous terms.

But we're not there yet.

Completing TPP while NAFTA is still in play could create confusion for some industries. The auto and dairy sectors are two obvious problem areas.

TPP members Japan and Mexico are both major makers of parts and vehicles. Canadian vehicle-assembly plants and parts makers could get caught between conflicting NAFTA and TPP regional-content rules.

Handling the "auto sector" in TPP 11 will be "a major issue," according to the Canada West Foundation report. That's because there is a lower content threshold for cars and light trucks to qualify for reduced tariffs in TPP than in NAFTA. And the Trump administration reportedly wants to raise NAFTA's current minimum-content requirement of 62.5 per cent and add a U.S. content threshold.

Dairy will also be thorny. Canada made significant concessions to the United States in TPP. Would those gains now go to other TPP dairy producers such as Australia and New Zealand, or would Canada take them off the table? This all comes as the United States is pushing for much deeper concessions in NAFTA that could threaten the survival of Canada's tightly regulated supply-management system in dairy and poultry.

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The bottom line is that the U.S. market means everything to Canada. It's the destination for three-quarters of our exports and access to the market is essential for the survival of integrated cross-border supply chains. Ottawa simply can't afford to do anything that would jeopardize its U.S. footprint by creating overlapping and potentially contradictory trade rules.

Canada's preference was to do a bilateral free-trade deal with Japan – the largest TPP 11 economy. But Japan made it clear it wasn't interested, at least not now.

Japan and Australia are the driving forces behind TPP 11. Both countries see it as a way to get the United States back to the bargaining table. That's not much of a lure for Canada, which is already reluctantly at the table with the Americans.

All this explains why Canadian officials have been coy about reviving TPP. They are engaged, but they appear less than fully committed. All their negotiating efforts appear focused on NAFTA.

With the outcome of the NAFTA talks so uncertain, TPP 11 risks becoming a trade mosh pit, with countries crashing into each other and stomping on the feet of onlookers.

Editor’s note: An earlier version of this story incorrectly stated that South Korea is a TPP member. The error has been corrected.
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