Careful management, including the cultivation of new areas of cooperation, is needed to prevent economic issues from hindering close security cooperation on North Korea policy and to put the overall relationship on more solid footing.
Since the 2006‒2007 negotiation and 2011 ratification of the Korea-U.S. Free Trade Agreement (KORUS FTA), U.S.-South Korea economic cooperation has emerged as a pillar of their alliance.

Other steps to expand the security relationship included cooperation on nontraditional security issues beyond the Korean Peninsula and the 2015 signing of a new U.S.-South Korea nuclear cooperation agreement. The two countries carried out this expansion under both Republican (George W. Bush) and Democratic (Barack Obama) U.S. administrations, as well as under progressive (Roh Moo-hyun) and conservative (Lee Myung-bak and Park Geun-hye) presidencies in South Korea.

South Korea, or the Republic of Korea (ROK), has actively embraced trade promotion since the mid-2000s, enabling it to expand its exports through free trade agreements with China, Southeast Asian countries, and the European Union (EU). This expansion has enhanced South Korea’s value to the United States as an economic partner by broadening South Korea’s economic options and enhancing international competition for a share of its markets.

But ongoing U.S.-China competition has put pressure on the U.S.-ROK economic relationship. The United States and China have pushed South Korea to choose between its security guarantor and its primary economic partner.Negotiations that resulted in revised U.S.-ROK trade arrangements, conducted under the auspices of the KORUS FTA, have temporarily lessened tension in U.S.-ROK relations.

Most recently, in early 2018, at the Trump administration’s insistence, the two sides agreed on relatively small modifications to the KORUS FTA and negotiated limits on South Korea’s exports of aluminum and steel to the United States. The economic relationship will require further attention as South Korea addresses its vulnerability to fallout from the U.S.-China trade war and adjusts to China’s growing economic power.

South Korea will also have to maneuver within the new trade environment resulting from the Comprehensive and Progressive Agreement of the Trans-Pacific Partnership (CPTPP), an eleven-nation agreement finalized in 2018 that emerged from the Trans-Pacific Partnership (TPP) after Trump’s January 2017 withdrawal. Although South Korea could be interested in joining the CPTPP, the recent decline in relations with Japan, a founding member of CPTPP, complicates that prospect.

Using the revised KORUS FTA as a platform for future cooperation, the United States and South Korea should work to expand their partnership to include economic cooperation in the Indo-Pacific, energy security, and plans for inter-Korean economic initiatives. They should also address unfair trading practices, the challenges aging societies face, and fourth-industrial-revolution issues.

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The Canada-United States-Mexico Agreement (CUSMA) has a number of liberalizing elements, including expanding US access to Canada’s dairy and poultry markets; raising the threshold for tax and duty-free entry into Canada and Mexico of low-value goods imports; and easing some barriers to services trade.

More controversially, the CUSMA increases intellectual property protection, which promises to generate some net benefit for the United States at Canada’s expense, and introduces new disciplines relative to NAFTA on cross-border data flows and data localization, the impact of which cannot as yet be quantified.

By far the most quantitatively significant effects, however, are the more stringent rules of origin that must be met for products to qualify for duty-free market access under the CUSMA. These new rules achieve the immediate objectives of the Trump administration to shift industrial activity – especially in the automotive sector – into the United States, but by increasing trade diversion, they impact negatively on economic welfare and efficiency.

There are only very limited gains in trade facilitation. Meanwhile, more stringent border enforcement promises some border thickening, especially for goods entering the United States.

The negative elements outweigh the positives and the CUSMA results in lower real GDP and welfare for all three parties, with Mexico being hardest hit and the United States the least. Canada’s real GDP stands to shrink by -0.4 percent and economic welfare to fall by over US$10 billion.

The major caveat to these results is the extent to which the longer-run investment climate in Canada (and Mexico) has been damaged by the weakening of the North American Free Trade Agreement (NAFTA) institutional framework through the introduction of a sunset clause; the elimination of investor state dispute settlement; the grudging way the United States accepted retention of the NAFTA Chapter 19 binational panel review of trade remedy cases; and, perhaps most importantly, the failure of the new agreement to eliminate the application of US section 232 national security tariffs on imports from its North American partners.

WorkingPaper_Ciuriak-Dadkhah-Xiao_2019

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The newly negotiated U.S.-Mexico-Canada Agreement (USMCA) demonstrates the power of rules of origin to force the many businesses that depend on the current trade agreement to alter their supply chains and business models. Analyzing the new rules, the Scholl Chair in International Business finds that the USMCA will bring new costs to both parts and auto manufacturers and consumers and may provide a boon to North American steel and aluminum manufacturers.

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The CUSMA would be the first major trade agreement of President Trump’s term, but US congressional approval is not certain. Republican members of Congress have expressed dissatisfaction with the sunset clause, restrictive rules of origin and the elimination of the investor dispute mechanism. Democrats have indicated a desire for even stronger labour and environmental protections.

The anti-trade rhetoric was common to both Hillary Clinton and Donald Trump’s 2016 presidential campaigns. To some extent, therefore, we should expect that each side will want to show follow-through on campaign promises for so-called fair trade deals. The CUSMA includes provisions on labour, wages, the environment, digital trade, as well as those specific to the auto and trucking sectors, all of which are likely to appeal to the Democratic base and would make it difficult for them to oppose the deal.

North American Forum Special Report_1

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With the onset of the Global Crisis, the longstanding downward trend in tariffs and other barriers to trade has come to a halt (Hoekman 2015, Aslam et al. 2016). In its place has come a growing recognition that trade policies create both winners and losers (e.g. Autor et al. 2016). As a result, international trade has become a salient issue in voters’ minds, and some parties and politicians profess strong views on the benefits and costs of particular trade policies. Recent political events such as the election of the Trump administration in the US and the British vote to leave the EU point to an acute danger of rising protectionism. 

However, today’s world economy is highly interconnected, with complex supply chains that cross over country borders. In this environment, who gains and who loses from particular trade policies is far from transparent. It is even less well understood whether the distributional consequences of proposed protectionist policies line up with the political support for them. In a new paper (Auer et al. 2018), we investigate the connection between the distributional effects of trade policies and voting patterns, using the North American Free Trade Agreement (NAFTA) as a case study.

We combine the multi-sector, multi-country, multi-factor general equilibrium Ricardian trade model (e.g. Eaton and Kortum 2002, Caliendo and Parro 2015, Levchenko and Zhang 2016) with a specific-factors model that generates distributional effects of trade across sectors (Jones 1971, Mussa 1974, Levchenko and Zhang 2013, Galle et al. 2017). We calibrate the model to the global matrix of intermediate and final goods trade from the 2016 edition of the World Input-Output Database (WIOD) and WIOD’s Socioeconomic Accounts (Timmer et al. 2015). 

We simulate a scenario in which NAFTA is dismantled. In particular, this counterfactual entails a rise in tariffs from the current NAFTA-negotiated ones to the ‘most-favoured nation’ (MFN) level, as well as an increase in non-tariff barriers in both goods and service sectors estimated by Felbermayr et al. (2017). The total welfare change from revoking NAFTA would be -0.22% for the US, -1.8% for Mexico, and -2.2% for Canada. These aggregate numbers are an order of magnitude smaller than the distributional effects across sectors. Sectoral real wage changes range from -2.7% to 2.26% for the US, from -16.76% to 9.46% for Mexico, and from -13.90% to 1.74% for Canada. 

We then analyse the political dimension of this policy by correlating the economic outcomes with recent voting patterns. We first compute the economic impact of this policy at the level of US congressional districts. To do so, we combine the sector-specific real wage changes resulting from our general equilibrium model with information on sectoral employment shares at the congressional district level. Because sectoral employment is unevenly distributed across geographic locations, there would be distributional consequences across space as well. Figure 1 summarises the geography of the economic impact across US Congressional Districts. Average wage changes range from -0.41% in Ohio’s 4th district to 0.08% in Texas’ 11th district, with a cross-district standard deviation of 0.04%.

Figure 1 Real wage changes from NAFTA revocation across the US

Turning to the relationship with political outcomes, we find that, if anything, there is a negative correlation between the real wage change in a congressional district and the 2016 Trump vote share. Though dismantling or renegotiating NAFTA was a prominent pillar of the Trump presidential campaign, Trump-voting districts would experience systematically greater wage decreases if NAFTA disappeared. Figure 2 presents the scatterplot of the real wage changes due to revocation of NAFTA against the Trump vote share. The slope of the relationship is negative, though not significant, in our baseline scenario.

Looking closer, in the baseline the negative relationship is substantially attenuated by districts with a heavy presence of mining and quarrying, such as Texas 11th district (encompassing central Texas and eastern Texas cities of Midland and Odessa), the state of Wyoming (a single Congressional district), and West Virginia 3rd (roughly the southern half of the state). Since mining and quarrying experience a large increase in NTBs in our baseline scenario, these districts are relatively better off from the policy change and voted heavily for Trump. Dropping just 2 districts (out of 435) with the highest mining and quarrying employment shares renders the negative bilateral relationship significant at the 1% level. All in all, with the possible exception of heavily mining areas, Trump-voting congressional districts experience systematically larger wage decreases if NAFTA is revoked.

To better understand this somewhat surprising pattern, we construct two simple, heuristic measures of trade exposure to NAFTA at the US congressional district level. The first is a measure of import exposure to the NAFTA partner countries, defined as the employment share-weighted average of sectoral imports from NAFTA partners in total US absorption. Intuitively, import exposure to NAFTA partners is high in a congressional district if it has high employment shares in sectors with greater import competition from those countries. All else equal, we should expect wages to rise the most in locations that in the current regime compete most closely with Canada and Mexico. The second is an export orientation measure, which is the employment share-weighted average of sectoral exports to NAFTA partners in total US output. Intuitively, we should expect locations with higher employment shares in NAFTA-export-oriented industries to lose disproportionately from NAFTA revocation. 

Figure 2 Real wage changes from NAFTA revocation and 2016 Trump vote share

Taken individually, the bilateral relationships between both heuristics and model-implied wage changes from NAFTA revocation are negative and statistically significant. This is intuitive for export orientation but counterintuitive for import exposure, as it implies that congressional districts currently suffering the most from direct import competition actually see larger real wage reductions when protection increases following a dismantling of NAFTA. 

At the same time, the statistical association between both of these heuristics and the Trump vote share is positive and significant. This is intuitive for the import exposure measure – locations suffering the most from import competition voted more for Trump – but not for export orientation, as locations exporting to NAFTA should foresee wage decreases if NAFTA is done away with. 

The apparent mystery is resolved by the fact that the correlation between the two heuristics is extremely high. The export orientation has a 0.92 correlation with import exposure. Thus, the picture that emerges from this exercise is first and foremost one of differences across locations in the overall level of integration with NAFTA countries. Places that suffer the most from NAFTA import competition are also overwhelmingly those that export to NAFTA. 

It is thus not surprising that the locations overall more open to NAFTA trade experience larger net welfare losses – effectively, a revocation of NAFTA represents a relatively greater reduction in trade openness for those locations. We do show, however, that these locations are also the ones that systematically voted more for Trump. 

This exercise underscores the difficulty of making simple heuristic judgments about who gains and losses from trade policy changes in the current global economy. The measures of import competition similar to those used in other contexts (e.g. Autor et al. 2013, and the large literature that followed) would be misleading as to which locations would stand to lose the most from NAFTA revocation, and how the distributional effects of NAFTA correlate with the Trump vote. Reaching reliable conclusions requires a model-based quantitative assessment that takes into account multiple import and export linkages and general equilibrium adjustments. 

References

Aslam, A, E Boz, E Cerutti, M P Ribeiro, and P Topalova (2016), “Global Trade: What’s Behind the Slowdown?”, IMF World Economic Outlook, Chapter II.

Auer, R, B Bonadio, and A Levchenko (2018), “The Economics and Politics of Revoking NAFTA”, NBER Working Paper 25379.

Autor, D H, D Dorn, and G H Hanson (2013), “The China Syndrome: Local Labor Market Effects of Import Competition in the United States”, American Economic Review, 103 (6), 2121–68.

Autor, D H, D Dorn, and G H Hanson (2016), “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade”, Annual Review of Economics, 8 (1), 205-240.

Caliendo, L, and F Parro (2015), “Estimates of the Trade and Welfare Effects of NAFTA”, Review of Economic Studies, 82 (1), 1-44.

Eaton, J, and S S Kortum (2002), “Technology, Geography, and Trade”, Econometrica, 70 (5), 1741-1779.

Felbermayr, G, M Steininger, E Yalcin (2017), “Global Impact of a Protectionist US Trade Policy”, ifo Forschungsberichte.

Galle, S, A Rodríguez-Clare, and M Yi (2017), “Slicing the Pie: Quantifying the Aggregate and Distributional Effects of Trade”, NBER Working Paper 23737.

Hoekman, B (2015), The Global Trade Slowdown: A New Normal?, VoxEU eBook, London.

Jones, R (1971), “A Three-Factor Model in Theory, Trade, and History,” in J Bhagwati (ed.), Trade, Balance of Payments, and Growth: Papers in International Economics in Honor of Charles P Kindleberger, Amsterdam: North Holland.

Levchenko, A A, and J Zhang (2013), “The Global Labor Market Impact of Emerging Giants: a Quantitative Assessment”, IMF Economic Review, 61 (3), 479–519.

Levchenko, A A, and J Zhang (2016), “The Evolution of Comparative Advantage: Measurement and Welfare Implications”, Journal of Monetary Economics, 78, 96–111.

Mussa, M (1974), “Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, an Intensity in the Short and Long Run”, Journal of Political Economy, 82, 1191–1203.

Timmer, M P, E Dietzenbacher, B Los, R Stehrer, and G J de Vries (2015), “An Illustrated User Guide to the World Input–Output Database: the Case of Global Automotive Production”, Review of International Economics, 23 (3), 575–605.

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Canada’s trade minister says everything is fine between Ottawa and New Delhi.

“There are lots of opportunities in India and we will continue to develop them,” Jim Carr said in an interview on October 26. “India remains a very important friend of Canada and trading partner and we’ll continue to develop that relationship.”

Predictable answer. But the question must be asked, because relations with India have become a sensitive subject in Canadian politics this year. Prime Minister Justin Trudeau’s star-crossed state visit in February — described almost universally, if superficially, by the mainstream press as “disastrous” — was followed immediately by a sharp drop in the polls from which he has struggled to recover.

Sensing opportunity, the Opposition leader, Andrew Scheer, visited India earlier this month to “repair” the damage. The Globe and Mail accused Scheer of “partisan point-scoring,” as he was openly critical of the policies of his democratically elected government while on foreign soil. Even Jagmeet Singh, the leader of the third party in Canada’s Parliament, has struggled to leverage relations with India to his advantage; the first major federal party leader of Indian origin was hurt by accusations that he was overly sympathetic to violent Khalistani separatists.

All of this could pass, but not before the next federal election, scheduled for October 21, 2019. If the Canada-India relationship “develops” in the meantime, it will be the result of whatever momentum that already exists. Once a focal point, India now is just one the Canadian government’s many targets in a trade-diversification strategy. There likely are practical reasons for a broader focus, but there also is a political one: Trudeau has every reason to allow most voters to forget he ever went to the subcontinent.

In the mandate letter Trudeau wrote for Carr’s predecessor in early 2017, the prime minister emphasized his desire to improve commercial ties with emerging markets, and mentioned China and India by name. Canada no longer has a singular focus. Carr’s own marching orders, which were published on August 28, a month after he took over from François-Philippe Champagne, show the two economic behemoths of emerging Asia are being crowded out by opportunities that might offer quicker rewards.

Canada’s trade priorities now include advancing trade talks with Mercosur (Argentina, Brazil, Paraguay and Uruguay); the Pacific Alliance (Chile, Colombia, Mexico and Peru); and the Association of Southeast Asian Nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam).

Trudeau also wants to make sure Canadian companies take full advantage of the country’s new Comprehensive Economic and Trade Agreement with the European Union, as well as of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), ratified by Canada’s legislative process on October 25. Canada has also taken a leadership role in assembling a collection of like-minded free traders to push for changes at the World Trade Organization. The 13-member group includes the European Union, Japan, Australia and Kenya; it excludes not only the United States and China, but also India.

Doors in Canada and New Delhi remain open to officials from either country, and economic gravity will ensure that trade and investment between Canada and India continue to grow. However, without a significant push, it seems likely that the relationship will fall short of its potential. The two countries have been working on the Comprehensive Economic Partnership Agreement since 2010, and there hasn’t been an official negotiating round since August 2017, according to the latest update published by Global Affairs Canada.

In February, Trudeau and Indian Prime Minister Narendra Modi promised to “intensify negotiations to finalize” the trade agreement and a separate treaty on investment. Yet, Carr offered no indication that negotiations have picked up speed. “I can’t tell you that there’s a particular meeting that’s been scheduled, but I can tell you the conversation continues among officials, among politicians in India,” he said.

Today, Canada’s trade narrative with India tends to revolve around resources: the fastest-growing major economy will need energy, and Canada produces lots of energy; a massive population of vegetarians will need access to plant-based protein, and Canada grows a lot of lentils and peas.

But this narrative may be impeding progress toward a more advanced and viable economic relationship. Canada will become a bigger source of natural gas for Asia’s fast-growing economies, but it is years away from building the transportation infrastructure required to take advantage of that demand. Agriculture is a weak pillar on which to base trade with India, given the desire of that country’s politically powerful farmers for protection, and Modi’s stated desire to make India self-sufficient in food. Surprise Indian tariffs on imports of chickpeas and lentils have upended the pulse market this year, crushing the profits and stock price of AGT Food and Ingredients Inc., a big food exporter based in Regina, Saskatchewan.

The economic narrative should, instead, revolve around people and services. Trudeau’s decision to don a kurta at every opportunity during his trip to India did not seem to slow a growing interest in Canada among highly skilled Indians. Increasingly, workers from India are choosing Canada over the United States.

Earlier this year, Brendon Bernard, a Toronto-based economist at Indeed, the job-search site, analyzed the company’s data to see if President Donald Trump’s anti-immigrant rhetoric and policies were affecting the United States’ standing as the first choice of workers seeking to move abroad. Bernard found that Canada’s share of outbound searches from India jumped to 13 percent from six percent between August 2016 and July 2018, while America’s share dropped to 50 percent from 60 percent over the same period, the most “dramatic” shift he recorded.

“To be sure, people in India are still more likely to search for work in the US than Canada, but the gap has narrowed,” wrote Bernard. “This could prove a boon to the Canadian tech industry since many of the top searches from India are for jobs in that sector.”

Indians seeking jobs in Canada could probably find one: there were nearly 550,000 job vacancies in the second quarter, compared with about 460,000 in the first quarter, according to Statistics Canada. They would need visas, but anecdotal evidence suggests that won’t be an issue for highly skilled applicants. Technology entrepreneurs in cities such as Toronto, Montreal and Vancouver say Canada’s Global Skills Strategy is helping them survive the global war for talent.

Canada might also begin to look more attractive to Indian companies keen to expand beyond their home market. Paytm, India’s largest digital payments company, set up a research lab in Toronto in 2014 to take advantage of the city’s strength in artificial intelligence. The company then realized that Canada would make a good testing ground for international expansion. “It is a serious competitive advantage to have access to so much skill,” Harinder Takhar, the Paytm executive in charge of the Canadian unit,  earlier this year. “The fact that Canada has a good financial sector and a lot of universities all in one concentrated area, this is very rare. This was almost like a discovery for us.”

That was before the CPTPP was completed: Canada soon will be a rare country with preferential access to Japan, the United States and Europe.

Any development of the Canada-India relationship in the short term will likely depend on the work of executives, public servants, think tanks and others outside of the political realm. The negative press of the past eight months has created a headwind, but the obvious ability of the Canadian and Indian economies to complement each other might finally be catching on with a broader set of economic actors in both countries. Politicians might witness Canadian and Indian investment grow by doing nothing all.

© 2018 Centre for International Governance Innovation

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