Plan C for Canada

The bureaucrats at International Trade Canada seem to think that their job is to negotiate “free trade” deals with anyone who is willing to sit at the table opposite us. For years they have salivated at the idea of a Canada-EU trade agreement; they were among the first to hop on the WTO’s Doha Round bandwagon; and they were perhaps the biggest cheerleaders for a Free Trade Area of the Americas. It’s time to put down the pom-poms.

What’s dangerous is that the feds seem to think that all trade agreements are “good” and that by signing them they are doing us all a favour in spite of any negative impacts they may bring. The context for what our trading relationship actually is with another country (or group of countries) and how that might be improved is veiled by a leap of faith in free trade. Jim Stanford has made this point repeatedly in the context of negotiations for a Canada-Korea free trade agreement. The elite consensus that more trade and investment are always a good thing is a utopian vision that exaggerates the benefits of trade, while downplaying, or completely ignoring, any costs of integration. That there are costs as well as benefits, and losers as well as winners, must have a fuller role in the public debate, and cannot be swept under the ideological carpet.

Don’t get me wrong. I like DVD players and other gadgets as much as the next guy. And Canada has lots of stuff that other countries want, too. So yes, we should trade – I don’t think anyone is arguing that we should build a wall around Canada – but let’s avoid deals that undermine our public services, that restrict our ability to regulate in the public interest, that force the elimination of programs and Crown corporations that benefit farmers and artists, that allow foreign corporations to sue us, that increase copyright and patent protectionism, and that strip us of the ability to engage in good industrial policies.

Part of the problem is that our negotiators … how should I say this … suck. A good history of this is in the memoirs of a former negotiator of the Canada-US FTA, Gordon Ritchie, called Wrestling with the Elephant: The Inside Story of the Canada-US Trade Wars. Ritchie documents nicely how Canadian negotiators got caught flat-footed by wily American negotiators, and ended up not getting the guaranteed market access the talks had promised, while giving up major concessions to the US. The recent debacle over softwood lumber has its roots there.

Perhaps the Plan B move to sign on to an APEC FTA is just bureaucratic inertia: a department that has grown around negotiating trade deals needs new negotiations to keep the bicycle upright (they actually use that metaphor, too). Instead, let’s rethink our strategy, and blow right past this Plan B: call it Plan C for Canada. Start with making climate change a national project – our own Manhattan project – and turn it into a major industrial strategy, then think about what trade deals we might sign. If we do sit at a trade negotiating table, it should be to cut trade deals that improve human rights, labour standards and environmental protections (internalize the externalities of international trade rather than exacerbate them), and that carve out spaces for democratic governance.

The key questions are which rules for global commerce and to whose benefit. The current “trade uber alles” approach puts commercial imperatives over all other legitimate social and economic goals, including standards for labour, environmental protection, consumer protection and the democratic choices over economic development. An alternative take on trade and investment must move in the opposite direction. It must strive to raise the floor for quality of life around the world, whether in terms of working conditions, a clean environment or safe and healthy products. Above all, a renewed framework should ensure respect for a diversity of national approaches. One of the greatest conceits of this past century has been the presumption that we have found a single model that will spawn economic success wherever applied. But in fact, each country needs tools at their disposal to address the problems particular to their circumstances.

As Marjorie Cohen has pointed out, it is through different approaches that we derive sources of comparative advantage. A more flexible framework creates the conditions for gains from trade. For Canada, this might mean provisions to enable countries to maintain key sectors such as health and education in the public sphere. For poor countries, it may mean an enhanced capacity to develop an industrial base. At any rate, it suggests a healthy alternative to the “one size fits all” approach that has dominated our thinking on trade and investment, and that has led to a growth industry of trade deal-making.

Oh yeah, here’s where my rant began:

Canada seeking ‘Plan B’ for global trade

With WTO stalled, Pacific pact beckons

With files from the Associated Press

OTTAWA — Canada is accelerating a drive for international trade deals in the wake of collapsed global commerce liberalization talks, signing an agreement with Peru yesterday and signalling it’s keen on an Asia-Pacific free-trade zone if worldwide negotiations can’t be revived.

“For us, Plan B could well be an Asia-Pacific free-trade area,” International Trade Minister David Emerson told reporters during a telephone call from an Asia-Pacific Economic Co-operation meeting in Hanoi.

“The centre of economic gravity is shifting inexorably toward Asia.”

He said the United States and Australia are enthusiastic backers of an APEC free-trade zone, adding that Canberra plans to lobby for the idea when it takes the helm of the 21-country body this year.

APEC membership represents close to 50 per cent of world trade and the forum could serve as an alternative to World Trade Organization’s Doha round of talks that fell apart in July if those negotiations cannot be restarted, Mr. Emerson said.

“In Canada, we simply have to have a Plan B. We cannot sit back and assume that there will be a successful Doha round, although we are putting tremendous effort into making sure that there is a successful round,” Mr. Emerson said.

Yesterday, Ottawa signed a foreign investor protection agreement with Peru, a measure that safeguards the rights of business in both countries. It’s Canada’s first FIPA in eight years and the first significant deal clinched since Ottawa signed a free-trade agreement with Costa Rica in 2001.

Mr. Emerson said the Peruvian deal reflects the fact that Canadian investors have poured $2.3-billion into the South American country, adding that securing the legal rights of business should pave the way for more investment there.

He said Ottawa is also talking with Peru, Colombia and Ecuador about launching full-fledged free-trade negotiations and hopes to resume stalled talks on a bilateral deal with Singapore next year.

Mr. Emerson’s push to secure access in markets around the globe is a change of pace for Ottawa, which previously focused on WTO talks — negotiations that collapsed after five years in July.

While Canada only signed one trade deal in the past half decade, the U.S. has been busy sewing up special two-way deals. Congress has approved at least seven of them with 12 countries since 2001.

Canada’s new tack mirrors many other countries’ as WTO talks lost momentum. Those negotiations show few serious signs of reviving before next summer, when U.S. President George W. Bush’s fast-track authority expires.

Marc Busch, a professor at Georgetown University’s School of Foreign Service, said APEC members may find negotiating among 21 countries as difficult as WTO talks.

“The bigger question is if Canada is able to negotiate something of substance with all these [APEC] countries — and all these other countries are willing to as well — why can’t we all go back to the WTO talks in Geneva?” Prof. Busch said.

APEC’s business advisory council has urged member countries to consider a Pacific free-trade area during next week’s summit.

An APEC free-trade area, stretching from the U.S. to China and from Australia to Chile, would include 40 per cent of the world’s population and 56 per cent of its gross domestic product.

5 comments

  • Dear Marc,

    You posted an article on the end-run around the failed Doha Round via free trade in the Asia Pacific region and prefaced it with a rather vague call for a regime of fair trade along with Cohen’s rather vague statement on derived comparative advantage. Taken together I was getting that warm fuzzy feeling that obscured more than it clarified.

    The whole problem with the call for fair trade regimes is that they fail to directly attack the theory of comparative advantage. The Ricardian theory of comparative advantage is more than a mathematical proof of the gains from trade that can be realized through specialization. If that were all it was than it would be Smith’s considerations of absolute cost. As you well know the Ricardian theory and its modern derivatives actually claim that even in the case where one country is relatively backwards in the production of N-Goods it does not matter because they will always have a comparative advantage in the production of at least one good. For comparative advantage to actually be revealed there must be some mechanism which reduces prices in the relatively backward country until its least least efficient good can compete in the advanced market. This mechanism is of course some theory of money which causes adjustment in the terms of trade via changes in relative national prices. Is there any evidence that the terms of trade between countries adjust like this?

    Back to Cohen’s rather vague gesture to derived comparative advantage: what possibly can this mean outside of a call for an industrial policy in which the state decides to develop industries which have an absolute advantage in terms of being able to compete on price? What does it have at all to do with comparative advantage and the dogma of free trade and its sanguine outcomes? The whole point of Ricardo’s and subsequent orthodox economists development of the theory of comparative advantage has been to insist that no one need fear free trade and all will be better off given existing conditions.

    And it is precisely here where the dogma of free trade derives its succor. We do not need our economists to issue one more vague call for a system of fair as opposed to free trade what we need is tackle the theory of free trade head-on. And we also need to our economists to develop a theory of fair trade to fill the vacuum and which maps-out how an international trading system can be built in such a way that a beggar thy neighbor race to the bottom is not the central tendency nor the creation of unwieldy vested interests which hold their populations hostage behind tariff walls.

  • Thanks for these comments. But I’m not sure what you are proposing as an alternative framework. You seem to disparage my comments as “fair trade” then argue for some form of it at the end.

    As for Cohen, I think she makes a relevant point. If we decide that we are going to take on climate change as a national project, as I suggest, this would comprise an array of tax, spending, regulatory and industrial policy measures — the sum of which may (or may not) lead to the development of Canadian businesses that have exportable products and services. This is not really so different from the historical experience of today’s advanced countries, all of whom have used some form of industrial policy to develop their economies and export sectors.

  • To argue for a well articulated regime of fair trade is different than invoking ad nausea the need for a fair trade regime. Let us just say we all agree on that point ie a fair trade regime. Let us just agree that we want all the externalities internalized including the social off-loading of labours’ working and living standards.

    First we need to demolish the arguments based on comparative advantage which suggest that the market moves in that direction and second we need to presuppose a regime in which considerations of absolute advantage will not degenerate into state led beggar thy neighbor policies or private monopolies holding their respective populations behind tariff walls.

    In short what kind of trading regime will allow for the liberation that come from the gains from trade ( ie specialization) but do not engender the inequities that characterize the for private profit pursuit of those gains?

  • We probably have a lot of common ground on this topic in terms of what a rules-based international trade system might look like. We should keep in mind that Ricardo’s theory of comparative advantage was developed in an era where capital mobility was limited, and that he was talking about trade in goods.

    The current WTO agreements and more liberalizing “free trade” agreements go well beyond border measures. Trade in services has a lot to do with restricting and harmonizing domestic regulations, which I think is dangerous. So called “intellectual property” protects big corporate interests and is the opposite of free trade. And rules that allow foreign investors to sue governments, as in NAFTA and many bilateral investment treaties, are deeply problematic.

    My point is that this game is not really about “free trade” in the academic sense of the term, but is more one of “corporate rights”. So I think your touchstone of debunking comparative advantage is a bit of a red herring. To the extent that comparative advantage affects the thinking of our trade bureaucrats it is a lingering fragment of their long-gone university days.

    In Ottawa the language is all about “competitiveness” or “competitive advantage”– talk about vague terms! And the trade bureaucrats think that signing more and more of these deals makes us more competitive. “Free trade” in this sense is more of a slogan than an apt description of what is going on at the negotiating table.

    It’s fine to want to create an alternative theory of trade. If you make real-world assumptions — increasing returns to scale, imperfect information, externalities, imperfect competition, lock-in effects, unequal distribution of initial endowments — you do not get a “first best” market equilibrium.

    Economists have done this, and the result is that trade theory is not so cut and dry. But all of this is a nuance that is lost on most observers who blindly invoke “free trade”, cause freedom is good, right?

  • To be sure. As the response to Jim suggests however the dogma gets repeated time and again and I think this because of the continued assertion that comparative advantage is the most certain of economic theories aka Samuelson. In the rebuke to Jim they wrote:

    “the [Jim’s] study ignores the usual measures of the benefits of trade liberalization, namely efficiency gains from increased specialization in areas of a country’s comparative advantage and consumer benefits in the form of lower prices and increased competition in the market.”

    —-
    When economists like Cohen invoke derived comparative advantage that is the same as competitive advantage as I understand the two terms. I am not sure how the embrace of competitive/derived advantage can be placed along side egalitarian calls for a fair trade regime. There is a compositional fallacy here; i.e., if all nations follow the same path with different levels of resources what will be the outcome? Would it not be to reinforce ceteris paribus, existing world inequalities? Would it also not force poorer nations to devote a higher share of their scarce resources to creating competitive advantages.

    An alternative theory of trade would have to be squarely based on considerations of absolute advantages and then ask the further question as to the post facto re-distribution of the gains from trade as they are likely to accrue in an uneven and inegalitarian way.

    Hence, we need to be rid of the neoclassical fantasy once and for all that “free trade” raises all boats and shift our attention to what the features of a managed trade regime would look like including a realistic assessment of what the existing barriers are to an implementation of such a trade regime.

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