Cracking the free trade taboos

We should not refuse to open the borders between two countries simply because a segment of the population will lose out.

Canada and the European Union are expected to ratify a major free trade agreement, the Comprehensive Economic and Trade Agreement. I won’t bore you with complicated details, but let’s just say the deal will eliminate virtually all customs duties between the two commercial zones and expand access to public contracts.

These days, signing such a deal is a challenge because politicians have become more opposed to free trade than ever before. Just look at our neighbours to the south. During the US primaries, Hillary Clinton had to take a protectionist stance in order to beat Bernie Sanders, while Donald Trump called for nothing less than the US’s withdrawal from NAFTA.

Raising the spectre of globalization, politicians are looking to win more votes. However, they are going about it the wrong way. They would be more in tune with voters — who also happen to be consumers — if they consulted with them once in a while. According to most polls cited in a recent New York Times article, voters view free trade agreements as generally positive.

The problem is that no one really listens to voters. Those being heard are lobbyists, acting on behalf of businesses most likely to lose certain advantages or market share to foreign competition. What’s more, the media usually analyze trade negotiations from the perspective of companies directly affected, instead of asking whether trade deals would benefit the majority of the population, as if this were taboo.

Yet most economists agree on the virtues of free trade. By driving prices down, free trade puts more money in consumers’ pockets and increases productivity in the economic zones involved, even though it leads to some job losses in less efficient companies. Take NAFTA as an example. Yale University economists and the US Fed have determined that tariff reductions under the deal increased real wages not only in Canada (0.32%), but also in the US (0.11%) and Mexico (1.72%).

Conversely, the softwood lumber dispute — a future textbook case on the negative effects of protectionism — still rages on. It’s a dispute in which almost everybody loses, except for the US companies that pressured the government to impose trade barriers.

My former colleagues at the Montreal Economic Institute calculated that tariffs on Canadian so wood cost our producers more than $2 billion between 2006 and 2015, and resulted in thousands of job losses in the industry. US consumers are no better off. Because their two-by-fours are more expensive as a result of the drop in Canadian imports, they spent US$6.36 billion more during the same period than they would have had Canadian so wood been exempt from tariff barriers. Meanwhile, US producers are the big winners, recording additional net earnings of US$4.63 billion. Now that’s an example where lobbying really paid off.

Of course, free trade isn’t perfect, and globalization inevitably leads to job losses, especially among less educated workers. But overall, the pros far outweigh the cons. And so we should not refuse to open the borders between two countries because a segment of the population will lose out. As the old saying goes, you can’t make an omelette without breaking a few eggs.

One solution is for governments to implement public policies to soften the blow for the real losers of free trade, by retraining them for the job market so they too can reap the benefits of new trade agreements. This way it’s a win-win for everybody.