Despite protectionist sentiment in the U.S. and Europe, trade remains vital to Canada’s economy
Protectionist forces are clearly on the rise in many parts of the world. Britain’s vote to exit the EU and Donald Trump’s vow to renegotiate trade deals such as the North American Free Trade Agreement (NAFTA) are only the most obvious manifestations of this sentiment. Hillary Clinton has vowed to “review” NAFTA and publicly opposes the Trans-Pacific Partnership. Canada’s trade deal with Europe is imperilled by the EU’s decision to allow each member state to vote separately on the treaty rather than ratification by the European Parliament, while the prospects for a U.S.-EU trade deal appear miniscule.
The growth in protectionist sentiment reflects a misunderstanding of how trade benefits the economy. The benefit does not come from a mercantilist maximizing of the surplus of exports over imports. Treating exports as good and imports as bad for the economy ignores how imports contribute to rising living standards. Import competition lowers prices, forces domestic firms to become more productive and increases the choices available to consumers and businesses. Countries that chose autarky, such as post-war Latin America, China before 1978, India before 1991 or Cuba and North Korea, remained near the bottom of global rankings of economic development. Countries that promote exports but discourage imports, such as Japan and several other Asian nations, invariably have low levels of productivity in their domestic economy and high consumer prices.
In Canada, it’s easy to document that trade surpluses rose rapidly during the Depression of the 1930s and the severe recessions of the early 1980s and 1990s. More broadly, a mercantilist policy that simple-mindedly favours exports and discourages imports inevitably ends up suppressing real wages, by keeping nominal wage costs low to encourage exports and raising import prices through tariffs or other restrictions. The goal of trade policy is not a simple excess of exports over imports, but productivity-enhancing specialisation and economies of scale from access to larger markets and more competition from imports that broadens the choices for all. From an economist’s point of view, the benefit of trade is based on comparative not competitive advantage; that is, about maximizing each country’s strengths so that all nations benefit, not beating others in a zero-sum competition.
Statistics Canada research concluded that from 1974 to 2010 “exporters accounted for more than twice their share (over 70 percent) of total manufacturing employment and shipments, and their labour productivity was 13 percent higher than that of non-exporters.” The same study found that imports of inputs contributed one-quarter of Canada’s total productivity growth between 1995 and 2000, and two-thirds between 2000 and 2007, a clear demonstration of how imports can boost the domestic economy.
Trade agreements replace the state-to-state resolution of trade disputes, such as between Canada and the U.S. over softwood lumber. In trade disputes between nations, the larger country usually fares better in a political setting where power triumphs. Trade agreements instead resolve disputes mostly with investor-to-state settlements in an arbitral setting. It’s erroneous to think of trade agreements as between countries, since it’s individuals and companies who actually trade within the rules set by governments. Trade agreements mostly reduce the scope for arbitrary and discriminatory regulations and for government interference in market-based decisions, allowing firms to plan long-term decisions on where to locate production and distribution with more certainty about the “rules of the game.”
Trade is vitally important to Canada’s economy. In 2015, total exports of goods and services accounted for 31.5 per cent of Canada’s GDP, up substantially from 25.2 per cent before the free trade accord with the U.S. Statistics Canada calculates that 2,942,480 Canadians, or 16.7 per cent of all workers, depend directly or indirectly on exports for their employment. The higher share of exports in GDP than in employment reflects that some exports include imported parts and that productivity is higher in export industries.
Canada’s trade remains overwhelmingly dependent on the U.S., which accounts for three-quarters of our exports and two-thirds of our imports. The dependence on U.S. markets is almost complete for key exports such as autos and energy. Oil and gas in particular were major beneficiaries of free trade with the U.S., which assured access to markets after a series of controls on both Canada’s energy exports and U.S. imports in the 1970s. Free trade was as much a boon to our natural resource industries as manufacturing, a reflection of Canada’s comparative advantage.
Of course, trade inevitably creates winners and losers in terms of both incomes and jobs. As well, it can increase the inequality of incomes, although this has been more of a factor in the U.S. than in Canada because of the boom in our resource sector over much of the past 13 years. In stressing the benefits of trade, economists and politicians have not paid enough attention to creating programs to help those disadvantaged by the loss of jobs or lower wages.
Canada had a visceral discussion about the value of more international trade in the 1988 election. Since then, a consensus has evolved on the overall benefit of more trade, even as we watch the acrimonious debate in the U.S. and Europe. Hopefully, the outcome of this argument in our major trading partners will be as enlightened as it was for Canada. The debate abroad may even be beneficial for Canada, since it highlights the inefficiency of the many internal barriers to trade within Canada.
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