Free Trade Not Always Fair

I vividly remember debating, in a very large public forum, the merits of the Free Trade Agreement (FTA) with America in the run-up to the national election in 1988. My opponent was none other than Frank Stronach, the founder of auto parts company Magna and an enormously successful (and intimidating) businessman. He was running for the Liberal party as a candidate in some Ontario riding. I focused on the merits of Free Trade and he kept talking about Fair Trade. He wasn’t opposed to Free Trade in principle, but argued that the FTA should be re-negotiated as it was not advantageous to Canada. There was a real irony here, for two reasons. One was that the auto industry, through the Auto Pact, already had essentially Free Trade with the U.S.; the second was that history suggests Canada had a great agreement with favorable terms. Nevertheless, there is substance in the argument for Fair Trade.

President Trump has focused on this principle as he berates any jurisdiction running a trade surplus with the United States. At the top of that list is China. That country is a member of the World Trade Organization which requires it to abide by certain standards. However, those standards aren’t always upheld and the process of enforcing them is arduous. Wilbur Ross, Trump’s incoming Commerce Secretary will be charged with enforcing the principle of Fair Trade (i.e. reciprocity). In China’s case, that principle does not exist. American firms are not able to do business in China, or buy assets/companies in China, on the same basis that Chinese firms are able to trade in the United States. Furthermore, China’s record on enforcing intellectual property rights is very poor. In fact, Chinese firms, often with the tacit or explicit backing of the Chinese government, have been accused of theft of intellectual property.

Still, we do need to have some sympathy for the Chinese. They are trying to lift hundreds of millions of people out of poverty and need to build a modern industrial economy. In the context of doing so, exercising rigid discipline from a command and control system of government inevitably leads to a breakdown in that control, and corruption. My point is simply that not everything that happens, happens because it is decreed by President Xi.

It is hard to imagine that Canada ranks as a meaningful target in either the sights of Trump or Mr. Ross. I loved the metaphor used by another American auto parts supplier in commenting on rearranging the terms of NAFTA: “A car made in North America today is like scrambled eggs. Good luck in separating it.”

So, what should we be worried about? As the U.S. runs around the world trying to execute bilateral trade deals, we need to be hot on their heels. Even better, we should be ahead of them. Hopefully, ratification of CETA (a free trade deal with Europe ) will have happened as you are reading this. But it is no good for our Federal authorities to open these doors if Canadian business doesn’t re-orient itself to such markets. We remain dangerously dependent on the U.S. market. While the United States will always be our most important trading partner, we cannot allow it to dictate pricing to us. A case in point is our oil sands’ total reliance on the U.S. and the resulting need to get volumes to both our coasts by way of the Trans Mountain and Energy East pipelines.

We also need to step down from the hypocrisy platform on which we extol the benefits of international Free Trade while practicing the contrary domestically. Our provincial premiers are all bragging about the extent to which those barriers are coming down but look at British Columbia’s position in respect to Alberta oil getting to the Pacific, and the regional monopolies imposed by the provincial liquor boards, and the distinct preference of municipalities to buy local. Worst of all are the agriculture-based supply side regulations.  All these attitudes and practices accomplish are higher costs for the consumer.

Free or Fair, we need to engage. Businesses now delivering goods or services exclusively to a local or domestic market need to engage internationally. Failure to do so will only result in a painful lesson in Darwinism. Atlantic Canada needs to get its act together, for the bubble under which we have been living is about to burst.