2023 Fall Economic Statement: Policy Statement on Ensuring Reciprocal Treatment for Canadian Businesses Abroad

1. Introduction

Canadian workers and businesses deserve to be treated fairly, including when doing business abroad. Our trading partners should grant Canadian businesses the same access that their companies enjoy in Canada. Unfortunately, this is not always the case.

To protect Canadian workers and Canadian businesses—and to develop mutually beneficial and resilient supply chains—going forward, Canada will consider reciprocity as a key design element for new policies, including certain clean economy investment tax credits, federal procurement, and federally-funded infrastructure projects. This includes reciprocal procurement to ensure that countries that do not provide Canadian goods and services with a similar level of market access do not unfairly benefit from access to Canada's markets.

This policy statement sets forth Canada's approach for continuing to protect Canadian workers and businesses from global economic and trade challenges, including the growing trend by other countries' of implementing protectionist and non-market policies and practices. Canada's reciprocity-based approach is detailed in the subsequent guiding principles.

2. Current Global Context

2.1 Canada is a Trading Economy

As a major trading economy, Canada benefits greatly from an international system with open markets, enforceable fair trading practices, and strong multilateral institutions. That is why Canada has always been a strong proponent of liberalized trade—which creates new economic opportunities across the Canadian economy—and has worked toward its advancement through multilateral fora, as well as bilateral and regional agreements. However, existing institutions and agreements must be continually reinforced to respond to the latest global trends in trade policy. Canada will not let its support for free and fair trade allow other countries to discriminate against it without responding.

Trade is, and has been, an engine for Canada's economic growth, high standard of living, and strong social safety net. Despite significant challenges following the pandemic and the supply chain disruptions it caused, Canadian trade levels have strongly recovered. In 2022, two-way trade in goods and services increased by 21 per cent to reach a record high of nearly $1.9 trillion, or 67.4 per cent of GDP—supporting roughly one in six jobs in Canada. Exports of goods and services—which supports an estimated 3.3 million Canadian jobs—expanded by 21.2 per cent to a record high of $940.4 billion last year, of which $681.6 billion was to the United States.

Canada, along with Japan, is the only country with comprehensive free trade access to all G7 and European Union economies, as well as the Trans-Pacific region. Canada's world-leading market access is made possible by the Canada-United States-Mexico Agreement (the new NAFTA), the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In total, Canada's 15 free trade agreements (FTAs) with 51 countries cover 61 per cent of the world's GDP, providing predictability and open market access to Canadian businesses, along with preferential access to 1.5 billion consumers.

To maintain Canada's privileged trading position, the government is also working towards opening new markets to create new opportunities, including through ongoing free trade negotiations with Indonesia and the Association of Southeast Asian Nations (ASEAN). A free trade agreement with Indonesia, according to the initial Economic Impact Assessment, would increase Canada's GDP by $328 million and bilateral trade by $1.55 billion—beyond current levels—and create nearly 2,000 jobs in Canada by 2040. The Joint Feasibility Study for a Canada-ASEAN free trade agreement estimates that Canada's GDP would increase by $3.3 billion and bilateral trade would increase by $9.73 billion beyond current levels. Beyond supporting economic growth, Canada's work to advance free trade agreements, in alignment with the intent of this policy statement, is also protecting and creating good opportunities for Canadian workers. Ambitious labour agreements and requirements benefit workers in Canada and in countries we have trade agreements with by ensuring meaningful labour protections across geographies, which help ensure foreign companies cannot gain an unfair competitive edge by taking advantage of their employees. Environmental protection clauses ensure that Canadian workers who do their jobs following world-leading environmental standards are competitive with workers in other countries that may not have as robust standards. While these elements of Canada's approach to free trade are beyond the scope of this policy statement, they reflect the government's overarching view that whether on labour, environment, or reciprocity, trade must be conducted on a fair and level playing field for Canadians doing business with and around the world.

In addition to its bilateral trading relationships, Canada has a long history advocating for the development of today's multilateral trading system. In 1948, Canada was a founding member of the General Agreement on Tariffs and Trade (GATT), which laid out the first rules of international free trade to eliminate protectionism and restore economic prosperity following World War II. In 1995, GATT was replaced by the World Trade Organization (WTO), and Canada was once again a founding member. Since the WTO's founding, Canada has been an active and supportive member of the Organization and its role at the core of the global multilateral trading system. WTO Agreements are the foundation of the rules that govern international trade including non-discrimination among the 164 members. For Canada and our trading partners, the WTO provides an important forum to fairly settle trade disputes and negotiate new rules to ensure the global trading system can adapt to new and emerging challenges. Canada is encouraging these reforms by leading the Ottawa Group on WTO Reform—a group of likeminded countries committed to reinforcing the multilateral trading system, and ensuring that it remains accessible and rules-based for everyone–to ensure that the international system that has benefitted Canada continues to do so.

2.2 Evolving Global Trade and Rising Protectionist Barriers

Canada relies on, and supports, open global markets. Unfortunately, many countries, including some of Canada's key trading partners, are increasingly introducing discriminatory policies intended to favour domestic production. These policies limit access for Canadian exports and suppliers. These policies are wide-ranging in nature, but are generally designed to favour economic activity in the country implementing the measure through the use of domestic content or "buy local" requirements, unfair subsidies, or other trade-related measures, such as technical barriers to trade and foreign investment restrictions. These restrictions are most often focused on the manufacturing and industrial sectors.

These restrictive measures to favour domestic production and goods have the potential to harm the integrated supply chains between Canada and our partners, and threaten the jobs, in Canada and abroad, that are dependent on them. Such threats include the restrictive domestic content requirements that have recently been included in other countries' government procurement policies.

While many of these policies are intended to support diversification away from unreliable trading partners and authoritarian regimes towards trusted democratic partners, in order to support supply chain resilience and economic security—objectives that Canada shares—these measures may have unintended consequences of reducing access and opportunities for Canadian exports and businesses. Canada is committed to working with its democratic allies to secure our shared supply chains, and will continue working to ensure procurement and investment incentive programs include friendshoring as a top-of-mind objective. Canada has also been focused on working with its trading partners to ensure fair access for Canadian iron, steel, and manufactured products under certain clean economy tax credits in other countries.

Importantly, the proliferation of discriminatory, trade-distorting policies is not occurring only amongst Canada's democratic allies. In fact, Canada and its allies are often responding to discriminatory practices by major non-democratic economies. Persistent subsidization and other non-market policies and practices favouring domestic industries, including steel and aluminum, electric vehicles, and critical minerals, continue to disrupt global markets and have negative impacts on Canadian producers. Other examples of the regulatory and structural barriers which aim to impede Canadian companies doing business in, or exporting to, their markets, include technical barriers to trade such as product or food safety regulations designed to favour domestic companies. In addition to restrictions on the aforementioned industries, Canada also remains concerned about restrictions faced abroad by the Canadian agricultural sector, including barriers to canola, beef, and pulse producers.

2.3 Global Institutions Under Strain

Many of the protectionist policies being pursued pose a risk to the global trading system, and outrightly undermine existing multilateral trade rules. However,for a number of these issues, Canada does not have access to effective recourse for dispute settlement under the WTO because of some countries' unwillingness to approve nominations to the Appellate Body.

Canada is committed to WTO reform, including the safeguarding and strengthening of the dispute settlement mechanism, as demonstrated through the work of the Ottawa Group. While Canada would prefer to address trade issues through effective recourse mechanisms, the WTO dispute settlement system is currently not a viable avenue to do so. This means that Canada must consider a domestic response to safeguard its economic security and create a level playing field for its businesses that seek to do business globally.

3. Canada's Response

3.1 The Importance of Reciprocity

Canada remains committed to ensuring that its trading relationships continue to be mutually beneficial.

Despite that effort, recent protectionist actions by Canada's trade partners have created a situation where Canada needs to take action to ensure the benefits of free trade are enjoyed by Canadian businesses and workers. To ensure strong trade growth can continue to support Canadian jobs and Canada's growing economy, the government is committed to ensuring the fairness of Canada's trading relationships.

Canada's intent is not to pursue protectionist or "Buy Canada" policies that undermine the multilateral trading system or that are unfairly punitive for Canada's trading partners. Rather, this approach seeks to ensure that countries that limit Canadian access  to their markets do not unfairly benefit from access to Canada's markets. In practice, this means carefully monitoring other countries' policies and practices and proactively seeking to address unfair trade barriers, while also being prepared to match at home the treatment that Canadian goods and suppliers face in those countries. The goal is to ensure a fair and level playing field.  

3.2 Reciprocity Policies Pursued by Canada

Canada has and will continue to stand up for Canadian businesses and workers by pursuing a reciprocal approach to respond to policies that have unfairly targeted Canadian industries:

• U.S. Section 232 Tariffs on Steel and Aluminum: In June 2018, the U.S. imposed a 25 per cent tariff on imports of Canadian steel and a 10 per cent tariff on imports of Canadian aluminum under Section 232 of the Trade Expansion Act, which relates to U.S. national security. In response, Canada imposed "dollar-for-dollar" retaliatory tariffs against $16.6 billion of imported steel, aluminum, and other products from the U.S. This subsequently resulted in the May 2019 joint statement eliminating U.S. tariffs against Canada.
• Government Procurement Restrictions: In response to restrictive measures adopted by some of Canada's trading partners, including domestic content requirements for other countries' federally-funded infrastructure projects, Canada is proceeding with the implementation of reciprocal procurement policies. This will ensure that Canada only procures goods and services from countries that grant Canadian businesses a similar level of market access. To support this work, the government recently concluded targeted engagement on concrete reciprocal procurement proposals with provinces and territories, industry stakeholders, and workers and unions. On the basis of this targeted engagement, the federal government is working to implement reciprocal procurement measures in the near-term.
• Domestic Content Requirements in Certain Clean Economy Investment Tax Credits: Canada has been vocal to its allies about concerning impacts on Canadian businesses in certain foreign clean economy investment tax credits. Through its work with the United States, Canada secured in the Inflation Reduction Act an important carve-in for Canadian companies in the cross-border electric vehicle supply chain. In light of the restrictive eligibility conditions associated with certain countries' clean economy tax measures, on October 5, 2023, Canada launched consultations to hear from Canadians businesses and other stakeholders on potential new reciprocal treatment measures for certain clean economy investment tax credits.

4. Guiding Principles for Canada's Reciprocity-Based Approach

Going forward, the Government of Canada will consider reciprocity as a key design element for new policies, rather than employing ad hoc reciprocal policies as a response to specific actions by other countries. This approach will be applied to a range of new measures including, but not limited to, government procurement, including infrastructure and sub-national infrastructure spending, investment tax incentives, grants and contributions, technical barriers to trade, sanitary and phytosanitary measures, investment restrictions, and intellectual property requirements.

Canada's reciprocity-based approach will be guided by the following key principles:

1. Fair Treatment and Opportunities Abroad for Canadian Businesses: Policies will be designed to, as closely as possible, match the treatment of Canadian businesses and exports by other countries to ensure a fair and level playing field. This will, however, not be a "Buy Canada" approach at the expense of existing non-discriminatory trading relationships.
2. A Team Canada Approach: Canada will engage with provinces and territories to explore the introduction of similar reciprocal policies at the sub-federal level, in order to ensure that these policies have broadest possible effect. Canada may also consider imposing relevant conditions on federal support to provinces and territories, as appropriate.
3. Securing Supply Chains with Canada's Partners: Vulnerabilities in critical supply chains around the world have been exposed by the pandemic, autocratic states' coercion, and Russia's illegal invasion of Ukraine, to which Canada and countries around the world have responded by friendshoring their supply chains. To secure our critical supply chains, the government will continue working with its allies to introduce incentives for businesses to reorient supply chains to trusted, reliable partners. In pursuing reciprocity, Canada will take care to ensure any new measures do not unnecessarily harm trading partners who do not discriminate against Canadian goods and suppliers.
4. Upholding the Rules-Based International Order: While Canada will consider incorporating reciprocity in the design of new policies moving forward, care will also be given to respecting and upholding the rules-based international order, including pursuing all other viable recourse options through multilateral institutions and continuing to support initiatives to modernize and strengthen WTO rules.
5. Providing Appropriate Flexibilities: In designing and implementing reciprocal policies, Canada will give close consideration to the development of appropriate flexibilities, such as exceptions and waivers, which may be necessary in limited circumstances, such as where there are short supply concerns or regional considerations. Reciprocal policies will be pursued in the overall interests of Canadian workers and businesses.