international trade

You don’t have to be an ‘originalist’ to protect free trade

The New Brunswick Provincial Court ruled that the province’s effective ban on liquor purchased out-of-province was unconstitutional.

Despite protectionist sentiment in the U.S. and Europe, trade remains vital to Canada’s economy

A mercantilist policy that simple-mindedly favours exports and discourages imports inevitably ends up suppressing real wages.
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The Importance of International Trade to the Canadian Economy: An Overview

In 2015, exports accounted for 31.5% of GDP, up from 25% before Canada signed a series of free trade agreements starting in 1988. Exports were 36% of GDP before the global recession began in 2008. Value-added exports, which subtract the imports embedded in exports, represented 22.2% of GDP.

Exports directly and indirectly accounted for 2,942,400 jobs in Canada in 2011 according to Statistics Canada, or 16.7% of all employment.

Imports were the equivalent of 33.8% of GDP in 2015. About 26% of imports are used as inputs into production in Canada, notably in export-intensive sectors like autos and high-tech. The effective tariff rate on imports is 1%, down from 3.5% before the push to more free trade began in the late 1980s.

Trade overwhelmingly is still oriented to the United States. The stagnation of exports to Europe and Japan in recent years was offset by increases to Asia. Because Canada exports to Asia, notably natural resources, it has a relatively small trade deficit with Asia compared with the US. Canada has little direct trade with Mexico.

Both exports and imports are beneficial to economic growth, largely by boosting productivity. Firms in Canada that export have significantly higher productivity than firms that do not export. Imports of intermediate inputs contributed over half of Canada’s recent productivity growth. However, trade does create winners and losers, which has fuelled protectionist sentiment.

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The Fraser Institute’s annual report, Economic Freedom of the World, measures the economic freedom (levels of personal choice, ability to enter markets, security of privately owned property, rule of law, etc.) by analyzing the policies and institutions of 151 countries and Hong Kong. It is the world’s premier measurement of economic freedom, using 42 distinct variables to create an index, ranking countries based on economic freedom, which is measured in five areas: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business.

According to the report, based on 2012 statistics (the most recent year of available data), the top 10 most economically free jurisdictions are Hong Kong, Singapore, New Zealand, Switzerland, Mauritius, United Arab Emirates, Canada, Australia, Jordan and (tied for 10th) Chile and Finland. The United States, once considered a bastion of economic freedom, now ranks 12th in the world, tied with the United Kingdom. Other notable rankings include Japan (23rd), Germany (28th), Russia (98th), India (110th) and China (115th). The 10 lowest-ranked countries are Myanmar, Democratic Republic of Congo, Burundi, Chad, Iran, Algeria, Argentina, Zimbabwe, Republic of Congo and Venezuela, which retains the title of the world’s least economically free country. Some despotic countries such as North Korea and Cuba could not be ranked because of lack of data.

The report also includes a chapter by Fred McMahon that provides an overview of the evolution of economic policy in the Arab world and how this relates to the Arab Spring and developments since; and another by Indra de Soysa and Krishna Chaitanya Vadlamannati that finds compelling econometric evidence that economic freedom reduces conflict.

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Free economic activity zones, or free market zones as they are often called, have generated many economic and social benefits and have proven politically acceptable in an increasing number of industrialized and developing countries. In these designated zones, industries such as banking, insurance, international trade, and enterprise are almost totally deregulated. Canada has not as yet taken advantage of the benefits associated with the establishment of such zones.

Author, Herbert Grubel, looks at the benefits and costs from a Canadian perspective and recommends, through the selected reduction or elimination of regulations, controls, and taxes, the implementation of free market zones in certain geographically defined areas. He concludes that economic activities in these zones would expand rapidly, resulting in increased employment and productivity combined with an improved balance of payments position for Canada.

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