In international trade, it’s not really all about exports

Posted on October 6, 2015 in Debates – Full Comment
October 5, 2015.   Andrew Coyne

As always when the subject is free trade, the debate is between rival camps of protectionists.

Barely had he announced the signing of the 12-nation Trans-Pacific Partnership, widely referred to as a “free trade agreement,” before Stephen Harper was boasting of his success in keeping trade unfree.

In the dairy industry, he bragged, Canada had conceded a mere 3.25 per cent of its market to the bloody foreign — er, to our valued trading partners, to be phased in over five years. Yet such was his concern for the interests of the dairy industry, so rudely deprived of one day’s sales out of 30 — at twice market prices — that the Conservative leader immediately promised them $4.3 billion in compensation.

Compensation, you may ask, for what? To qualify for their share of the $2.4 billion in income guarantees, dairy farmers will not be required to show any financial loss. Which is just as well, because they aren’t suffering any financial loss: They get another $1.5 billion to keep them whole on the value of their quotas.

All things considered, it was all the traditionally grouchy Dairy Farmers of Canada could do to keep a scowl on their face. “We obviously would have preferred that no additional market access be conceded in the dairy sector,” president Wally Smith averred. “However, we recognize that our government fought hard against other countries’ demands.”

(No kidding. With election day less than two weeks off, the Conservatives could ill afford to have the dairy farmers disrupting their campaign. For compensation, in other words, read: protection money. Not for nothing has the dairy lobby been christened — credit to CBC reporter David Cochrane — “lactosa nostra.”)

And that, alas, is how international trade talks are played. The game on all sides is to admit as little in the way of other countries’ exports as possible, while insisting on maximum freedom for your own. The government’s talking points on the deal, accordingly, are all about exports: The access we had gained to this unified market of 800 million people, the $28 trillion in GDP it represented and so on.

Of course, as large as these markets are, they loom rather smaller in proportion to our overall trade. Of the 11 other countries in the TPP, Canada already has free trade agreements with four — the United States, Mexico, Chile and Peru. These represent, together, 96 per cent of Canada’s total exports to, and 92 per cent of our imports from, the TPP area.

The North American Free Trade Area accounts for roughly 74 per cent of our trade with the world; the European Union, with which we have recently signed an agreement, another 9%. The non-NAFTA TPP nations will add less than three percentage points to that.

Still, every little bit helps. And as tariffs and other barriers are removed, trade with these countries should expand. The purpose of trade barriers, after all, is to stop trade.

But here’s the thing: the benefits from trade have comparatively little to do with increased exports, and almost everything to do with more and cheaper imports — the supposed “costs” of the deal.

That’s right, in free trade talks, the concessions are actually the gains. All sides, in effect, have guns to their own heads: stop taxing your consumers with tariffs and quotas, or we’ll … tax ours. Which I suppose is why it takes so many years for the typical trade agreement to be negotiated.

Of course, it isn’t just about the consumer interest, in some narrow sense, as if this were just one interest to be balanced against others. It’s about acknowledging the central role of consumers, and of competition for consumers’ custom, in driving businesses to lower costs and raise productivity — to specialize in areas of comparative advantage, and reap economies of scale from longer production runs.

The objective isn’t to increase exports, per se, as if every dollar of exports could simply be added to GDP. Rather, it’s to change the composition of GDP: An economy that trades relatively more of what it produces and consumes will be more specialized, other things being equal, and enjoy higher productivity as a result. Which is ultimately what underpins wages.

Trade is often presented as a competition between countries, and trade barriers as a way of protecting our industries from theirs. But it isn’t other countries’ industries we are really protecting them from: it is our own consumers — and not only them, but all those other Canadian industries, not so well protected, who find themselves starved of sales, capital and labour to feed the government’s pets.

As such there is no actual necessity for free trade to be reciprocal to be of benefit. Indeed, reciprocity is nowhere part of the case for free trade as economists have been making it for the last two centuries. It is only its opponents who have ever insisted upon it. The whole process of negotiating free trade, then, serves to undermine its own case.

On the other hand, free trade has always been a tough sell, politically. The benefits are spread across the whole of the population, most of whom may not even know they are receiving them; the costs are concentrated on a few groups, who know exactly who they are and who have every incentive to organize against it.

If there’s a case for negotiating free trade, then, it is the opposite of how it is commonly understood. It isn’t that, in exchange for opening our own markets, we might persuade other countries to open theirs. It is that, in pursuit of access to others’ markets, we might be persuaded to crack open our own — letting other countries “force” us to do what we should have done long ago, in our own interest.

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