Canada’s Pivot to the Indo-Pacific: The Strategic Importance of Prioritizing a Trade Agreement with ASEAN

Abstract

With new or updated trade agreements in place covering trade in North America, with Europe, and with many of its major trading partners in the Pacific Rim, Canada’s trade diversification strategy must increasingly look to the Global South. In the high-growth developing world, ASEAN stands out. Like Canada, ASEAN features a trade-dependent economy with similar interests in maintaining an open, rules-based trading system. An ASEAN-Canada free trade agreement (ACFTA) has been long under consideration and, on 16 November 2021, the parties agreed to pursue negotiations towards one. This study updates the business case for such an agreement. First, it draws on gravity modelling techniques to establish that Canada is under-trading in the ASEAN market. Second, it provides an updated quantitative perspective on the trade and economic implications of an ASEAN-Canada Free Trade Agreement (ACFTA) using a dynamic computable general equilibrium model. The level of ambition is calibrated to be consistent with the RCEP, ASEAN’s most ambitious and most comprehensive trade agreement to date. Third, it considers the advantages of Canada becoming an ASEAN Plus One partner in terms of strategically positioning Canada to join the RCEP, which promises direct gains that are an order of magnitude higher than an ACFTA alone, facilitates full participation in the dynamic production chains that have long characterized Asian regional economy and that will be further advantaged by the accommodating rules of origin in the RCEP, and provides a strategic hedge for preferential access to both the Chinese market and potentially the Indian market.

Keywords: Canada, ASEAN, FTA, CGE, gravity model, RCEP accession

JEL Classification: F13, F15