Tag Archives: trade

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

Facts and Opinions, employee-owned, survives only on an honour system: please chip in (suggest at least .27 per piece) or make a sustaining donation. Details. 

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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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Facts and Opinions is a boutique journal of reporting and analysis in words and images, without borders. Independent, non-partisan and employee-owned, F&O is funded by you, our readers. We are ad-free and spam-free, and do not solicit donations from partisan organizations. Real journalism has value. Thank you for your support. Please tell others about us, and follow us on Facebook and Twitter.

F&O’s CONTENTS page is updated each Saturday. Sign up for emailed announcements of new work on our free FRONTLINES blog; find evidence-based reporting in Reports; commentary, analysis and creative non-fiction in OPINION-FEATURES; and image galleries in PHOTO-ESSAYS. If you value journalism please support F&O, and tell others about us.

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‘It Don’t Come Easy’

JIM MCNIVEN: THOUGHTLINES
July, 2016

Dawn breaks behind the Houses of Parliament and the statue of Winston Churchill in Westminster, London, Britain June 24, 2016. REUTERS/Stefan Wermuth

Dawn breaks behind the Houses of Parliament and the statue of Winston Churchill in Westminster, London, Britain June 24, 2016. REUTERS/Stefan Wermuth

A long time ago, when I ran an organization whose role is analyzing and reporting on the economy of Atlantic Canada, one of my board members from the province of Newfoundland and Labrador made a comment that stuck with me. There are ‘big’ Newfoundlanders and ‘small’ Newfoundlanders, he said, referring to ones that wanted to take on the business world as a whole and win, and those who wanted to huddle behind a protectionist wall with their little piece of the economic pie. Ever since then, I have used his localism to look at all kinds of people, not just Newfoundlanders.

Since the 1960s, at least, the trends in the world have favored the ‘big’ types. They do include the likes of multinational companies, but they also include those in the tech sector who run little companies and who know that their success depends on how fast they can reach global scale. The whole panoply of trade barrier-lowering treaties, from tariff reductions to integrative economic agreements constituted the first steps toward a global economy. But there has been resistance from nationalist groups who see these moves as threats to personal, social and national integrity.

The arguments against globalization began to have resonance after the financial crash of 2007-8. The pain caused by widespread financial malfeasance, arrogance, greed and stupidity provided a platform for resistance.

Then the collapse of Middle Eastern and African States added a huge movement of peoples to Europe, whose countries have scant experience in accommodating immigration. The slowness or lack of economic recovery meant chronic distress for millions, which has been laid at the feet of international competition, even though there is ample proof that demographic stagnation and technological change have been more important causes.

The social aspect of the nationalist complaint is that immigrants, refugees or not, take jobs that might otherwise have gone to locals, and that the cultural differences between immigrants and locals are hard to deal with. These have a bit of truth in them. Immigrants come from the most adventuresome parts of their native cultures and could be more aggressive in job searches. Cultural differences may be seen negatively rather than as opportunities for local cultural expansion. Immigrant-based countries like Canada and the United States have more or less successfully grappled with these challenges and found it depends more on local willingness than anything else.

The economic arguments are more fantastical. The idea that carving whole countries out of the global trading system could lead to local prosperity makes little sense. Breaking up the globalized nature of manufacturing, communications and financial services companies is more a formula for ruin than prosperity.

Trying to do this by creating nationalist trade barriers would lead to a lot of job losses in all sorts of industries well before that country’s businesspeople could recreate downsized corporations and begin any rehiring. Restructuring an economy is not an automatic job-creator. Financial markets hate uncertainty and won’t lend until the uncertainty is resolved. Global corporations would not be able to repatriate jobs home without suffering from retaliation by potential losers. Not importing leads to non-exporting. In the end, stimulation could only be restored by wartime buildup, but this is not 1936. War means nuclear war.

So, we are coming to a crossroads. Either we continue with the globalization project that started with the Marshall Plan and the first GATT tariff reductions, or we don’t.

We still have to bring billions of people into some kind of economic parity with the rich parts of the world. It will mean profitably continuing and improving their situation, or we can pretend that parts of the world are a ‘gated community’ as far as the rest are concerned. This would lead to having to control these populations somehow or shutting down our internet communications so they don’t know what it is like on the other side of the ‘wall’.

What does continued globalization mean? The original goal of the General Agreement on Tariffs and Trade (GATT) on tariff reduction was largely met by the 1980s. A parallel step within Europe was toward more economic integration, first by the continental Europeans with the European Coal and Steel Community and then in the creation of Common Market. Then came the Canada-US Free Trade agreement in 1988, expanded into NAFTA about the same time as the creation of the European Union in 1993. A couple of years later, in 1995, the World Trade Organization was created to provide for a common set of rules for, basically, the whole globe to operate business and economic policy. Companies had similar rights and obligations within all of the national signatories’ economies. The agreement has not been perfect in its design nor execution, but it has made for the most level playing field the world has ever had.

So now, we are exhorted to break it up in the hopes that a few will be better off while others suffer. The double failure of nerve of the Cameron government in the UK, first in not acting as a properly elected government should by its permitting a referendum, and then campaigning against the ‘Brexit’ forces so ineffectively that it lost the vote, has led to the legitimizing of  nationalist attacks on the global rules that have benefitted everybody. Given the welter of trade rules that will not be affected by Brexit, it can be argued that the global economic system may not suffer, and that primarily, the UK will suffer the most. There are others, however, who would go further to fantasize extricating themselves from the WTO-globalized economy, promising to prospering from it while the rest of the ‘losers’ suffer.

Surprisingly, government does not operate like businesses. There is no global bankruptcy court out there to bail out national mistakes. There is no superior power making the rules to govern nations. To paraphrase Pogo, ‘they will meet the enemy, and it will be themselves’.

Maintaining and rebuilding confidence in the international economic system has to be Job One for policymakers today. We have something that works: there is no higher power to appeal to and no way to get off this big, blue marble we live on. Making it work after the idiocy of Brexit, to put it in the words of George Harrison and Ringo Starr, ‘It don’t come easy’.

 Copyright Jim McNiven 2016

Facts and Opinions is employee-owned and survives on the honour system: please chip in at least .27 per piece or make a sustaining donation. Details here. 

~~~

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.

 

 

 

 

 ~~~

Facts and Opinions is a boutique journal of reporting and analysis in words and images, without borders. Independent, non-partisan and employee-owned, F&O is funded by you, our readers. We are ad-free and spam-free, and do not solicit donations from partisan organizations. Real journalism has value. Thank you for your support. Please tell others about us, and follow us on Facebook and Twitter.

F&O’s CONTENTS page is updated each Saturday. Sign up for emailed announcements of new work on our free FRONTLINES blog; find evidence-based reporting in Reports; commentary, analysis and creative non-fiction in OPINION-FEATURES; and image galleries in PHOTO-ESSAYS. If you value journalism please support F&O, and tell others about us.

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Promises to aid development are empty

Pledges by “have” countries to help the “have-nots” are almost all talk and no action, new research shows. 

F&O Ecuador

A woman packs a load on her back in the hills above Otovalo, Ecuador. Deborah Jones photo © 2013

Since 2003, when a Washington-based think tank started an index to measure development policies by wealthier countries, “the scores for aid, migration, trade and technology transfer are about the same,” said the Center for Global Development in a report today

“Rich country policies to support global security are distinctly worse,” said the centre, because international peacekeeping has fallen as arms exports to undemocratic regimes have increased.

Only the environmental index showed improvement, because of a reduction in chemical emissions harmful to the protective ozone layer in the atmosphere. The exception was Canada, said the centre, “the only country whose environment policies have deteriorated since the index began … in part because of rising fossil fuel production, increasing per capita emissions and low gasoline (petrol) taxes. Slovakia and Hungary take top place in the environment standings with the highest gasoline taxes of CDI countries and greenhouse gas emissions among the lowest.”

The centre said its Commitment to Development Index (CDI) uses hundreds of indicators to rank member countries in the Organisation for Economic Co-operation and Development by how their policies affect poorer countries in aid, trade, finance, migration, environment, security, and technology transfer. Denmark, Sweden and Norway ranked first overall. South Korea and Japan ranked last, notably because of high tariffs on imports from developing countries.

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