DUMBED DOWN FREE TRADE.
Have you ever noticed a rather subtle change to naming trade agreements? Unlike the 1994 North American Free Trade Agreement and the 2014 Canada- Korea Free Trade Agreement, some recent ones no longer mention the words “free trade.”
CETA stands for the Canada- European Union Comprehensive Economic and Trade Agreement — somehow “free” got lost in the shuffle but at least trade gets a mention. CPTPP is a mouthful of meaningless terms: the Comprehensive and Progressive Agreement for Trans- Pacific Partnership. Neither “free” nor “trade” even come into it.
You might think this is just splitting hairs, but it isn’t. At a recent international conference, I raised the innocuous point that governments are somewhat hypocritical about trade liberalization, given their willingness to maintain protection for many sectors. The response from some senior Canadian government officials took me aback. They suggested that the term “free trade” is no longer used for this reason but instead “partnerships” (not quite true given the recently concluded 2017 Canada-Ukraine Free Trade Agreement). This seems unfortunate since the whole raison d’être of these agreements is to create economic gains from free trade.
Actions speak much louder than words. Governments will remove some trade barriers but keep others for political reasons such as agriculture support, quotas, tariffs and foreign investment restrictions ( e. g. banking and telecommunications). While we turn up our noses when U.S. President Donald Trump uses lumber, aerospace, steel and aluminum tariffs to target unfair trading practices in other countries, we feel no shame in protecting any industry, big or small, from competition. No country can brag it is truly open to trade, including Canada.
Sadly, trade agreements have been expanded to include everything but the kitchen sink: gender, social and other policies even though they have little to do with trade. This not only undermines the paramountcy of free- trade principles in agreements but also a country’s sovereignty, which is best supported by domestic policy formulation.
It might be useful to recall why free trade is good in the first place and how it can be corrupted by political decisions. The essence of rules- based free trade is to enable countries to specialize in what they do best, which maximizes the gains to producers and keeps consumer prices lower. This is no different as a principle for any individual, never mind a country. If a person has comparative advantage in, say, canola farming, time is best devoted to this line of work to maximize income. The income earned from selling canola is used to buy goods and services from others who specialize in what they do best and sell at lower cost than what the canola farmer can do.
The idea of comparative advantage dates back to the political economist David Ricardo’s 1815 criticism of British Corn Laws that protected farmers from grain and food imports. His view was contrary to that of the economist Thomas Malthus, who believed that food imports would lower worker wages and in turn reduce demand for manufactured products (this is same argument made by Ontario Premier Kathleen Wynne and Alberta Premier Rachel Notley, that higher minimum wages increase demand for products). If you had a chance to watch recent episodes of Victoria on PBS, you would have seen the former British prime minister Sir Robert Peel, persuaded by economist Adam Smith and Ricardo, push for the repeal of the Corn Laws to increase food supply in wake of the Irish famine 1845-54. It was Britain’s start as a free-trade nation.
Unlike Peel, today’s politicians focus far too much on producers, ignoring the benefits of free trade to consumers. When Trump put tariffs on steel and aluminum, it was to protect certain producers in the United States. Although it is possible for tariffs to be shifted back as lower prices paid to importers so that American consumers would not be affected, consumers would generally bear at least part of the brunt through higher prices.
If Trump has a point, it is a matter of strategy. Xi Jinping, China’s now lifetime president, caused eyes to roll at last year’s World Economic Forum when he championed free trade. China is no free trader. It grabs market share in steel, aluminum, manufacturing and rare-earth minerals through subsidies and money- losing state- owned enterprises and restricts imports and foreign investment to protect Chinese businesses from foreign competition.
Trump is expected to announce this week reciprocal action to protect intellectual property rights, restrict Chinese foreign investment and apply new tariffs. While he is right to consider reciprocal trade actions if they lead to a better freetrade system, it is not clear that is his goal. His withdrawal from TPP and his push in NAFTA negotiations for more U.S. auto production and ‘ Buy American’ government procurement seeks protectionism, not free trade.
Before being too hard on Trump, let’s remember that trade-barrier-loving politicians in other countries are easy to find. Canadian politicians of all political stripes embarrassingly protect just 15,000 dairy, egg and poultry producers under supply management quotas. Not only do resulting high farm prices crowd out export- related industries, it also raises consumer prices for millions of low-income Canadians.
As for Canada’s push for “progressive” trade policies, it is unclear what that means. If the concern is to make sure that workers are not left behind due to disruption, the best response is through domestic policies — training, moving assistance and removal of regulatory and tax obstacles to new jobs. Progressive policies, like getting rid of supply management in agriculture, would reduce consumer prices for those who can’t afford them. No chapter needs to be written into an agreement — instead, progressiveness comes from increasing competitive forces so businesses cannot take advantage of pricing power. If Peel understood that, so should today’s Canadian politicians.
Canadian and foreign politicians alike should get back to the concept of trade liberalization. We don’t need fancy words like comprehensive, partnerships or progressive. Just free trade.