It’s Canada vs. the protectionists in the new world trade wars

Posted on October 19, 2016 in Debates – FP Comment
October 18, 2016.   Philip Cross

As a trading nation, Canada has much to lose if protectionism — clearly on the rise in the U.S. and Europe — gains more ground.

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, trade surpluses rose rapidly during the Depression of the 1930s and the severe recessions of the early 1980s and 1990s. The goal of trade policy is not a simple excess of exports over imports, but productivity-enhancing specialization and economies of scale from access to larger markets and more competition from imports that broadens everyone’s choices. From an economist’s point of view, the benefit of trade is based on maximizing each country’s strengths so that all nations benefit, not on beating others in a zero-sum competition.

Canada has found consensus on the benefit of more trade, even as we watch it debated in the U.S. and Europe

In an era of slow growth, governments seek ways to boost productivity. International trade is proven to do so. Statistics Canada research concluded that from 1974 to 2010 “exporters accounted for more than twice their share (over 70 per cent) of total manufacturing employment and shipments, and their labour productivity was 13 per cent 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 nearly three million Canadians, or 16.7 per cent of all workers, depend directly or indirectly on exports for their employment.

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. Canada needs to diversify its energy exports to regions such as Europe and Asia to receive a higher price.

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 the arguments our politicians make for international trade highlight the hypocrisy of the many internal barriers to trade within Canada.

Philip Cross is the author of “The Importance of International Trade to the Canadian Economy: An Overview,” published Tuesday by the Fraser Institute.

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