Hey there, time traveller!
This article was published 8/9/2016 (342 days ago), so information in it may no longer be current.
What do canola and students have in common?
If you had answered "China," go to the head of the class. Prime Minister Justin Trudeau has returned from his latest charm offensive with the hope that Canada has worked out a firm deal on canola exports to China. Farmers can breathe a sigh of relief… or can they?
The current era has become increasingly marked by anti-globalization and anti-free trade. Brexit and the bellicose Donald Trump are just two of the high-profile manifestations of this sentiment. Even Hillary Clinton’s promise to re-examine the North American Free Trade Agreement (NAFTA) in response to left-wing Democrats shows how pervasive this anti-free-trade sentiment has become.
But why has this occurred? Surely the benefits of free trade are clear, as any first-year student in economics comes to understand. Why can’t people just accept that when you and I trade, we will both be better off? I trade my bologna sandwich for your cheese sandwich, and we both benefit. So what is so hard? Does government need to make economics compulsory in high school just so people understand what is good for them?
The problem is not with people. It is the easy acceptance of the simple models of free trade and the blind spots conventional economics has when it emphasizes the gains from trade without counting the losses. Modern trade deals are vastly more complex than kids trading lunches. The details of these agreements are snakepits of complexity, and the puppeteers behind them far from benign.
For Canada, three trade deals are on the table. The potential renegotiation of NAFTA, the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Trans-Pacific Partnership (TPP). The easy part is the agreement to reduce tariffs, the import duties that government imposes to make foreign goods more expensive. Imagine the roar from consumers if the Canadian government imposed an extra fee on all smartphones made outside Canada. People understand that part of free trade.
Offsetting the gains from trade are three losses typical of most agreements. As Canada negotiates CETA, it is useful to note that countries in the European Union make between 10 and 12 per cent of their budget revenue from tariffs. Canada’s experience is similar. Offsetting these losses to the public treasury is the gain in gross national product that usually results when trade lowers costs.
The second and more important losses are the increases in unemployment in those sectors affected by cheap imports. Reducing the tariffs on smartphones to allow cheaper models to enter Canada benefits consumers but kills any prospect for developing a domestic cellphone-manufacturing industry and also limits certain areas of software development. These losses place an added burden on employment insurance, retraining and relocation programs. A robust social and economic safety net is essential to support freer trade.
A final cost relates to the social impact of regulatory harmonization. Canola offers a good illustration. Despite the findings of science, European governments oppose the importation of food products and materials that result from genetic modification. This non-tariff barrier imposes restrictions on Canadian exports of canola, most of which is produced from genetically modified seed.
China has been imposing a requirement that canola exports from Canada contain one per cent dockage and not the international standard of 2.5 per cent. Dockage is the non-canola "junk" such as other seeds, weed and dirt dragged up in the harvesting and transportation process. China alleges that high proportions of dockage includes a fungus known as blackleg, a "fact" contrary to all expert opinion.
Negotiating agreements that need to navigate complex and arbitrary foreign standards is a cost of trade agreements in the modern era. Often, issues completely removed from the commodity in question are on the table. One report suggests the Chinese objection to the "high" levels of dockage might be "managed" by dramatically increasing the number of visas for Chinese students in Canada.
On balance, most studies show the gains from trade outweigh the losses. And Canada must trade. Just tell a farmer that grain or beef cannot be exported, and then stand back and watch thousands lose their livelihoods.
When it comes to trade, Angela Merkel, Li Keqiang and Barack Obama play by street rules, working to protect their own. As we negotiate new trade agreements, Canadian diplomats will need every trick in the book to defend our interests. Playing nice will not work. The problem is, up against Germany, China and the United States, we are the runts of the litter.
While playing tough with our competitors, politicians must also have the resolve to maintain the social and economic safety net to ensure all Canadians bear the gains and losses from trade fairly.
Gregory Mason is an associate professor of economics at the University of Manitoba and a senior consultant at PRA Inc. His views are his own.