Trade’s Bastion: Canada

There is no doubt that free trade policies, and their accompanying open border principles, have taken a political beating in 2015. The vote in the United Kingdom to exit the European Union (Brexit) along with the protectionist and isolationist tone of the U.S. Presidential debate (on both sides) reflect a shift in public support for free and open international trade. During the U.S. Election Campaign, Candidate Trump called NAFTA “the worst trade deal in history” and NAFTA seems to remain at the top of President Elect Donald Trump’s agenda. He wants to renegotiate or “terminate” NAFTA and wants to slap a 35% tax on goods, such as Ford (F) cars, that are made in Mexico and sold in the U.S. Moreover, there was the last minute hold-up of CETA by the small but disgruntled region in Belgium – the Walloons, and potentially the unravelling of other trade deals like TPP, brought to light the prevalence of protectionist sentiments globally. Canada, however, offers a contrasting paradigm.

Overlooked in the political foray of Walloon parliamentary members, Canada (including its provincial governments) remained steadfast in its commitment to free trade and its accompanying principles. As pressured mounted elsewhere to turn inwards, Canada turned outwards with earnest.

The eventual ratification of CETA reflected that cohesiveness of Canada’s academics and policymakers alike – favouring a fair rules-based trade environment. As such, 16 prominent Canadian trade policy experts even went so far as to write an open letter dispelling many of the myths surrounding CETA during its tumultuous finish.
And it is this consensus that contrasts with the rest of the world. CETA’s ratification is a good deal for both Europe and Canada. Additionally, it provided a platform for Canada to signal its willingness to compete on an international level. Protectionist’s insecurities about open borders were deemed unfounded. For this reason, the great white north is demonstrably better off.

Opening Markets

Trade agreements, foremost, aim to eliminate tariffs and by doing so, improve the lives of Canadians. CETA is monumental in this respect. Once voted through the EU parliament, the agreement will open the Canadian market to a bevy of new European products, some of which domestic firms cannot produce – like regional cheeses. But, beyond the expectation for better consumer choice, freer trade with Europe will lower prices by creating competition.

Freer trade’s effect on Canada’s car market is a great example of competition at work. Since 1996, the price of a car adjusted for inflation has actually gone down. It is cheaper to buy a car now than 20 years ago! That is, in part, because of trade deals like NAFTA and a reduction of import tariffs in general. Canadian consumers in present day have access to an assortment of better quality car brands that were unthinkable to an early 90’s shopper.

Canada’s auto manufacturing sector also benefited from more competition and lower tariffs. NAFTA allowed for Canadian manufacturers to link into the North American value chain of auto production, which in turn made them more competitive. Car parts produced in Mexico, are now assembled in Canada and exported to the U.S. for sale. Similar linkages in advanced manufacturing will likely occur under CETA.

These trade benefits don’t only flow one way though. The EU is home to a staggering 500 million consumers and CETA outlines a reciprocal elimination of tariffs. Canadian firms, with their world class products and rich natural resources, will get equal access to all of them foregoing anymore political objections in Europe. Additionally, exporting firms are more productive than domestic firms and pay higher wages. Simply put, a nation that exports is richer and more competitive. CETA affords Canadian firms that opportunity.

Standards of Living Improve

Trade and wealth have been synonymous with each other. It is one of the key selling points of agreements like CETA. And, for the most part, treaties such a these are good for Canada.
NAFTA’s ratification in 1994, a multi-lateral trade deal, is a good point of comparison when determining trade’s outcomes. Critics of freer trade, at that time, argued that low tariffs contributed to net job losses and that its outcomes disproportionally benefited the rich. Those arguments, in the long run, never materialized.
Median incomes of Canadians, for instance, that were stagnant before NAFTA, have consistently trended upwards since the mid-90s. The Government of Canada estimates that this added wealth totals around $1 trillion.

The productivity of Canadian companies increased too. Daniel Trefler, an economist at the University of Toronto, analyzed both the employment and productivity effects of NAFTA on the Canadian economy in 2004. He reported that Canadian labour productivity increased for export intensive industries following the ratification. Part of this gain, however, was attributable to the closing of inefficient plants, which in turn, produced layoffs.

Does this mean that unemployment increased after NAFTA? Unemployment actually began to trend downwards, with the exception of the years following the 2008 financial recession. In 2015, unemployment stood at 6.9 percent, much lower than the national average before NAFTA went into effect.
That is not to say that free trade in its current form is perfect. There are short-term adjustment costs, like layoffs described above. Public policies that bridge the gap between employment, incentivize retraining, and establish a safety net for vulnerable jobs, are required.

Competitive Advantage

From a global competitiveness perspective, Canada stands to benefit considerably because of CETA. The advantage comes in the form of preferential access, absent tariffs, to Europe’s lucrative markets including government procurement.

Canadian exporters, consequently, are in line to receive a competitive boost without having to do much at all. CETA’s structure allows for Canadian firms to price their exports more competitively relative to non-EU members. U.S. exporters under a CETA scenario, for example, would be required to pay-up at Europe’s border, while Canada pays nothing.
In this sense, Canada’s willingness to make trade deals garners an economic advantage over the unwilling.

Going Forward

Protectionist’s hiccups did not deter Canada from completing new trade agreements, but instead strengthen its resolve. Hard fought trade policies and experiences from this time period will be applied elsewhere to the benefit of Canadians. For now, however, the country remains steadfast in its commitment to trade agreements and the betterment of the world’s social welfare.