THE NEW PROTECTION RACKETS
If the U.S. is going to call Canada out on its protected industries, it had better be ready to defend its own,
In 2002, a former Brazilian engineer born into a family of cattle ranchers and sugar farmers took on the United States government. Pedro Camargo, who had joined Brazil’s Department of Agriculture following a mid-life career change, believed the U.S. was unfairly subsidizing its cotton industry. At his urging, the Brazilian government lodged a complaint at the World Trade Organization and a disputes panel in 2005 ruled in its favour.
What followed is one of the more outlandish entries in the annals of global trade. After a long string of failed appeals, the U.S. was told to eliminate all subsidies for its politically influential cotton growers. Congress balked.
Brazil threatened retaliatory tariffs on a laundry list of U.S. goods: tires, intellectual property, pharmaceuticals and cars. American industry balked.
The U.S. government then made an offer: it would pay US$147.3 million per year to Brazilian farmers if Brazil dropped its complaint.
“It was very bizarre because (the U.S.) only had about 5,000 farmers then,” Camargo said in an interview. “It was a payoff and they were paying, basically, to get out of the rules.”
The cotton dispute, while unusual, is a good illustration of just how far countries will go to support politically sensitive industries. It’s also proof of what every trade negotiator knows: Almost every country, including Canada and the U.S., has a contentious policy or two, not necessarily hidden, but largely unnoticed until another country wags an accusatory finger.
Of the $900 billion in annual trade flowing between Canada and the U.S., the vast majority of it is tariff-free under the North American Free Trade Agreement. Dig a little deeper, though, and you’ll find the aberrations, the policies that aggravate, frustrate or otherwise irk relations between the trading partners and, on occasion, prompt accusations of protectionism.
In Canada, it might be courier services or telecommunications, for which restrictions are among the toughest in the developed world. In the U.S., it might be the heavily regulated maritime transport industry or insurance services. Both countries might have a bone to pick with each other — and others — on agricultural policy.
“There’s certainly no clear case to be made that Canada is more protectionist than the United States,” said Alan Deardorff, a professor of international economics at the University of Michigan. “That’s just nonsense. That doesn’t mean individual tariffs are the same, not at all. Each country has particular objectives and sectors it protects more than other sectors.”
In tweets, President Donald Trump has accused Canada of having “all sorts of trade barriers on our Agricultural products,” treating U.S. agricultural businesses and farmers “very poorly,” and being “highly restrictive on Trade!”
Some form of government aid — be it subsidies, tariffs, price supports or other interventions — contributes 9.6 cents of every dollar that goes to Canadian agricultural producers, according to 2017 data compiled by the Organization of Economic Co-operation and Development. That’s just slightly below the U.S. at 9.9 cents per dollar. Both countries’ rates are below the OECD average, though Canada’s share of aid delivered through market price supports — one of the policies considered most “distortive to trade” — is higher.
The main recipient of that largesse: the dairy sector.
Between 2015 and 2017, Ottawa contributed 44.7 cents of every dollar going to Canadian dairy producers, almost all of it coming from market price supports, according to the OECD’s measure of singlecommodity transfers (STCs), which provides an estimate of the total dollar value transferred via government policy from taxpayers and consumers to agricultural producers.
Dairy farmers receive the most support of any Canadian agricultural sector, through a complex supply management system that employs production quotas, fixed prices and hefty import duties, said Jared Greenville, senior agricultural policy analyst at the OECD. After dairy, support for most other Canadian food, including soybeans, barley, oats and rapeseed, drops to a few pennies at most.
“If it weren’t for dairy, Canada would be, I guess, one of the champions of better access and freer access in world agricultural markets,” Greenville said, noting that Canada is a member of the Cairns group of 19 countries seeking to liberalize global trade in agriculture. “In fact, if you were to take dairy out of it, Canada provides less distortionary support to agriculture than the U.S.”
Yet Canada isn’t the only country whose support for the dairy industry — one of the most protected group of commodities globally — has been called out. Between 2015 and 2017, 19 cents of every dollar that went to U.S. dairy producers came from government support, all of it via market distorting measures, according to the OECD.
New Zealand and Australia, which demanded greater access to Canadian markets during talks to form the Trans-Pacific Partnership, also took issue with the U.S. “This was a big issue for the U.S., too, in the TPP,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, D.C.
Dairy isn’t the only agricultural product that the U.S. supports with trade-distorting measures. At nearly 54 cents on the dollar, U.S. sugar producers received the most relative support between 2015 and 2017, with 32 cents of that coming from market price support. Likewise, nine cents of every dollar going to sheep meat producers is through SCTs, all of it from market-distorting measures, the OECD noted.
“The point is that everybody is doing something on agriculture,” said Debra Steger, a law professor at the University of Ottawa and a former senior trade negotiator for the Canadian government. “What I don’t think is fair is to just pick on Canada for dairy and act like the U.S. isn’t doing anything.”
Countries have plenty of motivations for supporting agricultural producers. Some hope it will slow the rate of rural decline and postpone the problem of how to employ large quantities of labourers when farms disappear. Developing countries, in particular, often cite food security as a concern.
There is also evidence that as populations become wealthier and more urban, they are more willing to pay to protect their agricultural sectors for nostalgic reasons, Hufbauer said. In many cases, he added, the political lobbying power of agricultural producers can throw off reform.
Ironically, one of the main reasons agriculture supports have stubbornly remained in place can be traced back to the U.S., which led the global charge to liberalize trade coming out of the Second World War.
Following the 1930s imposition of the Smoot-Hawley tariffs — generally believed to have exacerbated the Great Depression — it was hoped that a low tariff agenda would cement bonds between Western nations and promote shared prosperity. But U.S. Congress insisted on an exemption for agriculture.
Until the Uruguay round, the multilateral negotiation that began in 1986 and ultimately formed the World Trade Organization, “countries could basically do whatever they wanted in terms of agriculture,” Hufbauer said.
Economists have long championed freer trade, arguing that lower tariffs encourage countries to specialize in what they produce best and most efficiently, while allowing other countries to buy those products at better prices, reserving their own labour and capital for more productive means.
“In general, countries that have remained open to trade, that haven’t erected barriers including tariffs, have grown faster, they have higher incomes, higher productivity,” U.S. Federal Reserve Chairman Jerome Powell said in Senate testimony this past week. “Countries that have gone in a more protectionist direction have done worse. I think that’s the empirical result.”
Removing tariffs might be better for an economy overall, but it also exposes companies that can’t compete and, in practice, politicians have allowed protections to hang around rather than deal with the fallout of lost jobs.
A look at the services trade suggests Canada and the U.S. are both less restrictive than most countries, scoring below average in the 22 sectors covered in the OECD’s Services Trade Restrictiveness Index. But, here again, each country has its sacred cows.
No. 1 for Canada: telecommunications, for which policies on foreign ownership are among the most restrictive of all OECD countries.
Foreign ownership is limited to no more than 20 per cent of a company’s voting shares and no more than 33.3 per cent of the voting shares of a carrier’s holding company. In addition, 80 per cent of the board members must be Canadian nationals. These rules, however, do not apply to telecoms with less than 10 per cent of the market share.
Postal and courier service is another area of tight control, with Canada Post Corp. holding a monopoly on all letters weighing less than 500 grams, which is heavier than most other countries.
In the U.S., maritime law states that goods can only be transported between U.S. ports if they are carried on U.S.-built ships that are flying U.S. flags and crewed by Americans. The shipping company must have at least three-quarters U.S. ownership, and the chief executive, chair of the board and majority of directors must be U.S. citizens.
The U.S. also places unusually tight restrictions on foreign involvement in the insurance industry, freight forwarding and customs brokerage.
“These policies carve out a large portion of the market for domestic players and the result is that consumers pay more because there is less competition,” said Hildegunn Nordas, a senior economist at the OECD.
Yet in services, as in any form of trade, there is a fine line to be drawn between barriers that exist for public policy reasons and those that are purely designed to disguise protection, said Daniel Trefler, a trade economist and Canada Research Chair in Competitiveness and Prosperity at the University of Toronto’s Rotman School of Management.
The airline industry, Trefler points out, is one of the most protected sectors in the world. The limitations on foreign ownership of Canadian airlines was recently raised by Ottawa to 49 per cent from 25 per cent, although no single international investor can hold more than 25 per cent of the voting shares. The U.S. has similar restrictions.
Countries will often argue that protecting the airline industry ensures a certain amount of control over the movement of people, particularly in remote areas. Were a U.S. company to take over Air Canada, for instance, it might find it more profitable to cancel a route between two less populated cities in the North in order to focus resources elsewhere.
“Competition has a massive impact on the price charged to consumers,” Trefler said. “So when Air Canada has a route that competes with Porter, prices are much lower. I mean substantially lower. I understand if the government wants to help a portion of the population who are in difficult-toaccess areas of Canada. The easiest way to do that is any airline that flies that route, you will give them $100 to $200 for each passenger. But don’t disrupt the competitive environment to reach that goal.”
Restrictions in other industries can also be severe, but serve a different purpose. For example, Canadian banks wield enormous power over the market and limit consumer choice, but Trefler said that completely opening the sector could be risky.
“We run the risk of having our financial sector, which is systemically important to the country, being taken over by American companies,” he said. “It could open us up to massive financial instability.”
The same argument applies to Canada’s screening system for foreign direct investment, Trefler said.
The Investment Canada Act evaluates foreign purchases of more than $1 billion to determine if they are a “net benefit” to Canada, either in terms of providing jobs or offering other opportunities. By comparison, the U.S. selectively screens purchases and evaluates whether they are a risk to national security. In both cases, the impact comes down to how the laws are exercised.
“You can say those are restrictive, I guess,” Trefler said. “But in China, for instance, even though there are likely clear rules on foreign investment, crony capitalism means the situation is far different on the ground.”
Tariffs and border measures are just one way to protect industry, and there have been growing concerns since the late 1980s that trade-restricting non-tariff barriers — or NTBs — have risen as tariffs have fallen, said Dan Ciuriak, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ont.
NTBs can include licensing requirements, regulations and delaying inspections of products at the borders, and their effects are difficult to quantify. Evidence suggests the use of anti-dumping and countervailing duties that use tariffs to protect domestic industry from imports being sold at less than a fair price have also increased, Ciuriak said.
“There are tools for safeguards under trade agreements, but often it takes too long to get approval under the rules to use them,” he said. “So these other tools have come into greater use as safeguards.
Who benefits from all these policies? Not the consumer. Canada’s system of dairy supply management, for example, costs families an extra $444 a year, according to a recent study by the University of Calgary.
“Behind every tariff wall, you see the emergence of inefficient practices,” Ciuriak said. “The optimal outcome is free trade. This is a theoretical target, of course. We don’t live in a perfect world, but what we do know is the more trade we have, the better off we are. And when tariffs are not there for corrective reasons — for example, to correct for a subsidy — they drive a wedge between countries’ cost structures and ultimately cost consumers more.”
But if you are going to call another country out on its trade policies, trade economists say, you’d better be ready to defend your own.