Duties that protect domestic interests look attractive
…But they’re a very expensive way to retain jobs
Bill Morneau is obviously an influential figure in Prime Minister Justin Trudeau’s cabinet, but he’s no finance minister – despite his title. Given the budget he presented last week, he may be more of a social justice enabler.
Supporting more diversity, equality and inclusiveness is obviously critical to the betterment of our society, but most Canadians expect more from a finance minister.
The budget offered anything but. There were no plans to balance the books and, most importantly, there were no mitigating strategies to deal with a floundering global trade environment.
Few details were given on the government’s plan to deal with the possible demise of the North American Free Trade Agreement (NAFTA), based on US President Donald Trump’s “America First” policy. And there were no plans outlined in the budget to circumvent broader trading challenges.
The United States announced last week that it’s considering new trade restrictions, including a 25% tariff on imported steel and a 10% duty on aluminum. This could be the beginning of a trade war, embraced by Trump.
Despite recent trade deals signed by Canada, the world seems at odds with open trading and instead many countries want to protect their domestic markets.
Agriculture and food are often considered the most vulnerable and sensitive sectors when it comes to trade barriers. They make easy targets. Trade barriers can make a significant dent in an economy almost instantly and consumers are often affected the most.
Most economists see trade as an absolute good – until politicians get involved. Trump clearly sees trade as a zero sum game. Some win while others lose. But Canada can’t win many trade wars, especially not with the US.
We’re already witnessing how a trade war could affect the Canadian agri-food sector. Canadian pulse farmers are bracing for major trading headwinds with India. Some political opponents link Trudeau’s recent visit to India with its decision to increase its tariff on chickpeas from 44 to 60 per cent overnight. This comes after India introduced a variety of other tariffs on pulse crops, including lentils, peas and chickpeas, in the past few months. Canadian pulse exports to India alone are worth well over $1 billion and growing – until now.
This could easily escalate further and affect other sectors of Canada’s agri-food economy.
More governments in Europe, South America and elsewhere are reducing their exposure to international markets. Doing so reduces risks for those countries and makes managing the economy more simple.
But trade wars can backfire. Protectionist policies support inefficiencies, which ultimately hurt consumers. Trade barriers make economies weaker and less competitive over time.
Duties may look like attractive, simple mechanisms to protect domestic interests. But they’re a very expensive way to retain jobs.
Canada doesn’t have an immaculate record on this front. This nation applies heavy duties on many imports, such as dairy products, poultry and eggs. These duties are embedded into our supply management regime, which is one of the most protectionist policies in the world. In some cases, duties exceed 300%.
Most countries place duties on a variety of food products, but Canada goes even further by enabling and controlling domestic production with quotas. We’re the only western economy still doing it. And it’s awkward to ask trading partners for exemptions on certain sectors.
We need to be more aware of how intertwined our economies are. Duties in one sector will affect the ability of other sectors to trade. It’s difficult to link steel and aluminum with dairy, poultry and eggs, but at negotiations like those for NAFTA, everything is on the table.
This protectionist behaviour could easily worsen and that spells trouble for an open economy like ours. Given our abundance of resources and knowledge, we have plenty to share. Almost 60% of our economy is trade-driven.
Morneau’s budget shortchanged Canadian taxpayers by focusing on equality. The lack of focus on what really matters means Canadians should not be shocked if Ottawa is utterly unprepared to deal with Washington’s trade wrath.
Upholding equity values is undoubtedly noble. But the government could fall short on its social promises if it runs out of cash as the economy flounders.
© Troy Media 2018