Free trade keeps economy free of politicians
AS THEY ... SAY ON THE PRICE IS RIGHT, ‘COME ON DOWN!’ — WILLIAM WATSON
Most commentary about the virtues of NAFTA and other free-trade deals currently in peril have stressed the efficiency of global value chains, in which different parts of production take place in different places according to their economic strengths and weaknesses. Invention, design and marketing are done in rich countries with workforces skilled in those pursuits, construction and assembly in not-so-rich countries with workforces adept at those activities. It all makes for economic efficiency: the best possible products in the greatest possible quantities at the lowest possible prices.
Granted, if you’re an inventor, designer or marketer in a poor country or a constructor or assembler in a rich one, you won’t like global value chains and may well ask politicians to, well, unchain you. But do the politicians do what’s best for you or what’s best for them?
Silly question. To my mind, the strongest argument for free trade is not that it enhances efficiency, though it does, but that it keeps politicians from manipulating trade, which they will do for their own benefit rather than the general good.
Evidence that’s what they do appears in a new research paper from the Bank of Canada looking at Canada’s trade policy during the “first era of globalization,” from 1870 to 1913. It’s by Patrick Alexander of the bank’s international economic analysis department and Ian Keay, an economic historian at Queen’s. I’m not sure why the BoC is funding historical work on trade policy but it’s good someone is: It’s a great paper.
It’s also research that can only be done in a post-Gates world. It uses digitized versions of annual Canadian tariff records — some of which run to 1,200 highlydetailed pages in a year — for the four decades following 1870. It then links them up with industry data as described in the also highlydetailed industrial census of 1871.
What do the researchers find? First, that John A. Macdonald’s National Policy tariff of 1879 was a big protectionist deal. In this age of Trump, it’s best to remember that Canadian protection was very much a second best. Macdonald tried to get the U.S. Republicans to give up their own post-Civil War tariffs, which were steep and aggressive. Only when they wouldn’t did Canada turn protectionist itself. (Note: There is no evidence President Rutherford B. Hayes ever called Macdonald “weak.”)
Macdonald’s policy raised average tariffs on manufactured goods from 13 per cent to 22 per cent, while the “effective rate of protection” rose from 22 to just over 36 per cent. The effective rate measures the tariff system’s overall impact, including through tariffs on intermediate inputs. If you raise tariffs on the goods a domestic industry sells, it likes that. But if you raise tariffs on its inputs, that hurts it — a point Donald Trump seems not to grasp, given the damage his tariffs are doing to U.S. industries that use steel and aluminum.
Apart from raising tariffs, the National Policy also substantially increased their dispersion, that is, it increased the number of different tariff rates, evidence consistent with politicians exercising their discretion. Was that what was going on? In a section of their paper called “Protection for sale,” Alexander and Keay quote a Toronto speech of Sir John A.’s in which he said “Let each manufacturer tell us what he wants and we will give him what he needs.” In other words, as they used to say on The Price is Right, “Come on down!”
To test the influence of political influence, the researchers looked at the size, characteristics and location of different businesses, as well as whether they had someone on the executives of the Ontario and Montreal manufacturers’ associations, which submitted detailed tariff suggestions to the Macdonald government. The most influential industries, they found, were tobacco, petroleum, iron and steel. Tobacco’s influence has waned (though cannabis is coming on) but the others are still with us. In the U.S., Commerce Secretary Wilbur Ross and Trade Representative Robert Lighthizer are both steel men.
What’s the bottom line on political influence? On average, it boosted the protection an industry got by about half again as much as in industries that didn’t have such influence.
That’s inefficient: There are no good economic reasons for favouring some industries over others just because of their political heft. But it’s also deeply unfair. Friends get government help, non-friends don’t.
If instead you lock tariffs in at zero, you remove one vehicle for this kind of venality. But if we go back to intricate, discretionary tariff schedules, we re-create a swamp we spent decades draining.