16 January 2018
Originally published by CapX.
The lack of free trade hurts poor people the most. Therefore, we should welcome Canadian Prime Minister Justin Trudeau’s comments in support of free trade, right? Well, not so fast.
During Trudeau’s visit to China in December, the Canadian Press published an article titled “World at ‘pivot point,’ needs to embrace free trade: Trudeau”:
The world is at a “pivot point” and will fail unless countries embrace free trade and elevate their citizens who have been left behind by globalization, Prime Minister Justin Trudeau warned Wednesday.
…Trudeau came to the Fortune Global Forum, a Davos-style gathering of the world’s business elite, to sell Canada as a good place for foreign investment, but he went off script and delivered a stern warning about the dangers of allowing protectionism and inequality to flourish.
“We are at a pivot point in the world right now, where we decide whether we work together in an open and confident way and succeed or whether we all falter separately and isolated,” he said.
“As that anxiety spreads, people start to turn inwards. They start to close off. They start to get fearful,” he added. “If that continues to happen, make no mistake about it, we will all lose.”
Trudeau didn’t mention the Donald Trump administration in Washington, but he’s already spoken out in China on the need to save the North American Free Trade Agreement [Nafta] from demise…
Trudeau expressed concern about people starting “to turn inwards” and “close off” because “we will all lose.” He is referring to protectionism, and I suspect his comments are largely directed toward the United States. Much has been written about the Nafta negotiations and Donald Trump’s desire for more protectionist tariffs.
Trudeau’s position seems to be that free trade is economically beneficial and protectionism is economically harmful. I agree, but if we pay close attention, we see that the Prime Minister is merely paying lip service to free trade.
Defining Free Trade
Free trade is a simple concept which exploits the division of labour to the fullest possible extent. Two parties want to trade with each other. They want to exchange goods for goods, or goods for money, or labour for money. If no one interferes with this voluntary exchange between the two parties, then free trade exists. If a third party — the government — intervenes and uses force to prohibit the exchange or to impose conditions on the exchange, then free trade does not exist. In today’s world, free trade does not exist.
Many countries negotiate “free trade agreements,” but this is a misnomer. The essence of these “agreements” is to serve corporate interests through the establishment of rules which reduce competition. These are lengthy, complex documents which contemplate “managed trade,” not “free trade.” The largest beneficiaries are multinational corporations, and the biggest losers are consumers who pay higher prices. The division of labour is suppressed, and political power becomes more centralized.
Bill Curry, writing for the Globe and Mail before the US dropped out of the Trans-Pacific Partnership (TPP), referred to the TPP as an agreement which “would create a free-trade zone among 12 nations around the Pacific, making it the world’s largest.” However, further along in the article, we read this: “TPP countries get duty-free access to 3.25 per cent of Canada’s dairy market and 2.1 per cent of its poultry market.”
So, more than 95 percent of Canada’s dairy and poultry markets remain unfree. I am not sure why Curry defines this as free trade, but that is how the TPP is commonly described.
Similarly, Canada’s dairy and poultry markets are highly protected under Nafta, which Trudeau wants to “save from demise.” The Prime Minister has a strange conception of free trade.
If a firm is unable to sell its products at a price which consumers are willing to pay, and which allows the firm to be profitable, then the firm is wasting resources — human labour and raw materials. I have written about this here. In the realm of free trade, lower-priced imports send a market signal to inefficient domestic producers. The signal says, “You must improve efficiency, lower your costs etc., or you will go out of business,” thereby conserving resources for someone else who can utilize them more efficiently.
However, producers hate these market signals, and they lobby the government for tariff protection. This penalizes consumers whose choices are limited to buying the expensive domestic product, or the formerly cheap import which is now expensive because of the tariff.
The government claims it must approve tariff requests from these inefficient producers in order to “save” domestic jobs while it simultaneously avoids discussion about the economic cost of this policy. Studies often reveal this cost to be exorbitant when the “additional markup” all consumers are forced to pay in a particular year is divided by the total number of workers whose jobs have been saved. The cost per job saved is often considerably higher than the worker’s annual salary.
For example, according to calculations by the Peterson Institute for International Economics, the total cost to American consumers from higher prices resulting from safeguard tariffs on Chinese tires in 2011 was at least $900,000 for each job “saved,” where the annual average salary for a tire builder was $40,070. Studies in other industries have also revealed an exorbitant cost for each job saved.
Furthermore, as the Peterson Institute tells us, tariffs have a ripple effect elsewhere in the economy:
The additional money that US consumers spent on tires reduced their spending on other retail goods, indirectly lowering employment in the retail industry. On balance, it seems likely that tire protectionism cost the US economy around 2,531 jobs, when losses in the retail sector are offset against gains in tire manufacturing. Adding further to the loss column, China retaliated by imposing antidumping duties on US exports of chicken parts, costing that industry around $1 billion in sales.
Nafta contains numerous protectionist measures favoring special interest groups at the expense of the general public. Prime Minister Trudeau knows this, and he wants to “save Nafta from demise.” All his talk about the evils of protectionism is nothing more than political rhetoric.
Get Government Out of the Way
Prosperity is greatly enhanced by free trade which does not require negotiated agreements between governments. These so-called “free trade agreements” make free trade illegal.
Governments do not trade with each other — individuals do. If a government really wants to facilitate free trade, a legal document which runs hundreds or even thousands of pages is unnecessary. A one-page document with two sentences would suffice: “People are allowed to trade freely. The government’s role will be limited to enforcing the terms of the contract which the private parties themselves have voluntarily negotiated.”
I have seen no evidence that Prime Minister Trudeau is sincere about “embracing free trade.” He appears to be a typical politician, subservient to special interest groups while attempting to bamboozle the public with an illusion of free trade.
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