Free trade does work, and our country is proof
Open markets benefit both sides, writes Brett House.
Judging by recent headlines, it would be easy to form the impression that the post-Second World War goal of freer trade between nations is under assault everywhere. But talk of ripping up trade pacts, such as the North American Free Trade Agreement, is more the exception than the rule.
China is leading the Regional Comprehensive Economic Partnership to liberalize trade among 16 Asia-Pacific countries. Canada just concluded the Comprehensive Economic and Trade Agreement with the European Union. And emerging-market countries, such as Mexico, are racing to sign a web of bilateral and multilateral trade deals with other industrialized and developing countries. These governments recognize trade agreements don’t compromise national sovereignty, but rather create non-discriminatory rules for economic relationships to flourish.
Nevertheless, when our largest trading partner’s tone turns protectionist, Canada has an interest in restating the case for open markets in goods, services and capital. Canada was an early adopter of porous borders for trade and investment, and it has been one of the greatest beneficiaries of free trade’s potential to generate increased output, income, and wealth.
Free trade periodically comes under assault because the key argument underpinning open markets — that every country possesses a comparative advantage in some good or service — remains poorly understood. In brief, a country that is the lowest cost producer in every sector and another country that is the highest cost producer in every industry both stand to gain from free trade, as it allows each country to specialize in the good or service where its relative production costs are lowest. They can then exchange part of their output for more of the things they would like to consume than they could produce alone.
Through specialization, free trade can make every country better off. A trade deficit isn’t an indicator that a country is losing from free trade. A trade deficit has to be matched by capital inflows from abroad. The investment this capital supports creates jobs, increases productivity, and enhances prosperity.
Free trade remains vulnerable to protectionist tendencies, however, because the gains from trade are often spread broadly and are hard to identify, while the costs imposed by foreign competition on specific industries, regions, and workers are often easy to see. To enable continued political support for free trade, domestic economic policy should ensure that the economywide benefits from trade are used to help those hurt by trade — redeploy resources, retool, retrain, and adapt.
Free trade has come under fire owing to a steady decline over several decades in the share of manufacturing jobs. Trade with low-wage economies hasn’t been responsible for this shift. In most countries, jobs have been added in other sectors, particularly services. And technological innovation has made manufacturing more productive and less labour-intensive.
Scotiabank’s recent paper on NAFTA highlights how free trade between Canada, the U.S., and Mexico has generated additional trade, jobs, and income for all three countries. NAFTA has ensured North America remained competitive in the race to attract capital and retain jobs. Millions of North Americans in every region now depend on NAFTA trade for their livelihoods.
Successive federal governments have recognized Canada’s leadership on free markets needs to start at home. Provincial premiers took action on this imperative in July 2016 when they concluded the Canadian Free Trade Agreement to sweep away restrictions on interprovincial trade. This pact starts from a presumption that trade in all goods and services should be free within Canada unless specifically excluded by a provincial request. Completely free trade within Canada could be achieved immediately if our provinces committed to forego any exclusions.
A renewed global commitment to free trade is a cornerstone in building a more resilient and robust Canadian and international economy. As arguably the world’s most successful small, open economy, Canada has nearly 150 years of history to cite in making the case that free trade works. At our sesquicentennial, it’s Canada’s time to lead the charge for open markets.