Time to prepare a National Policy for the post-NAFTA era

When countries erect tariff barriers, companies move their production. That’s a reality that Canada once used to its advantage. This week’s decision by motorcycle manufacturer Harley-Davidson to shift at least a sixth of its production to plants outside the U.S. is a reminder that this reality still exists.

Canadian politicians trying to deal with the trade war triggered by U.S. President Donald Trump might want to take note.

The Harley-Davidson move is the logical result of Trump’s decision to slap punitive tariffs on steel and aluminum from Canada, Mexico and the European Union. All three promised to retaliate by levying tariffs of their own on American-made products. The Europeans had the wit to single out Harley-Davidson by imposing a 31 per cent tariff on any of its bikes imported from the U.S.

The company was already trying to expand foreign sales. The EU is its secondbiggest market after the U.S. and the new tariffs, which are expected to add on average $2,200 to the price of a Harley sold in Europe, threatened its entire strategy.

So Harley-Davidson announced it would do the rational thing. It would no longer manufacture in America the roughly 40,000 bikes it sells in Europe each year. Instead, it would build them in a country inside the new EU tariff wall.

Whether that means building a new manufacturing facility in Europe is unclear. The company already assembles bikes in India, Brazil and Thailand. Theoretically, it could shift its Europe-bound production to any country that is not subject to the new 31 per cent tariff.

But the point is that it is responding to the tariff not by going out of business but by shifting production.

Jobs in America will be lost but jobs elsewhere will be gained.

That’s worth keeping in mind when trying to assess the effects of the new protectionism.

Protection carries an economic cost. It is inefficient. But as Nobel Prize winning economist Paul Krugman has pointed out, trade wars do not cause global recessions.

He argues convincingly that even the infamous Smoot-Hawley tariffs that the U.S. imposed in 1930 did not cause a fall-off in trade and thus the Great Depression. Rather, the reverse happened: The Depression caused a fall-off in trade.

Canadians used to understand that trade protectionism could be made to work.

Historically, we have been a trading nation — particularly when it comes to raw materials. But for more than 100 years we were also a protectionist nation that nurtured manufacturing behind a wall of tariffs.

This was one of the three pillars of what former prime minister John A. Macdonald called his National Policy. It lasted from 1879 until the Canada-U.S. Free Trade Agreement came into force in 1989. And for most of that period we prospered.

Most manufacturers were American branch plants set up specifically to serve Canada’s tariff-protected market. But they brought jobs and good wages to Canada — particularly to Ontario.

Niagara peaches were grown by Canadian farmers and processed in Canadian canneries. Washing machines were manufactured in Kitchener and outboard motors in Peterborough.

To remember this is not to suggest we can easily return to those days. The World Trade Organization frowns on nations that try to protect their manufacturers. As a result, low-wage countries, such as China, now make virtually everything.

But it is a reminder that Trump-style protectionism does not signal the end of the world. There was life before the North American Free Trade Agreement. There will continue to be life if, and when, it is gone.

Shrewd politicians would be wise to construct a plan for living without NAFTA. They could call it the National Policy.