Philip Cross: It’s Canada vs. the protectionists in the new world trade wars

October 20, 2016

By: Financial Post

As a trading nation, Canada has much to lose if protectionism — clearly on the rise in the U.S. and Europe — gains more ground.

Protectionist sentiment reflects a misunderstanding of how trade benefits the economy. The benefit does not come from a mercantilist maximizing of the surplus of exports over imports. Treating exports as good and imports as bad for the economy ignores how imports contribute to rising living standards. Import competition lowers prices, forces domestic firms to become more productive and increases the choices available to consumers and businesses. Countries that chose autarky, such as post-war Latin America, China before 1978, India before 1991 or Cuba and North Korea, remained near the bottom of global rankings of economic development. Countries that promote exports but discourage imports, such as Japan and several other Asian nations, invariably have low levels of productivity in their domestic economy and high consumer prices.

In Canada, trade surpluses rose rapidly during the Depression of the 1930s and the severe recessions of the early 1980s and 1990s. The goal of trade policy is not a simple excess of exports over imports, but productivity-enhancing specialization and economies of scale from access to larger markets and more competition from imports that broadens everyone’s choices. From an economist’s point of view, the benefit of trade is based on maximizing each country’s strengths so that all nations benefit, not on beating others in a zero-sum competition.

In an era of slow growth, governments seek ways to boost productivity. International trade is proven to do so. Statistics Canada research concluded that from 1974 to 2010 “exporters accounted for more than twice their share (over 70 per cent) of total manufacturing employment and shipments, and their labour productivity was 13 per cent higher than that of non-exporters.” The same study found that imports of inputs contributed one-quarter of Canada’s total productivity growth between 1995 and 2000, and two-thirds between 2000 and 2007, a clear demonstration of how imports can boost the domestic economy.

Trade agreements replace the state-to-state resolution of trade disputes, such as between Canada and the U.S. over softwood lumber. In trade disputes between nations, the larger country usually fares better in a political setting where power triumphs. Trade agreements instead resolve disputes mostly with investor-to-state settlements in an arbitral setting. It’s erroneous to think of trade agreements as between countries, since it’s individuals and companies who actually trade within the rules set by governments. Trade agreements mostly reduce the scope for arbitrary and discriminatory regulations and for government interference in market-based decisions, allowing firms to plan long-term decisions on where to locate production and distribution with more certainty about the “rules of the game.”

Trade is vitally important to Canada’s economy. In 2015, total exports of goods and services accounted for 31.5 per cent of Canada’s GDP, up substantially from 25.2 per cent before the free trade accord with the U.S. Statistics Canada calculates that nearly three million Canadians, or 16.7 per cent of all workers, depend directly or indirectly on exports for their employment.

By: Financial Post

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