Attack on Free Trade

Our Next Pandemic Policy Mistake: Self-Sufficiency in All Things

Peter Shawn Taylor
December 23, 2020
The mutual gains created by international trade have been well-established since 1817, when economist David Ricardo first explained why Portugal sold wine to Britain, and Britain traded cloth to Portugal. Capitalizing on each’s “comparative advantage,” Ricardo observed, raised overall incomes and left consumers better off in both countries. The same still holds today. Yet our current global pandemic has many claiming self-sufficiency in all things is not only a virtue, but a national necessity. With Canada’s future prosperity at risk from an outbreak of Covid-19 inspired protectionism, Peter Shawn Taylor explains just what’s at stake and offers a stout defence of classic free trade principles.
Attack on Free Trade

Our Next Pandemic Policy Mistake: Self-Sufficiency in All Things

Peter Shawn Taylor
December 23, 2020
The mutual gains created by international trade have been well-established since 1817, when economist David Ricardo first explained why Portugal sold wine to Britain, and Britain traded cloth to Portugal. Capitalizing on each’s “comparative advantage,” Ricardo observed, raised overall incomes and left consumers better off in both countries. The same still holds today. Yet our current global pandemic has many claiming self-sufficiency in all things is not only a virtue, but a national necessity. With Canada’s future prosperity at risk from an outbreak of Covid-19 inspired protectionism, Peter Shawn Taylor explains just what’s at stake and offers a stout defence of classic free trade principles.
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Are you ready for some more bad news? You might want to sit down for this. In addition to the havoc already wrought by Covid-19 and the economic, social and health consequences of government lockdowns and restrictions, Canada’s trade-dependent economy may be facing even greater peril in the years to come ­– regardless of any vaccine-inspired recovery – due to global trends now being unleashed by the coronavirus.

Covid-19 has already had a devastating effect on international trade. While trade volumes were beginning to shrink prior to the pandemic, the crisis has greatly worsened this trend. In the second quarter of 2020, the World Trade Organization reports, merchandise trade fell by more than 14 percent worldwide from the year previous, while trade in services is down 30 percent. Travel restrictions, tighter borders controls and closed stores are no doubt to blame for much of this drop.

According to the World Trade Organization, global trade has fallen significantly during the Covid-19 pandemic.

But a resurgence of protectionist policies is also playing a big role. With approximately one-third of Canada’s $2.2 trillion GDP tied to trade, any curtailment in cross-border sales is bad news for our economy. Canada’s current prosperity is built on recognition of the “gains from trade” that has been an accepted economic principle since the early 1800s. We produce far more raw and semi-processed commodities and agricultural products than our relatively small population could ever consume. We also participate in global supply chains that see manufactured goods built from components produced in numerous countries, all taking advantage of their own comparative advantages. Any threat to the free movement of goods and services across borders must thus be considered a threat to our standard of living. And this risk is now rising.

Canada’s Looming Peril

“One of the results of the pandemic has been renewed emphasis on unilateral measures from countries that want to protect their domestic supply chains,” says Lawrence Herman, an experienced international trade lawyer and proprietor of the Toronto consulting firm Herman & Associates, in an interview. “We’re seeing policies implemented that I thought had become museum pieces. Some of these measures haven’t been used since the 1940s.” Here he is referring to export restrictions and other border controls unveiled by numerous countries throughout the global pandemic. Last spring, for example, Germany blocked the shipment of surgical face masks to Italy. And earlier this month U.S. President Donald Trump signed an executive order requiring U.S. vaccine producers to prioritize American deliveries. This is why Canada’s first doses of the Pfizer vaccine had to be flown in from Belgium.

Meanwhile, more familiar protectionist measures are also enjoying a revival in political interest. Of particular concern to Canada is President-elect Joe Biden’s apparent plan to one-up his tariff-wielding predecessor Donald Trump with new Buy American procurement policies, something that’s been the bane of Canadian manufacturers for many decades. And while the term “protectionist” is now considered a pejorative, such policies are often disguised with new labels such as “reshoring” or “localization.”

Given the importance of trade to the world’s economic prosperity and ongoing growth, any revival in protectionism is likely to complicate, if not stall, a global recovery. “We’ve heard a lot of discussion about reshoring of production to isolate domestic economies from global shocks in the midst of Covid-19,” says Frank Van Tongeren, head of the economic modelling division at the Organization for Economic Cooperation and Development (OECD), in an interview from Paris. “So what happens if all countries come to rely less on international trade and less on global supply chains?” To find the answer, Van Tongeren simulated the effects of greater protectionism around the world. It is here that Canadians are advised to sit down.

Protectionism, reshoring or localization – whatever you call it, it means less trade: U.S. President-elect Joe Biden’s “Buy American” plan is one of many trade-choking policies newly in vogue.

Among the 22 countries and regions examined by Van Tongeren’s econometric investigation, Canada stands out as the worst performer if localization/reshoring/protectionism policies become more dominant. Over a five-year period, Canada’s GDP is predicted to fall a cumulative 13 percent, or US$224 billion. The worldwide forecast is a 5 percent decline, as less trade-focused countries fare markedly better. India, for example, is projected to experience a mere 1.1 percent blip. “The findings are clear that localization will be very costly,” says Van Tongeren. “And the hardest-hit countries will be the ones that depend most on international trade and that currently have low border protections. Canada falls into both those categories, which is the reason for its big negative effects.”

Canada’s poor result in this theoretical exercise comes as no surprise to Ari Van Assche, a professor of international business at the École des hautes études commerciales de Montréal (HEC Montreal). While he cautions that the OECD results are only a projection, they point to the risks to Canada if greater protectionism takes hold around the world. “This is a small open economy that’s highly integrated with world supply chains, so any trade shock is going to result in a bigger negative impact for Canada,” he notes in an interview.

Better sit down: OECD economist Frank Van Tongeren warns Canada’s economy could be hit the hardest by a global turn towards protectionism.

Van Assche says there’s good reason to be worried. “Politically, you can understand why people are making these arguments,” he says. “After we experienced shortages of key items in the early days of the pandemic, such as masks and other medical items, the demand to bring production back home sells well.” Beyond recent examples from Germany or the U.S. that show how easily global supply chains can be stymied by politics, Van Assche considers it worrying that the final communique from the G-20 meeting last month omitted an explicit promise from member nations to avoid protectionist measures, unlike during the global financial collapse in 2008-2009. This suggests closing borders and curtailing trade is no longer considered bad policy, he frets: “Forced localization is a different way to create trade wars. And it could get very costly.”

The Dangers of “Canada First”

Here at home, the stance of the Conservative Party of Canada’s leader Erin O’Toole illustrates the forces at play. While the Conservatives were historically protectionist in the late 19th and early 20th centuries, the modern-day iteration of the party has staked out policy ground firmly in favour of unfettered trade and open borders. In the pivotal 1988 federal election, Progressive Conservative Prime Minister Brian Mulroney went all-in on the Canada-United States Free Trade Agreement. This orientation towards trade was not only followed by Mulroney’s Tory successors but was later adopted by the federal Liberal Party as well.

Since becoming Conservative leader earlier this year, however, O’Toole has been crafting a more nuanced – and at times confusing – position on trade. In recent statements he has loudly promoted a “Canada First” stance that he says argues for “more self-sufficiency” in domestic manufacturing capacity. “Free trade alone won’t solve our problems,” he said in a speech in October to the Canadian Club in Toronto.

Taylor - Inset 4 (above)1
Tories on trade: Progressive Conservative Prime Minister Brian Mulroney (top) went all-in on the Canada US Free Trade Agreement during the 1988 federal election whereas current Conservative Party leader Erin O’Toole (bottom) has adopted a “Canada First” stance that argues for self-sufficiency in many areas.
Tories on trade: Progressive Conservative Prime Minister Brian Mulroney (top) went all-in on the Canada US Free Trade Agreement during the 1988 federal election whereas current Conservative Party leader Erin O’Toole (bottom) has adopted a “Canada First” stance that argues for self-sufficiency in many areas.

O’Toole has made security worries about China central to his trade policy. “It is more efficient and affordable to make masks and gowns and ventilators in China,” his October speech noted. “But as we have learned to our cost, it is not in our national interest.” The Conservative leader is certainly on solid ground in decrying the belligerent manner with which China uses trade policy as a weapon to further its foreign policy goals. But he errs in equating China with the entire global trading environment. Or that if we don’t buy masks and gowns from China, we therefore need to make them at home. Arguing for self-sufficiency at the expense of Canada’s participation in the global trade arena threatens serious harm to our own best interests.

“Promoting ‘Canada First’ makes no sense,” snaps trade lawyer Herman. “Having a made-in-Canada policy means you are limiting yourself to a small domestic market at the risk of ignoring much bigger global markets.” He points to the effects of Canada’s supply management system for dairy and eggs as evidence of the damage wrought by adopting Canada First policies. “Protectionism measures in support of the domestic dairy industry have sacrificed our ability to be a major player on the global market,” he complains. It has also dramatically elevated prices on consumers. According to research from the University of Manitoba, supply management imposes extra costs ranging from $339 per year for Canada’s poorest households to $554 for wealthier households, depending on how much dairy and poultry products any given household consumes. 

The cabal at work: Canadian dairy farmers successfully protest against free trade in milk and cheese, leading to higher prices and less choice for Canadian consumers.

Of course, MPs from all parties have repeatedly expressed their support for this sort of self-destructive self-sufficiency. Recall that during the 2019 federal election, People’s Party of Canada leader Maxime Bernier was the only politician to speak out against the harm done by our domestic dairy cabal. In fact, remaining true to his free-trade principles may have cost him the Conservative Party leadership contest in 2017, when his main rival’s campaign team rallied Quebec’s dairy farmers against Bernier.

What applies to dairy is equally true for such things as masks, ventilators and other medical supplies. We are better off participating in global markets than walling ourselves off from the outside world. While there was a short-term crunch in many medical supplies around the world last spring, those issues were quickly resolved. Masks, hand sanitizer and other medical necessities are now in ample supply everywhere, Herman notes. And even if Canada had been self-sufficient in these items before the pandemic, the massive and unexpected increase in demand would have temporarily exhausted the capacity of domestic suppliers just as it did foreign sources.

‘Canada First makes no sense:’ Limiting Canadian producers to a small domestic market means missing out on much bigger global opportunities, says long-time international trade lawyer Lawrence Herman.

Nonetheless, the Covid-19 crisis has sparked new interest in rebuilding Canada’s manufacturing capacity in all areas, regardless of comparative advantages or future need. In an example illustrative of O’Toole’s Canada First demands, the federal and Ontario governments recently handed out $46 million in subsidies to 3M Canada to build a new medical mask plant in Brockville, Ontario. Ontario Premier Doug Ford boasted that “never again are we going to rely on foreign countries and foreign leaders to supply our country … we are self-sufficient [in masks].” Yet subsidies and other measures to encourage domestic production regardless of efficiency or scale are precisely the sort of localization policies the OECD study’s results warn against. As Canada takes action to bring manufacturing back home to bolster its own self-sufficiency in any number of goods, other countries are acting likewise. According to the Journal of International Business Policy, India, Brazil, Italy, Japan, Korea and Russia, among other countries, also threw government money at domestic medical supply manufacturing in the first eight months of 2020 as they sought to make more at home and buy less abroad. Given our relatively small domestic market, this is a game Canada cannot win.

“We have to fight against de-globalization – Canada depends on trade,” says Dennis Darby, CEO of Canadian Manufacturers and Exporters (CME), an industry lobby group. There was a time, he recollects, when Canada made nearly everything we consumed domestically: “from tires to shovels to soup cans to elevators.” But those days of self-sufficiency are long gone, he says. “Our economy has changed greatly over the past 25 to 30 years.” This is largely due to the 1989 Free Trade Agreement and later NAFTA and USMCA treaties. “Now, 90 percent of what we make are components and bits and pieces and ingredients for other products,” Darby notes.

In essence, Canada willingly gave up relying on domestic production in all things, in order to gain access to global supply chains and global markets. And while the benefits of this process can be complex and often indirect, it inevitably yields higher incomes, lower prices and greater selection for consumers. This is the reason we enjoy California strawberries in February and Korean-made smart phones year-round, while selling Canadian-made cars to American buyers and maple syrup to the world.

Trade makes everyone better off: Canada’s manufactured goods and natural resources can be traded for products from other countries around the world, offering both greater efficiency and security.
Trade makes everyone better off: Canada’s manufactured goods and natural resources can be traded for products from other countries around the world, offering both greater efficiency and security.

Yet on closer inspection, Darby’s apparently full-throated endorsement of free trade appears as muddled as O’Toole’s, and for transparent reasons. The CME’s membership of manufacturers and exporters tend to be enthusiastic supporters of any reshoring or localization policies that boost manufacturing capacity at home. That includes those subsidies handed out to the 3M mask factory to Brockville. “Made in Canada is a good thing. We don’t see it as protectionist,” Darby says. “It’s what the public wants.” No doubt equivalent organizations in countries around the world are making similar claims. It is not an argument that will further Canada’s long-term interests. 

Must We Trade Off Efficiency and Security?

Given the political and sectoral arguments in favour of protectionism in its many guises, it may appear the pandemic has laid bare an eternal debate between efficiency and security. Must Canadians be prepared to sacrifice some of the benefits of open markets and global trade in order to guarantee ourselves a sufficient supply of critically needed items at home and protect our national security? That’s certainly how O’Toole frames the issue ­– domestic production is the only way to stave off Chinese dominance. It is, however, a false choice.

There are many good reasons to worry about becoming dependent on a hostile foreign power for crucial items of national security. For products we do not make ourselves, it makes sense for Canada to assure itself access to diverse and reliable foreign suppliers. These might not all be the lowest-cost competitors; some sources might be preferable because they’re geographically convenient, or from long-standing allies. We do not, however, have to be self-sufficient in all things to secure our national interests.

The high price of self-sufficiency: Ontario Premier Doug Ford and Prime Minister Justin Trudeau announce a deal to make medical masks in Brockville, Ontario that will cost taxpayers $46 million.

Consider the national security debate over Canada’s 5G network. While it makes ample sense to exclude China’s Huawei from participating in building this system, it is also the case that Canada’s high-tech needs have been easily satisfied by Ericsson, a Swedish company, and Nokia, based in Finland. Despite the security concerns in play, creating a 5G network using exclusively Canadian-made technology was never an option. And such a policy, if tried, would be ruinously expensive; as a small country, we can never hope to be at the top of the heap in every sector and industry.

Aside from exercising greater caution in our dealings with China and other hostile powers or unreliable failed states, such as Russia and Iran, defending and promoting a robust global trade environment based on shared interests offers Canada both greater efficiency and greater security.

On the efficiency front, the risks of aiding and abetting a global retreat from freer trade are plain to see in the OECD modelling. If current localization or reshoring trend continue, it will drive a significant contraction in income around the world as supply chains wither and less-competitive local manufacturers supplant foreign suppliers. The more trade-dependent a country, the worse these effects will be. And according to the OECD, Canada would be hardest hit of all.

As for security of supply, turning inward is also likely to disappoint. The OECD’s Van Tongeren notes that greater localization raises rather than lowers the risk of supply disruptions of key items. “Relying on international trade means if there is a problem in one country, you can switch to other suppliers,” he points out. “The global nature of supply chains is probably the best insurance you can have.” HEC Montreal’s Van Assche agrees, pointing out that relying on a single domestic factory could be far riskier than having the whole world to buy from. And this is true for basic commodities as well as items of the utmost significance.

Consider the current debate over access to Covid-19 vaccine in Canada. While Canada does make certain vaccines at home, we lack a production line that can produce the advanced mRNA process required to fight the coronavirus. Lacking a domestic source, the federal government has instead contracted with multiple foreign producers around the world to secure the rights to a potential 414 million doses – enough to vaccinate our population nearly six times over given the need for two shots per person. This gives us the ability to choose between competing vaccines of varying effectiveness and supply.

We are clearly in a better position than other countries that wish, or are forced, to rely on a single supplier and/or a single vaccine. While Australia’s prime minister claims “onshore manufacturing is a very precious thing” when it comes to a Covid-19 vaccine, his government was recently forced to shut down testing of a domestic vaccine candidate due to poor results. Australia will therefore have to rely on vaccines developed in other countries, just as Canada is doing. And we have a considerable head start in securing access to those necessary doses from foreign suppliers. Global trade has many benefits, but chief among them is the ability of Canadian purchasers to choose among many possible vendors. Surely this is a case where more is better.

Canada’s Trade Agenda for 2021

The best sort of insurance policy: Lacking domestic production capabilities for a Covid-19 vaccine, Canada instead bought the rights to 414 million doses from suppliers around the world – enough to vaccinate every Canadian nearly six times. (Shown: Canada’s first doses of the Pfizer vaccine arrive by plane from Belgium on December 13, 2020)

Given the risks of a prolonged contraction in global trade, it is incumbent on Canada to do more than simply state our continued support for open borders, says Herman. The former-diplomat and trade lawyer offers up a three-part agenda to extend and strengthen this country’s web of international trade connections. “First, we need to do a better job of taking advantage of our existing trade agreements,” he says, listing off Canada’s various trade deals with Britain, Europe, the Pacific Rim and South Korea as vital components for Canada’s future growth, prosperity and economic security.

Next, Herman says it will be necessary to rebuild the authority of the World Trade Organization’s trade dispute mechanism. The WTO has been severely weakened by Trump’s preference for bilateral trade deals and unilateral action. Canada, lacking the size or leverage to bend other countries to its will, must instead rely on third party referees to resolve our trade disputes. “We need to get the WTO back to some semblance of workability,” he notes. 

Herman’s final agenda item: “We need to fight protectionism everywhere.” That includes at home. Building our own walls will only encourage other countries to build new walls of their own. Of particular concern, he says, is Biden’s Buy American plans. “We’ve got to make sure we aren’t cut off from U.S. procurement policies. ‘Made in Canada’ will never equal the vastness of the American market.”

Whatever warm feelings one may derive from buying local, protectionism is always bad for Canada.

Peter Shawn Taylor is senior features editor at C2C Journal.

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