Trade strategy for the not-so-powerful

The logic of free trade – why we’re signing CETA

Sometimes the answers are so simple you miss them for fear they couldn’t possibly be correct. Analyzing the rationale for Canada’s participation in a comprehensive economic trade agreement (CETA) with the European Union has reminded me of that.

For unless a magical pot of gold has been promised to us (likely by the Irish … or maybe the Greeks..) and not communicated to the rest of us, a reasoned analysis of the potential costs and benefits of CETA wouldn’t lead one to automatically sign up.

As while the Federal Government continues to bandy about a 3 year old study conducted prior to any of the negotiations that highlighted a potential net benefit of $12billion per year, and upwards of 80,000 new jobs. Two research projects conducted in the wake of the negotiations, and thus using the negotiations as the base of their quantitative assumptions, show much weaker gains. For example, Jim Stanford from the CAW finds that the agreement will actually lead to between 28,000 and 150,000 job losses. Less extreme, research by Kitou and Philippidas show an annual gain of 3 billion Euros, or 5 billion CDN, far less than the Canadian government’s somewhat useless data points.

If the truth lay in Stanford’s figures, we wouldn’t sign up right? And if the figures we’re closer to Kitou and Philipidas’ we’d likely be even more reticent about the procurement and IP related items in the agreement.  

So why in the world are we rushing headlong into this?  The answer is frighteningly simple: if we don’t, someone else will.

Years ago I had the privilege of studying under American political scientist Lloyd Gruber at the LSE. His best known work is “Ruling the World : Power Politics and the Rise of Supranational Institutions.” In it, Gruber highlights that, as opposed to what most think, countries don’t necessarily benefit from signing up to trade agreements. In fact, he says, they often lose. So why do they sign up? Simply because they believe they would be worse off should they choose not to sign up and thus fall behind others in the pecking order of preferential trade, and be left with far fewer cards to play in negotiations. As Gruber explains, “…the losers know the supra-national arrangements they dislike are perfectly capable of functioning without them.” The powerful have “go it alone power” while the weak have nothing but strategy at their disposal.

The question is thus less about the benefits of participation and rather more about the costs of exclusion. And therein lies why I think we’re rushing towards CETA despite its ambiguous benefits, and potentially significant costs. For while we’re negotiating CETA, India and the EU are involved in a similar set of negotiations. And while Canada and India don’t compete on a great deal of products today, there’s no reason to think that in product lines such as automobiles, machinery and high-tech innovation and pharmaceuticals we won’t soon. CETA thus gives Canadian producers a limited window to further lock in consumers.

More important than India, however, is that the EU is entertaining the expansion of its trans-Atlantic relations with the United States into a similarly comprehensive economic framework. Given  similar US-Canadian export strengths, in particular around machinery, auto parts and agricultural products, beating our southern neighbours to the punch ensures we’re able to negotiate, in theory, a better deal than were we following them to Europe. The costs to access Europe might be high, in this case opening up government procurement, doing away with buy local and implementing stricter IP regulations, however the costs could in theory be substantially higher should the US sign up first.

The same theory of first-mover advantage applies(d) to Canada’s trade talks with South Korea.  As this article by Barrie McKenna in the Globe and Mail highlights, on offer in the talks are preferential access to Korea’s consumer market, long highly protected. Moving first means securing price advantages via the elimination or significant reduction of tariffs for access to this market. To be sure, there’s nothing holding Canada back from signing up after the US (as we are now positioned to do as the US-SK agreement has been ratified by both sides). But in so doing, we lose a significant amount of leverage as the Koreans negotiate from a far stronger position (on this specific bilateral relationship).

To be sure, some will argue that we enter such agreements in order to get access to cheaper imports.  And lowering our tariffs on imported goods will certainly allow Canadian consumers to enjoy the fruits of cheaper access to our markets.  However, cheaper imports are only positive insofar as they don’t unduly displace domestic labour. Shifting labour from uncompetitive to competitive sectors is certainly fine, and encouraged for its broader effect on productivity. Shifting from jobs with high-multipliers to low-wage, low-multiplier jobs is much less attractive. Others will argue that the benefits of such trade strategies are measured in broader productivity measures.  For example, signing up to NAFTA saw Canadian productivity jump upwards of 13%, leading to significant aggregate income gains. To be sure, signing up to NAFTA is also related to significant job displacement in the Canadian economy, especially in manufacturing. ON the whole, however, the economy has grown as a result.  The impact of CETA on liberalizing domestic trade and procurement, and of opening up highly protected sectors like telecommunications, might all be accurate rationale.

What isn’t good rationale is relying on somewhat irrelevant research to communicate the deal as leading to over 80,000 new jobs. There is absolutely zero evidence that what is currently being negotiated could lead to that. In fact, there’s a much greater chance that the outcome lies in between Jim Stanford’s 28,000-150,000 job losses and Kitou and Philippidas’ more moderate economic gain.

And that’s as things stand today. Remember, the analysis of such deals occurs in a vacuum and doesn’t take into consideration the trade diversion effects that occur when someone else signs up for a similar preferential deal with your partner. So while we may gain moderately in the short-term, those gains are likely to be whittled away as the EU’s other trade partners seek to regain similar access rights. They’ll do so with less leverage and thus give up more in the process. What results in an iterative process of competitive liberalization, a race to the bottom on domestic protection, and thus real free-trade.

So back to the start, why are signing up to a comprehensive trade deal with Europe? It’s not about jobs or growth. It’s perhaps slightly about productivity and improving domestic competitiveness. But ultimately it’s all about not being left out,  being able to dictate a better set of terms for the short-term, and perhaps, one could argue, about setting us up to compete for the long-term.

Is that a good thing? Yes if you’re able to keep up and compete. No, if you’re not. As simple as that. Now decide if you think we can.

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