Friday, March 16, 2018

Life after NAFTA

The Financial Times ran a couple of stories recently about free trade. One was about a new White House economic report -- issued under the name of Donald Trump -- that contradicted much of what Trump had been saying about free trade in general and free trade with Canada in particular. It has some interesting things to say, even if FT reporting on it quickly gets caught up in a numbers game that is, well, neither convincing nor important.  The other piece was about "life after NAFTA" and it is more important. It is important because it suggests that there is life after NAFTA. This make sense, of course, and it is a bit of clarity in otherwise fairly bad public reportage on this issue. What is more, there always was life after NAFTA and that is important to recognize for Canadians because Canada needs to be willing to explore what that life means and where it might lead the country. Some of the tenor of the discussion on free trade can be found here. As I have tried to indicate before, there is a bigger picture here and it is that bigger picture I would like to address.

The Ideology of Trade and Anti-Trade

The first bits of reporting about the US post-Trump trade policy were nothing short of alarming and some still are. They were presented in a stark binary way that was, in fact, conducive to different political agendas. Trump's arguments against free trade (which had always been part of a isolationist sub-set of Republicanism in the US dating back at least to Pat Buchanan), provided rust-belt Americans and Americans in other regions suffering from de-industrialization, with an argument that checked a number of political boxes at the same time. The anti-free trade argument explained American long-term economic stagnation through a conspiracy. It was nothing Americans had done. They were, in effect, sold out by greedy foreigners pretending to be the allies and weak governments at home who off-loaded American largesse.

There was, of course, little truth to this argument. Free trade is part of a broader neoliberal policy orientation that, almost certainly, had hampered growth in family income in the US and Canada (and Mexico and a bunch of other places) but neoliberalism, for Canadians and Americans, is a self-inflicted wound. Or, rather, self-inflicted in this sense: the economic problems that neoliberalism created were the product of largely Canadian- and American-based multinational corporations. Mexicans did not "steal" American jobs, for example. American companies decided to lay off their American workers and move their plants to Mexico because, they reasoned, they could make larger profits. The decision was not taken in Mexico but in American and Canadian boardrooms by American and Canadian chief executives. Mexicans, we know, overall did not benefit from this, at least there is no evidence of any economic benefit for the average Mexican (rates of poverty, for instance, and rates of extreme poverty remain shockingly high).

The political side of the anti-trade argument, however, was that it allowed a critique of trade without a critique of neoliberalism or at least of the substance of it. The anti-trade argument, for instance, ignores a series of other disconcerting trends in the American (and, Canadian) economy and society, including: widening income gaps, persistent and potentially worsening poverty, stagnating average incomes, increased imbalances in political power based on income. It ignored concentrations of ownership and uneasy questions about the role of American capital and the profit motive in shifting jobs to other countries, avoiding taxes, failing public infrastructure, and the like. The critique of trade was not a critique of capitalism or, it turns out, a critique of the lifestyles of the wealthy.

The other side of the coin was Canada which was painted, in this picture, as a pro-free trade country and there have been some polls lately that suggest that Canadians are in favour of free trade. But, exactly how Canada got to be in favour of free trade is not clear. The idea that Canadians embrace free trade and that this embrace is somehow progressive paints Canadians as at ease with neoliberal reforms when, in fact, they are anything but. Canada has attempted to build its neoliberalism differently than has the United States or, rather, what we might say is that Canadian Liberals have attempted to build a different type of neoliberalism than American Republicans (which is almost self-evidently true). Even acknowledging this, Canadians are somehow cast as defenders of neoliberalism and globalized neoliberal trade. Once more, this casting is self-inflicted.

Why mention all of this? Because it shows that the free trade debate ushered in by the Trump administration is actually about things other than free trade. It creates binaries that limit alternatives and which paint unidimensional pictures that are partial approximations of reality and which elide a consideration with the broader historical processes shaping American and Canadian life.

From Canada with Trade

What the discourse ushered in by Trump elided -- and what we now know is that the Trump administration assumed that free trade was the problem and, literally, made up data to confirm their perspective -- was a consideration of the nature of Canadian/American trade. From the Canadian perspective, however, what we have been treated to is a long drawn out quest to find a way to off-set the supposed implosion of the Canadian economy *if* free trade went down the tubes. In other words, a large measure of public discourse on the subject has focused, in Canada, on how Canada cannot economically survive without neoliberalism.

In my view, this is another ideological position and one about which we should be wary because I don't think it has much truth to it. No one is arguing, btw, that trade is bad. The question is how should it be regulated, what should be its objectives, how do we ensure fairness and proper ecological protection?

What is interesting is that we have heard this storyline before: lose neoliberal trade and your economy will go down like a tonne of bricks. We heard it, for instance, about Brexit. Those people who argued for the EU often used this argument: the British economy will suffer serious and deep damage if Brexit goes through. There were a few days of a down stock market but the truth of the matter is that the much predicted big hit did not come. Likewise, the election of Trump, we were told, and an anti-free trade agenda, could send the US economy into a tailspin. It has not. I'm not convinced this lack of a tailspin has anything to do with Trump's policies, but for now the simple and important fact is that trade has not collapsed.

More recently, the Trump government announced a tariff on steel and aluminum. Disaster in the brewing in Canada and, the Cato Institute warned on TV, in the US as well. Yet, Canada -- and Mexico -- has been exempted from the duty. There was an air of last minute reprieve to the announcement and some posturing that a better deal on NAFTA should be forthcoming ... or, else ....! But, catastrophe was adverted.

Reconsidering Trade

Trade is important and that is precisely why I would suggest that a refashioned NAFTA, or even no NAFTA, is not going to have the effect its promoters think it will. I might say "for good or ill" but I want to be clear that I am trying to avoid the simplistic trade = good binary.

The Trump government backed away from a tariff on Canadian steel not out of the goodness of its heart but because it needs Canadian steel, or rather American industry did. According to the Cato Institute the ratio of workers in steel production to workers using steel in other products is something like 1:47. What that means is that for every worker making steel, there are forty-seven workers making things out of steel. The US does not produce enough steel for its needs. Hence, it imports Canadian steel. Moreover, increasing steel production is not something that can be done overnight. If one assumes that the US is not artificially lowering its own steel production (a pretty straightforward assumption), then adding new capacity means mining more ore, building new plants, making new bids, and networking new suppliers. Said differently, it is not an easy thing to do and it cannot be done in the short term. Tariffs can and should be used for a variety of things. I am not, as a matter of faith, opposed to tariffs in all circumstances and for any reason. But, their short term ability to increase production of heavy industrial products that rely on new capital goods is limited owing to the high cost of market entry. Think about it like this, it is easy to create new ice cream stands. You need a freezer, some cones, a scooper, and a cash float. It is a lot more difficult and more expensive to build new steel production facilities. Cato suggested it could take years.

Thus, despite the threat of the tariff, there was no real threat to Canada. Hurting Canada through a tariff (which would limit Canadian exports to the US), would simultaneously hurt Americans and it would be done in the name of helping a small group of workers by harming much much larger (almost 50 times larger) number of workers (by increasing the costs of the key raw material in their product).

There can, and likely should, be a vigorous debate about international trade, its merits, who benefits, how and why. In having this discussion, we should not make the simplistic assumption that everyone necessarily benefits from trade. A rising tide, it turns out, does not float all boats. But, we can also start to ask about why certain nations look to solidify trading relationships with others. Here, there is likely a diverse range of views. One can argue whether or not Canada or the US has benefitted more from NAFTA (I actually think this is a silly debate, but I'll save my thinking on that for another day. I'm just saying here that one can allow that debate.) The point is that the benefits of trade, on a national level, are not all one way. As the Politifacts piece I cited earlier shows, Canada accounts for over 18% of US exports in good by itself. Limiting trade with Canada, then, creates problems because one cannot or should not assume that such exports will continue at the same level. In the absence of trade with the US, Canada would have to put its market (which is a lucrative market) on the block in deals with other countries.

This is not a threat. It is simply a fact.

It also means that even if we don't have NAFTA -- and we might want to change it -- Canada/ US trade will likely continue. The truth is that Canada is, overall, not ripping the US off on trade. In fact, the man who claimed we were now concedes that he has not checked the facts. We might find individual products where Canada has a surplus but that is really getting deep down in the weeds. The point of a trade agreement is not that one country has a surplus in every good. In fact, under capitalist economics, the opposite is true. I won't get into the details on this but the point of capitalist trade is that it is supposed to make use of comparative advantage. I can make shirts cheaper than you can; you can make pants cheaper than I can, so I focus on making shirts; you focus on making pants and we then trade so we all actually have more of products that we both need. Comparative advantage suggests, in this model, that I am supposed to have a deficit with regard to you in pants and you are supposed to have a deficit with regard to me in shirts. That is the point of the trade.

A capitalist breaking down trade into individual products and then claiming that a deficit in one product is an example of trade gone wrong is, in fact, making a statement that runs deeply against the grain of capitalism.

And, this is the reason America companies trade with Canada. They don't do it to be nice. They do it because we buy their products. Likewise, Americans buy Canadians products not to be nice but because they need them. Much is made of the Canadian energy sale surplus with the US, something I think will draw to a close for its own reasons, but it is a case in point. Americans buy Canadian energy because they need more energy than they produce. Ipso facto, hey, those Canadians have a lot!

Trade After NAFTA

So ... what happens if NAFTA goes down the tube. Well, not nothin', but perhaps a lot less than people think. If NAFTA goes down the tubes, it will be a clear sign that the US government has become a lot more interventionist and protectionist and is willing to, in effect, harm itself and its allies. This is not a new trajectory.  America's allies have been wondering about its governments for a long time. That might surprise Americans (or, I guess it might not) and there is more to say on that, but not here. That being the case, allies like Canada will have little choice but to search for economic opportunities elsewhere. Canada might, for instance, need to seriously consider (or, reconsider) a northern gateway for oil shipments to East Asia. But, let us not over-estimate this. It may happen but let's not assume we are going to suddenly see China as Canada's number one trade partner.

I also expect that the collapse of NAFTA would be felt unevenly across Canada.  Some provinces will be harder hit than others.

But, I also expect that, in other circumstances, not a lot will change. In the shorter run, the US will still need to buy Canadian steel and energy. Multinational corporations have integrated cross border production facilities. I read somewhere that the part in the average car cross the border multiple times (something like 10 or more) before the car is finished. That will not change. Nor will American companies stop seeing Canada as a market for their products. It is doubtful, for instance, that the US will want take a pass on almost 20% of its goods exports.

What this means is that the US and American companies have good, built in reasons, for keeping up positive trading relations with Canada.

Other things won't change either. I don't expect Canadians to stop vacationing in the US and vice versa. I don't expect educational exchanges to stop (the US is the number one destination for foreign schooling for Canadians). I don't expect Canadians to stop watching American TV or Americans to stop seeing a peaceful Canadian border as a real plus in their national life. I don't expect American comics to stop making fun of Canada.

NAFTA may not be here to stay. I honestly don't know. Canadian-American trade, however, is. Why? Because both Canada and the US, Canadians and Americans benefit from it. 
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