The Road to a Canada- U.S. Customs Union: Step-by-Step or in a Single Bound?

The Study in Brief

As Canada determines how best to safeguard and enhance its access to the U.S. market, one option, either as a stand-alone or as part of a bigger package, is to negotiate a Canada-U.S. customs union. This would involve Canada and the U.S. establishing a common external tariff and other barriers to imports from the rest of the world. This Commentary assesses the feasibility and desirability of a basic customs union, as well as deeper and more limited variants. A customs union would, on balance, enhance Canadian economic welfare. The major benefit of a Canada-U.S. common tariff against third countries is that it would eliminate costly rules of origin requirements between Canada and the U.S., reducing border costs and bolstering investor confidence. A customs union with a common trade-remedy regime would eliminate trade-remedy penalties between the two countries, reducing trade irritants. Common non-tariff barriers would further reduce border frictions.

Despite expected benefits for businesses and consumers and the similarity of Canadian and U.S. external tariffs in many industries, arriving at a basic customs union raises both practical and political challenges. Tariff structures differ considerably in some sectors, and even when MFN duties are similar, a customs union would involve reconciling tariffs and rules of origin in the many bilateral free-trade agreements signed separately by Canada and the U.S., as well as special arrangements for developing countries and other nations, including Cuba. Canada and the U.S. would also have to coordinate their positions in future trade negotiations, agree on how to share tariff revenue and create a uniform customs code. A customs union which exempted some sectors, harmonized tariffs in some areas initially, eliminated MFN tariffs on intermediate goods, or eliminated rules of origin where tariff rates are close are practical intermediate options which would secure some of the benefits of rules of origin elimination. All would improve on the status quo by enhancing access for Canada to the U.S. market and increasing predictability for traders and investors