Down and Dirty in the Trade Game

JIM MCNIVEN: THOUGHTLINES
June, 2017

The new American administration is not only understaffed, but the organizational tendencies of the President consist of surrounding himself with a coterie of cronies and family, and then governing by Tweeted statements that disregard, and often contradict, what his departmental subordinates are saying at almost at the same time. Needless to say, the world has come to see this to-ing and fro-ing for what it is—the President has his reactions and lurches, but, for the most part, American policy has not changed much, yet.

This is particularly true of his approach to NAFTA, the North American Free Trade Agreement. The President has said that it was the worst deal ever. His officials say it is pretty good, but needs some updating after 25 years or so. Is Canada going to have an updated rules-based relationship with the US, or are we headed back into the 19th century and the law of the jungle?

NAFTA was created out of the sentiments of the Macdonald Commission on the Canadian economy, created in the early 1980s by the Pierre Trudeau government as it entered its last years. Its most notable recommendation was to propose a free-trade agreement with the United States, thus abandoning the National Policy approach that had been adopted almost at Canada’s Confederation, in reaction to American tariffs during and after the US Civil War.

The time was right. US President Ronald Reagan, acting on his and his advisors’ classic economic principles, had already envisioned a free-trade zone that was expansively seen as extending from Alaska to Patagonia, taking in all of the Americas. Canadian and American negotiators came up with CUSTA, the Canada-US Trade Agreement. The Conservative Mulroney government that succeeded Trudeau backed the negotiations, not so much for economic reasons, as for the political split it would cause in the Liberal Party, already wracked by disputes between free-traders and economic nationalists. The internal Liberal battle duly happened and contributed to the party’s defeat in 1988.

It did not take long for another country, Mexico, to decide it needed to be included. The resulting tripartite negotiations led to a split amongst Republican voters in the 1992 Presidential election. Democrat Bill Clinton was elected, and went on to approve the agreement.

All this was done in the global context of new regional free trade agreements, climaxed by the formation of the World Trade Organization in 1995, created to try to enforce a global rules-based trade context.

Fast-forward 20 years to 2015 and global sentiment seemingly has begun to change. Trade has expanded greatly in the time since CUSTA was signed and the rest of the world got onside with the trend. Millions, if not a billion, people were brought out of poverty.

Now the trend is going the other way, towards more inward-looking protectionism. The US Government is dominated by Republicans who are ostensibly led by a President who wants tariff and tax walls put up to ‘protect’ US jobs from going overseas. Given his predilections, he would probably not object to the global structure being dismantled. In particular, he has been very critical of NAFTA, especially the boost it has given to the Mexican economy.

Of course, behind all this lies the simplistic notion that the trade balance for any country is only the merchandise account. This is what the President focuses on when he talks about losses due to trade agreements. However, there are three elements in the trade equation for any country. The first is the aforementioned merchandise account; the second is the services account and the third is the capital account.

All of these taken together tend to even out in terms of surpluses and deficits. Canada, for instance, normally runs a merchandise surplus with the US, but it runs a services deficit. Remember the next time you ‘Google’ something that somehow you paid somebody in the US for that service.

The capital account fluctuates depending on the demand by foreigners, including Americans, for Canadian dollars, whether for trade or investment or better financial returns. It is also affected by Canadians’ demand for foreign currencies. Examples are money flowing into the country by house buyers from Asia, money flowing out with Canadians travelling to Florida for the winter, and in or out depending on the price for oil and earnings from exports and borrowings for oilsands investment. This last is so big that the Canadian dollar is often called a ‘petro’ currency: it fluctuates relative to other currencies with the world price for oil.

Now, let’s relate all this to the concerns of many Americans about the loss of manufacturing jobs. In truth, most of the lost jobs have come with changes in technology, but that is a hard idea to sell in a political debate. ‘Vote for me and I’ll force manufacturers to use only technology dating to 1960 and nothing newer!’ It just doesn’t have that zing that ‘foreigners stealing our jobs’ has.

The problem goes back to the notion that the trade balance has to settle around zero. If the existing mix among the three accounts is altered by public policy, different industries will be affected and there will be pressure to rebalance the accounts.

First, countries may retaliate to these changes. Mexico is a prime buyer of American corn. Closing out American plants in Mexico may lead to American farmers not being allowed to sell their corn to Mexico. Canadian airlines could be encouraged to buy Airbus planes from Europe rather than a Boeing product from the US. There are thousands of such potential retaliatory actions that the world’s countries (3/4 of the global economy) can take that would see other Americans than the beneficiaries of these changes suffer losses. That’s just on the merchandise side. Similar actions can be taken on the services and capital accounts.

Maybe this is too abstract. Let me tell a story where I was tangentially involved. Many years ago, in an attempt to prevent Washington fishermen from taking salmon near the BC Lower Mainland, the Government of Canada designated a certain area popular with US fishermen as a conservation zone and closed it. All around it, the fishery was open. The US protested and under international law won their case, but Canada remained righteously stubborn. By rights then, the US could retaliate, and they did—with a moratorium on Atlantic seafood exports to the US.

I was one of the only non-industry members of the Canadian fisheries industry committee, and I came into the next meeting to find the Atlantic representatives all but crawling over the table to get at those @!!xxx&** British Columbia %*##@’s, whose lobbying created this mess. Meanwhile, the western members were trying to say that all of Canada should stand up for conservation virtues, no matter what the cost.

The closed zone decision was soon reversed and life returned to normal. This is how the game is played.

This whole NAFTA review under way now could either end up in discussions over the usual topics; lumber and dairy products, or it could get ugly.

Yes, Canada is small next to the US and the President likes to push people around, but at some point, he will accept that simply focusing on the merchandise account is to risk having the other two accounts be negatively affected.

Nationalize Google.ca? Put a special tariff on US software purchases? These examples could affect the services account.

The international trading system is the way it is because the US, as the world’s policeman for decades, thought a rule-of-law system was in its best economic interest. Going back to the law of the jungle may not be in the works, but just in case, we Canadians had better dust off Sir John A’s National Policy.

 Copyright Jim McNiven 2017

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Jim McNiven’s latest book is The Yankee Road: Tracing the Journey of the New England Tribe that Created Modern America

Who is a Yankee and where did the term come from? Though shrouded in myth and routinely used as a substitute for American, the achievements of the Yankees have influenced nearly every facet of our modern way of life.

Join author Jim McNiven as he explores the emergence and influence of Yankee culture while traversing an old transcontinental highway reaching from the Atlantic to the Pacific — US 20, which he nicknames “The Yankee Road.”

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Jim McNiven

James McNiven has a PhD from the University of Michigan. He has written widely on public policy and economic development issues and is the co-author of three books. His most recent research has been about the relationship of demographic changes to Canadian regional economic development. He also has an interest in American business history and continues to teach at Dalhousie on a part-time basis.

 

 

 

 

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