Social Policy in Ontario

If freer trade kills off these Canadian businesses, it would be better for everyone

Posted on May 24, 2017 in Debates

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NationalPost.com – FP Comment
May 23, 2017.   William Watson

Here are a few nuggets from a 26-chapter, 31-contributor, 642-page brick called “Redesigning Canadian Trade Policies for New Global Realities,” which Montreal’s Institute for Research on Public Policy (with which I am loosely associated) brought out last week.

• Between 1995 and 2000, one-quarter of Canadian productivity growth came from foreign countries, predominantly the U.S., via cheaper and better imported inputs. (Does Trump know about the effects of imports on domestic productivity? Does Fox News talk about it?)
• “The pace of commodity specialization” across Canadian manufacturing plants “increased dramatically following the implementation of the (Canada-U.S.) Free Trade Agreement, accompanied by a substantial increase in the length of production runs.” (Just as economists had predicted it would.)
• The 96.9 per cent of Canadian exporters who were SMEs (small-to-medium-sized enterprises, those with fewer than 500 employees) accounted for just 25.6 per cent of total export value. By contrast, the 3.1 per cent who were large firms accounted for 74.4 per cent of export value. (It seems in some things size does matter.)
• Only about five per cent of Canadian exporters make use of the panoply of available government supports for export.
• Exporting to emerging economies offers slightly higher gross profits per unit increase in sales than does exporting to advanced economies. On the other hand, it produces much greater variation in profits, with top-quartile exporters experiencing 24-per-cent annual growth in gross profits from 1994–2008 but bottom-quartile exporters experiencing a 20-per-cent annual drop in gross profits. (It’s a risk-reward choice our governments should leave to the business organizations that will earn the rewards and suffer the risks.)

I present these facts as an almost totally agnostic economist. It’s interesting that the small firms, so beloved by policy-makers, produce such a small share of exports. On the other hand, there’s nothing sacrosanct about exports. Business firms should produce exports, imports or both, or neither, as their customers wish and are willing to pay for.

Likewise, although higher productivity is generally a good thing, it depends on how you achieve it. If you buy a fantastically productive machine that makes your one or two remaining employees terrifically productive, well, that’s great for your productivity numbers and maybe gets you on the cover of business weeklies. But if it’s also fantastically expensive, kills your profits and puts you out of business, it wasn’t a very smart investment, was it? The policy I favour is a scrupulous neutrality on the part of the government. Let markets figure out what works and what doesn’t.

A call for more ‘inclusive’ trade would protect firms that aren’t very good at or interested in trade.

By contrast, the IRPP researchers don’t seem to be agnostic about the kind of trade policy they want. One strand of their thinking is that policies should be more “inclusive.” Thus there’s a chapter on the need to gather more data about the effects of trade on women, which is now a very trendy thing among people of progressive stripe: the federal budget tried to track its changes with respect to women. I suppose if we come up with suggestive enough data, some of our future trade agreements will block tariff reductions in industries where women work more than men — on the highly debatable presumption that protection will be female-friendly.

But another meaning of “inclusive” adopted by some of the IRPP contributors refers to firms. They want trade to be more inclusive of smaller firms, that is, the kinds of firms that on average have shown themselves not to be very good at or interested in trade. Yes, if governments are doing things to actively discourage small firms from exporting, they should stop it. But a standard economic story is that exporting involves large fixed costs. Should government indemnify small firms for these large costs? They may be fixed costs, but they’re costs nevertheless. We want to encourage exports that can’t cover their fixed costs?

Another big theme, reflecting changes in the economic theory of trade, is that trade isn’t good or bad for industries so much as for firms. Lots of big-data studies now show that firms’ experience of trade varies a lot within industries. In fact, one of the best things about trade, though no politician can say so, is that strong competition from foreigners kills a country’s weak firms. But the fact that firms’ experiences do differ leads some of the researchers to argue that in constructing trade policy we need to take the needs of different firms into account. (Can anyone think of one firm in particular that will have the ear of the trade minister? Begins with “B”. Then an “O,” and an “M” and another “B” …)

Firm-specific trade policies? Count me out. Let’s make trade as free as we can — which means much freer than it is — and by all means let’s help losers adjust. But we really do need them to lose.

http://business.financialpost.com/fp-comment/william-watson-if-freer-trade-kills-off-these-canadian-businesses-it-would-be-better-for-everyone

Tags: economy, featured, globalization, ideology, standard of living

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