Canada will need more than a paper partnership to create an EU ‘alliance’

Economists long ago borrowed from physics to argue that trade flows act like the pull of gravity between two objects. The larger the economy, and the closer it is, the stronger the pull to trade with it. That model makes the United States the sun pulling Canadian trade into its orbit and the European Union a distant star, drawing a small flow across the Atlantic.

It’s not a perfect model. If more barriers are put in the way of trading with the big economy next door and the path is eased to doing business with that distant star, then the forces of trade attraction can presumably be shifted. Still, Canada and the EU haven’t found it easy to alter those forces.

When Canada signed the Comprehensive Economic and Trade Agreement with the EU in 2016, it was hailed as a landmark. Prime Minister Mark Carney and European Commission President Ursula von der Leyen – who meet this week in Montreal for a Canada-EU summit that will launch a new “alliance for the future” – still laud it as a major success that has increased trade in goods and services by 80 per cent.

Yet in real, after-inflation terms, it’s been a smaller success, an increase of roughly 4 per cent a year from a modest base. And importantly, there is room for more. The government’s own studies find CETA is underused. A study by the Office of the Chief Economist at Global Affairs Canada (GAC) concluded CETA “still offers untapped potential.” For all its liberalizing trade clauses, CETA has brought a moderate increase in trade – but no Euro boom.

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Beyond trade flows, the forces drawing Canadians to Europe haven’t been strong, either. In 2023, 23,850 students came from France to Canada to study under a bilateral exchange agreement – ten times more than the number of Canadians who went to study in France.

Now there is a new impetus to get closer. The United States has gone from free-trader to tariff toll-gater and from trusted ally to predatory power, making both Canada and Europe feel vulnerable.

This week’s summit is supposed to launch a much-touted Canada-EU “alliance,” which will include an agreement on digital trade, negotiations for Canada to join Europe’s student-exchange program, work towards connecting payment systems and AI cooperation, among many other things.

Yet what we have learned after nearly a decade of CETA is that it’s not so easy to shift big patterns of economic ties by signing an agreement. It will take efforts to identify the things that keep getting in the way – and practical steps to build platforms and networks to move closer.

“It’s such a great example of why a trade agreement, while a great idea in general, is neither necessary nor sufficient for more trade. Having a trade agreement doesn’t guarantee that you get more trade,” said McGill University economic professor Chris Ragan, who co-wrote a recently published paper to launch an ongoing series on trade diversification by the Institute for Research on Public Policy called Defying Gravity.

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The paper warned that Canada is structurally unprepared to meet its trade diversification goals, with the EU or others – and that such efforts will incur costs. Canada’s exports are often loaded on trucks now, but shifting to new markets will mean more will be transported by ship, creating a need for better ports, for example. If Canada really wants to shift the pull of trade forces, it will have to identify the structural barriers, and find ways to counter them.

For both Canada and Europe, the shift in U.S. policies under President Donald Trump – from tariffs, to threats that the U.S. might withdraw security guarantees, to demands to be given Greenland – are a motivator.

Canadians have not only experienced tariff threats but saw the U.S. demand financial concessions to open the new Gordie Howe International Bridge in July in order to get through a trade chokepoint.

The U.S.’s potential control over many chokepoints – in financial systems, defence production, data or AI – are now seen by both Canada and Europe as vulnerabilities to be strengthened.

In theory, Mr. Trump has the power to wreak costly havoc on foreign economies by restricting their financial institutions’ access to clearing U.S.-dollar transactions, which are central to global trade and finance. That’s one reason Mr. Carney has proposed that Canada and Europe connect their new payment systems directly, so transactions don’t have to go through the United States, in what Carleton University international affairs professor Fen Hampson calls “multi-lateral de-risking.”

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In a world where SpaceX CEO Elon Musk has the power to slow Ukraine’s access to satellite communications in the midst of a war with Russia, it’s no wonder that Mr. Carney has expressed a desire to “diversify away” from SpaceX’s Starlink platform.

That’s why the draft statement for the Canada-EU summit includes a call for exploratory talks on co-operating on Iris2, the European Union’s own planned low-Earth-orbit satellite communications program that is supposed to offer European governments a secure alternative to Starlink.

That program would still be a relatively small alternative to SpaceX’s fleet of nearly 10,000 satellites, but in theory, Canada-EU cooperation could lead to business, since Canada’s Telesat Corp. is planning to deploy a fleet of 198 low-Earth-orbit satellities in 2028.

For Canada, economic dependence remains the primary issue driving cooperation, and both Mr. Carney and Ms. von der Leyen say they plan to build on CETA to expand trade.

But the Canadian government’s own trade assessments indicate that a majority of Canadian companies don’t use the trade agreement; nearly a third don’t know how, and exporting to Europe is particularly daunting to small- and medium-sized companies.

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The EU’s byzantine regulations are certainly one issue. Its twice-delayed Deforestation Regulation, designed to ensure certain imports don’t come from deforested land, requires registration and detailed tracing of precisely where the products come from – prompting Canadian government calls for a exemption for Canadian forest products.

That’s the kind of thing that could be dealt with by wider mutual recognition of each other’s internal regulation as adequate, said Meredith Lilly, the Simon Reisman chair in international economic policy at Carleton University. But such arrangements can be hard to work out with the EU.

The study by GAC’s Office of the Chief Economist found “untapped potential” with the use of CETA but concluded that the obstacles varied so much that the challenge now is really in equipping companies to navigate the complexities.

That suggests that it’s time to beef up Canada’s trade commissioner service to help medium-sized companies find a way to export to Europe – to navigate a European market that they still see as far away.

One way to make foreign markets seem less distant, research indicates, is by building networks.

Some studies find that student exchanges can significantly drive trade between countries; this week’s summit is expected to launch negotiations for Canada to join Europe’s Erasmus-plus exchange program but the issue is whether Canadians will go. Canadian university researchers already take part in EU-funded joint research projects with European scientists and expanding such research networks is a promising way to build economic opportunities.

The CETA lesson for any new Canada-EU alliance is that a paper partnership isn’t enough to really shift the forces of gravity. It will take strong, practical mechanisms to bring Canada and Europe into closer orbit.