/Managed trade is back, but don’t mistake its return as proof that free trade doesn’t work

Managed trade is back, but don’t mistake its return as proof that free trade doesn’t work

Part of an ongoing series that looks at changes one year after the global trade wars ignited.

In the summer of 2017, Jeff Rubin, the former Bay Street economist who predicted oil would one day cost more than $200 per barrel, came up with another doozy. Or at least I thought he had.

Rubin, who made his name at CIBC World Markets in the 1990s and early 2000s, published a paper that argued Canada should ditch Mexico and try to return to something resembling the Auto Pact that it signed, with the United States, in 1965.

“To the extent that threatened future U.S. restrictions on imports on vehicles and motor parts from Mexico redirect investment and production back to the United States, they could do likewise for Ontario, providing cross-border movement of vehicles and parts between Canada and the United States remains duty free, as it has for more than five decades,” Rubin wrote. “If so, renegotiating NAFTA could provide an essential reprieve for a Canadian industry that otherwise faces almost certain downsizing over the next decade.”

Rubin’s suggestion was retrograde. The Auto Pact was from the era of “managed trade,” an evolutionary phase on the long march to free trade between nations. The arrangement, which made it so Canada produced an automobile for every vehicle it bought, was replaced by the 1989 Canada-U.S. Free Trade Agreement (CUSTA), which erased import duties on most goods. CUSTA was superseded by the 1994 North American Free Trade Agreement (NAFTA), which added Mexico.

Canada joined the World Trade Organization with 122 other countries in 1994 and signed off on China’s admission in 2001. It felt like we were on our way to achieving British economist David Ricardo’s ideal of a global economy arranged by comparative advantage instead of tariffs, subsidies, and quotas. For free traders, it had been a long journey. Riccardo published his theory of comparative advantage in 1817.

Yet here was Rubin, a former bank economist, proposing that we go in reverse. It was heresy. It also was essentially what happened about a year later when Prime Minister Justin Trudeau and Enrique Peña Nieto, the former Mexican president, signed a new North American trade agreement with U.S. President Donald Trump that would create more impediments to trade than it would remove. The word “free” was dropped from the title. 

“For a generation, we were committed to lowering barriers to trade,” Adam Taylor, founder of Export Action Global, an Ottawa-based trade consultancy, said in an interview. “In the last five years, we’ve started to march backwards.”

Rubin’s paper foreshadowed a revival in managed trade that few were ready to accept in 2017, when it still seemed possible that the responsibility of high office would curb Trump’s worst instincts about globalization.

For a generation, we were committed to lowering barriers to trade. In the last five years, we’ve started to march backwards.

Adam Taylor, founder of Export Action Global

The U.S. and Canada didn’t restore the Auto Pact. But the cost of preserving something that looked like NAFTA for Canada and Mexico was agreeing to an array of measures that would give bureaucrats and politicians greater influence over certain markets than buyers and sellers.

Taylor, who advised Ed Fast, the former Conservative trade minister, said he realized the game was changing when the Trump administration demanded that American firms be given greater access to government procurement in Canada and Mexico, even though it was unwilling to grant reciprocal treatment for Canadian and Mexican companies.

Negotiators from Ottawa and Mexico City fought off that advance. But they failed to dissuade the Trump administration from implementing complicated rules of origin that would force automobile companies to use a greater percentage of U.S. inputs than they might otherwise.

Of note, the new trade regime would grant preferential treatment only to vehicles that are made almost entirely — 70 per cent — from North American steel and aluminum. The Canada-U.S.-Mexico Trade Agreement also would force automakers to show that a certain percentage of their vehicles — about a third — was the result of work by men and women paid at least (US) $16 per hour. Both measures are “unprecedented,” according to Jon Johnson, a senior fellow at the Toronto-based C.D. Howe Institute.

“These are performance requirements that are consistent with a managed trade regime (where rules are designed to achieve economic outcomes) and not with a free-trade regime (which seeks to remove barriers trade so that economic results are dictated by market forces),” Johnson, who advised the government during the original NAFTA negotiations, said in July. If the new North American trade agreement is ratified, “the North American automotive industry will have to live with the agreement’s rules of origin for a long time,” he wrote.

We think we know how we got here.

Former president Bill Clinton said China’s entry into the WTO would be “a hundred-to-nothing deal for America when it comes to economic consequences.” The outcome wasn’t so lopsided.

The U.S. Bureau of Labor Statistics recorded about 12.8 million American manufacturing jobs in August, roughly 100,000 more than a year earlier, but more than four million fewer than in the summer of 2000. A lot of those jobs were lost to innovation, but research suggests that about a third probably disappeared because of import competition. Trump was propelled to the White House because he won manufacturing states such as Michigan and Pennsylvania that typically vote Democrat.

Free trade did create so-called losers. Governments, businesses, and others missed how people were being affected by it.

Adam Taylor, founder of Export Action Global

“One piece that was missed was how people were affected by freer trade,” Taylor said. “Free trade did create so-called losers. Governments, businesses, and others missed how people were being affected by it.”

Canada has been affected by the same trends. There were 1.7 million manufacturing jobs in August, according to Statists Canada, about half a million fewer than at the start of 2000. The rapid expansion of the oilsands at the start of the millennium probably masked some of the pain, as stranded factory workers in the East were able to find work in the West.

Still, it was difficult to ignore that the industry shaped by the Auto Pact was shrinking. And just like in the U.S., politicians here have felt compelled to tilt the scales. The idea of carving out a portion of North American auto production for high-wage labour came from Ottawa, and the Trudeau government has thrown tens of millions of dollars at the steel industry in recent weeks.

That’s the thing about managed trade, it’s contagious.

But don’t mistake the return of a fad from the 1960s as evidence that there was something fundamentally wrong with the trade policy of the 1990s. StatCan reported Friday that employment has increased by about 300,000 positions this year. All of the growth is the result of rapid hiring in technology, retail and other services. That’s significant for this discussion because the intangible economy has mostly escaped Trump’s attention. It’s a reminder that trade still produces the most benefits when it’s managed by executives and entrepreneurs, not politicians and bureaucrats.

Read the rest of the Financial Post’s report from the trenches of the global trade wars here, here, here and here.

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