All our trade doors look unattractive now
I’ve been reading a new paper by Oxford economic historian Kevin O’Rourke called Two Great Trade Collapses: The Interwar Period & Great Recession Compared, a title that, unlike many academic titles, pretty much catches what the paper’s about.
The comparison of the two episodes is heartening. The trade collapse following the Crash of 2008 was actually sharper and in its beginning stages than following the Crash of 1929. But it ended up to be much shorter. By October 2010 the volume of world trade was back to where it had been in August 2008. In the Great Depression, by contrast, world trade took more than eight years to return to its 1929 level. World industrial output bottomed out just a year after our most recent crash. In the 1930s it took more than three years to hit bottom and then another three to get back to where it had been.
Why the happier experience this time round?
O’Rourke credits monetary and fiscal policies that helped prevent a 1930s-style collapse of demand. Partly this was because of the greater freedom enjoyed by policymakers not burdened, as their forbears had been, by the gold standard. Another positive difference: trade policy has not been nearly as protectionist. “No serious economic historian believes that interwar protectionism caused the Great Depression,” O’Rourke writes. On the other hand, a breakdown in multilateralism in trade probably did cause the crisis to be longer and more serious than it would have been otherwise. By contrast, “the recent crisis has clearly seen nothing even remotely comparable to the worldwide increase in protection of the 1930s.”
Or at least not yet, he might have added. President Donald Trump seems to be taking a decidedly 1930s, beggar-thy-neighbour approach to trade, and largely for 1930s reasons—the belief that running a trade deficit means exporting jobs.
As a result, Canada’s trade choices are becoming less and less attractive almost by the hour. How might we rank them?
1. Status quo NAFTA. Time was when we sought and, as with streamlined border measures, obtained genuine improvements in NAFTA. But the status quo now seems the very best we can hope for, though despite reasonable economic performance all round and even allowing some margin for posturing by the Artist of the Deal, it no longer seems to be on offer.
2. Renegotiated NAFTA. Probably not as good as the status quo, given the Trump administration’s mulishness. But less disruptive than other possibilities.
3. Back to the Canada-U.S. FTA. The president reportedly broached the possibility of a bilateral during Prime Minister Trudeau’s recent visit to Washington. There’s a history here. We originally got into NAFTA to avoid the dreaded hub-and-spoke, which is not a medieval compliance instrument but a situation in which the United States, having a bilateral with each North American partner, would be an investment hub attached to two or more spokes, depending how many bilaterals it eventually negotiated. The hub would have access to all its partners’ markets but each partner would only have access to the hub. So NAFTA, in which no one’s a spoke, was better than a second bilateral. But NAFTA was definitely a second-best defensive measure in response to the U.S. not wanting to refuse Mexico’s request to orient itself northward. (Time was when U.S. presidents actually encouraged Mexico’s development.) First-best was CUSFTA, in which we have preferential access to the U.S. market and Mexico doesn’t. If we had to go back to the old CUSFTA, that might not be so bad strategically. Unfortunately, the old CUSFTA probably isn’t on offer. So it’s on to…
4. A renegotiated Canada-U.S. FTA. It might be better than nothing but, given some of the stranger demands the U.S. government is making—trade deals with five-year escape clauses?—that’s not a sure thing
5. A Canada-U.S.-U.K. FTA. In principle, fine. In practice, what is the U.S. looking for? And what do we do with our brand new FTA with Europe?
6. Back to the WTO. In the end, do we return to 1987, when all we had was the Uruguay Round, or maybe even 1964, if the Auto Pact gets blown up, too? WTO tariffs are a lot lower than they used to be, so living by WTO rules alone is closer than it used to be to the economist’s ideal of free trade. But what if President Trump discovers he doesn’t like the WTO any more than he did NAFTA? Will the WTO be more popular in U.S. politics than NAFTA is?
In his paper, Kevin O’Rourke notes that it was in 1934 that Congress enacted the Reciprocal Trade Agreements Act, which marked the U.S. pivot “towards its post-war role as defender-in-chief of the multilateral international trading system.” Both the world and the U.S. have done extraordinarily well under that system. It’s both sad and dismaying to see the U.S. now becoming attacker-in-chief.