North American Free Trade Under Attack: Newsprint is just the tip of the iceberg

Canada is now getting a good look at just how aggressively protectionist the Trump administration in the U.S. is ready to act. It has hit Canadian newsprint exports with punishing tariffs based on unjustified claims that the Canadian industry is both subsidized and dumping product below fair-market value into the U.S. marketplace. This latest trade skirmish, following President Donald Trump’s demands to renegotiate NAFTA, American-instigated trade challenges to Canadian exports of softwood lumber (yet again) and Bombardier aircraft, and Washington’s initial threats to levy duty on Canadian aluminum and steel (now on hold), should set off alarm bells beyond the newsprint industry. Canada’s policy-makers and exporters should be on notice that the administration is clearly eager to penalize the exports of an ostensibly free-trade partner based on overwrought claims. While newsprint sales have been declining everywhere, Canadian producers have nevertheless been able to gain a larger share of the shrinking market, having grown from controlling 60 per cent of combined U.S. and Canadian production in 1990 to 69 per cent in 2016, while developing new products and innovating to maintain a sustainable industry. Complaints about subsidies and dumping from U.S. competitors are plainly intended to halt and possibly reverse that trend. But in addition to hurting Canadian paper producers, including 21 mills in Canada and impacting thousands of workers, also punished in the process will be already struggling American newspaper publishers who will have to pay more for newsprint. While the U.S. has longstanding arguments about the market distortion caused by government’s role in Canada’s softwood lumber industry, the justifications it now considers as valid for claims of Canadian subsidization of newsprint are much broader and more creative. They include government programs to help the industry manage pine beetle infestations, provincial school tax-credit programs, local municipal revitalization programs and even the construction and repair of public access roads and bridges. It is hard to see how many of the dozens of programs identified by the Americans as subsidies fit the traditional definition. If these are now considered subsidies, then suffice it to say that there is scarcely a Canadian export that could not be accused of enjoying subsidies and become subject to trade disputes and tariffs. The signals are as unmissable as they are distressing. The U.S. government has begun using new laws that have never been tried and dusting off old laws that have not been used in decades to erect protectionist barriers. There was a 62-per-cent jump in the number of anti-dumping and countervailing-duty investigations initiated in the first year of the Trump administration compared to the previous year. The U.S. is leading the world in enacting discriminatory trade measures and its pace is speeding up. Canada’s government must mobilize to fight off these attacks against the country’s exports through the use of NAFTA’s Chapter 19 dispute-resolution panel mechanism, while ensuring it retains that mechanism in whatever form of NAFTA emerges from renegotiations. What is happening to the newsprint industry today could be happening to many more Canadian exporters soon

Canada-Korea Free Trade: A Watershed in Economic Integration with Asia

If there is one thing to question about the recently signed free-trade deal between Canada and South Korea, it is this: What took us so long? South Korea is a long-time trading partner with Canada, with a democratic political system and a rapidly expanding free-market economy offering strong protections for commercial rights. The country is an excellent place for Canada to begin a deeper economic integration with the larger Asian market. The details of the deal itself are certainly worth celebrating. Certainly Canadian consumers will save money on Korean-made products, such as cars. But Canadian companies exporting to South Korea have also, in recent years, found themselves increasingly unable to compete with exporters from the E.U. and U.S., who have already established free-trade deals with Seoul. Since the Americans signed their deal, U.S. exports to South Korea have soared, while the value of Canada’s exports to the same market have dropped by 30 per cent, as Canadians were left facing tariffs as high as 269 per cent.The Canada-Korea Free Trade Agreement levels that playing field for Canada, something that will especially benefit firms exporting agricultural products (tariffs on Canadian beef, for example, were a punitive 72 per cent) and professional services. Even automakers may find that whatever increased competition comes from cheaper Korean car imports are offset by the opportunity to more easily sell Canadian-made vehicles in the much-larger Asian marketplace. There is a wealth of economic opportunity waiting in that burgeoning market; this free-trade deal is a pivotal first step for Canada to start fully capitalizing on it

The Comprehensive Trade Agreement with India: What’s in It for Canada (Or India for That Matter)?

Prime Minister Stephen Harper is leading a mission to India from November 3 to 9, 2012. On this, his second official visit to India, Harper will meet with the prime minister of India, Manmohan Singh, with the stated goal of strengthening trade and investment links between the two countries. In fact, the two countries have been negotiating a trade agreement known as the Comprehensive Economic Partnership Agreement (CEPA) since November 2010. The case for Canada to pursue a comprehensive trade agreement with India appears to be ironclad. India is a rapidly growing, very large economy with the second largest population and tenth largest GDP in the world. India is open for business and began economic reforms to liberalize trade and investment, deregulate industry and privatize state-owned enterprises in the early 1990s. India has been growing at an average rate of more than seven per cent per year since 1997. Moreover, India is a democracy and shares a colonial past with Canada. However, bilateral economic relations between the two countries have historically been very weak, but with the potential to grow substantially. It seems like India has all the right ingredients for Canada to make the CEPA a priority. So, what can Canada really expect from these negotiations? The answer: Unfortunately, not much

International Trade, Labour Turnover, and the Wage Premium: Testing the Bhagwati-Dehejia Hypothesis for Canada

In this paper we examine the impact of international trade on the absolute and relative wages of educated and less-educated workers in Canada over 1993-96. We show that after correcting for the relative supply effect of educated to less educated workers the wage differential would have been on an upward trend. Moreover, after controlling for other relevant factors influencing real wages, trade had a statistically significantly positive impact on the wages of both educated and less educated workers. However, the impact on the educated workers was four times stronger, roughly the same as the impact of technology on relative wages. We show that the observed relationship between trade and the relative wage of educated to less-educated workers does not fit the Stolper-Samuelson theoretical explanation. The observed results are more in line with the Bhagwati-Dehejia hypothesis, which posits a link from trade to wages through volatility, labour turnover, and jobless spells.

Trade Policy Trends: Chinese Protectionism: Restriction on Canola Imports from Canada

On March 3, 2019, China revoked the import licence for canola from Richardson International Ltd. (a large Canadian processor of grain based in Winnipeg). Chinese officials have cited pests as the reason for their action. The licence revocation occurs amid a conflict between Canada and China over the arrest in Canada of Huawei’s chief financial officer, Meng Wanzhou. Some see this as a retaliatory measure on the part of China, which has a history of using trade policy in political disputes

Why Delay the Inevitable: Why the AIIB Matters to Canada’s Future

Yesterday was the deadline to join the Asian Infrastructure Investment Bank (AIIB) as a founding member. Once again Canada is on the sidelines as Asia and most of the rest of the world moves forward while Canada watches. When Chinese President Xi Jinping announced plans for the AIIB at the APEC summit in Indonesia in 2013 and launched the initiative in Beijing at the China-hosted APEC summit a year later, who would have predicted that such an idea would cause an international furor. The new Bank has garnered significant headlines for two reasons. One is American opposition to the China-led Bank; and two is that some see it as a rival to the World Bank and other multilateral banks. The official U.S. position is that the AIIB is a rival to these institutions and that the funds would be better channeled through the World Bank and the Asia Development Bank. We argue that the AIIB is a welcome Chinese initiative, in line with American calls for China to become a ‘responsible stakeholder’ in the international system. The AIIB will become a multilateral development bank that finances programs addressing huge infrastructure deficits in the Asian region. Myanmar, Cambodia, Laos, the smaller and newer members of the ten-country Association of Southeast Asian Nations (ASEAN), for example, are emerging from years of economic and political isolation to join the region’s economy. Connecting them to each other and their larger neighbours, including China and India, requires major investments to create modern transportation corridors and other infrastructure, including electronic connectivity. Infrastructure development is also integral to a shared vision of integration of the region’s economies to be an engine of global growth. We also argue that The AIIB reflects a world where the majority of global GDP will soon be produced in Asia, and where the infrastructure needs in the region are enormous. Canada has much to offer in terms of skills and expertise in building infrastructure. For Canada it is important to look west, as well as south and east in this century. Failure to join the AIIB would be another failure to make inroads in Asia

What Dependency Issues? Re-examining Assumptions about Canada’s Reliance on the U.S. Export Market

There are things about Canada’s economy that Canadians take for granted: We are unusually reliant on exports; and we are exceptionally reliant, even precariously so, on trade with one particular market, the United States. But despite the fact that we are accustomed to believing such things, to the point where these assumptions inform discussions about developing trade policy, a closer examination reveals a different picture. In reality, while it is true that Canada has a higher ratio of trade to GDP than some of the largest countries in the world, we are not, in fact, an outlier relative to other countries. In fact, our trade-to-GDP ratio is similar to those of France, Great Britain and Australia. Canada’s ratio of exports to GDP is not only unexceptional, it has been steadily declining, almost to the point where soon, rather than debating whether we are too dependent on the U.S. export market, Canadians may find the more urgent policy question to be why our trade openness has been underperforming in international markets. The conventional wisdom that Canada is “too dependent” on the United States for trade has veered many trade policy discussions toward the conclusion that it is essential for Canada to diversify its trade. But this ignores the evolution of trade patterns globally. Throughout the world, open economies are typically concentrated on regional, rather than wider global trade. It is true that more than 80 per cent of Canadian exports went to the United States between 1995 and 2010. But in 2012, 69 per cent of European exports went to other European countries. In Asia, 53 per cent of exports were traded within Asia. The reality is that, across the world, trade is predominantly based around regional value chains, and the North American region where Canada is situated is, of course, heavily dominated by the United States. A comparable economy to ours, such as Australia’s, may appear to have a more diverse trading pattern, because it trades heavily with several Asian countries, but it is still principally reliant on the Asian region. And when comparing intra-regional trade dependency, Australia is actually more dependent on a single regional market than Canada is. Similar assumptions about a lack of diversification in Canada’s export products — that perhaps we are too dependent on, say, energy or automobile exports — also dissolve under closer analysis. Looking at regionallevel data, Canada’s export products are more diversified than Australia’s, Poland’s, Austria’s, Mexico’s, Hong Kong’s, and those of many more countries. Out of 121 countries measured, Canada ranks roughly in the middle, at 51st, on export-product diversity. None of this is to say that there is no benefit to Canada increasing trade diversification; rather, Canada should focus trade policy both on deepening its regional trade ties with the U.S., while also developing, as much as possible, other global export markets. It does, however, reveal that Canada’s attachment to the U.S. is not unusual in the global context, let alone cause for concern. Moreover, it is a recognition of the reality of international trade: That such trading patterns have emerged around regional value chains for good reasons. These are the export decisions made by countless firms to meet the demand decisions of tens of millions of consumers. Assuming that diversification policy could hope to redirect so many sensible market-level decisions would be naïve at best, while contriving policy aimed at interfering with the natural and entirely normal flow of these market-based decisions could only invite grave economic danger

NAFTA Renegotiations: An opportunity for Canadian Dairy?

What are the implications of a renegotiated NAFTA for Canadian dairy producers? Many observers dread the prospect of even the slightest liberalization in the dairy sector. This paper takes a different perspective, arguing that opening Canada’s dairy sector would come with benefits not just for consumers, which is undeniable, but could also transform the industry and lead to a more productive dairy sector in Canada. Canadian dairy producers have been protected domestically through supply management and internationally through import-restricting border controls for over 40 years. This combination of domestic and foreign policies keeps Canadian dairy prices artificially high and allows producers to gain enormously from the system while hitting dairy consumers directly in the pocketbook. These policies are extremely costly for Canadian consumers and benefit the protected domestic dairy producers. Canadian international trade policies result in 200-percent tariffs on imports of many dairy products and almost 300-percent tariffs on over-quota imports of cheese. The OECD estimates that from 2010 to 2016, Canadian trade policy with respect to dairy and the “supply management system” annually transfers over US$2.9 billion from Canadian consumers and taxpayers to milk producers. This is extremely expensive for Canadian consumers and this transfer to Canadian dairy producers underscores why our trade partners have focused on the exorbitant tariffs that support this system. We argue that it is not only consumers that are hurt by the status quo, but that the industry itself can evolve and thrive from increased competition. According to standard trade theory, liberalizing trade in an industry like this leads the least productive producers to exit the industry as the most-productive producers increase market share and expand. These dynamics generate a more competitive and productive industry. We present evidence that these dynamics played out in Canada following the Canada-U.S. Free Trade Agreement (CUSFTA) and the North American Free Trade Agreement (NAFTA) and also in liberalized dairy industries in New Zealand and Australia. We argue that the massive economic rents earned by dairy producers in the essentially closed Canadian dairy sector means there is little competition in the industry, which has stifled growth and innovation in the sector. Liberalizing international trade in dairy will turn this around, increase competition in the industry and lead to a more productive and internationally competitive Canadian dairy sector while reducing the high cost of dairy faced by Canadian consumers. Liberalizing dairy will also be a strong signal to our trading partners that we are prepared to expend domestic political capital to improve NAFTA or other trade agreements. It has become clear that our trading partners have lost patience with our protectionist trade policies with respect to dairy. Multinational organizations such as the WTO have also highlighted the problems that these policies pose. Canada is feeling pressure to reform the system from trading partners who are hurt by supply management policies. Eliminating trade restrictions in the supply management sector would go a long way toward appeasing our trade partners and fulfilling our international commitments. Supply management policies are in violation of the spirit and, arguably, the letter of law in international trade agreements. In the recent Trans-Pacific Partnership (TPP) negotiations, Canada agreed to increase foreign access to its dairy market over a period of time by an estimated 3.25 per cent of its yearly milk production. This was a step in the right direction toward more competition in the sector. Canada should continue to push for reform in the dairy sector along the lines agreed to under TPP — but push even harder in the renegotiation of NAFTA. Unfortunately, Canadian politicians of all stripes have found that fixing supply management is a non-starter politically, with the powerful supply management lobby being such an effective lobby group. The TPP agreement provided the right opportunity to open the dairy industry. This is obviously good for Canadian consumers but will hurt some Canadian dairy producers. The negative impact on the politically sensitive dairy producers, primarily in southern Ontario and Quebec, has left the level of protection in the industry largely untouched for decades. Although some dairy producers will be hurt by opening the sector, the industry overall will thrive and become globally competitive. As demonstrated in the empirical literature of trade reform, and as we have observed in other Canadian industries that liberalized under CUSFTA and NAFTA, inefficient producers will close shop and more-productive producers will expand and prosper. The dairy trade liberalization that Canada agreed to under TPP should be the beginning and the NAFTA renegotiations are an opportunity for Canada to step up and do the right thing with respect to international trade in dairy while giving the Americans something they want in the negotiations. At the same time, it is an opportunity to weaken supply management and move toward dismantling it altogether.

The Impact of Foreign Investment Restrictions on the Stock Returns of Oil Sands Companies

In December 2012, prompted by the proposed purchase of Nexen by the Chinese SOE CNOOC, the federal government announced revised guidelines for investments by state-owned enterprises (SOEs) in the oil sands. Declaring the sale marked “the end of a trend and not the beginning of a trend,” Prime Minister Stephen Harper explained how the government would approach such decisions in the future, including placing the onus on foreign investors to demonstrate how deals would be of net benefit to Canada, as well as granting the industry minister the discretion to accept or deny proposed deals. Accounting for five per cent of Canadian GDP, $28 billion in government revenue and three per cent of all jobs nationwide, the oil sands are an integral component of Canada’s economy. The sector has long relied on foreign capital to finance projects, meaning that any move to deter outside investment could have profound consequences for the development of this critical economic asset. In this paper, the authors examine the impact of this policy change by measuring the stock returns of firms operating in the oil sands. Employing an event study analysis, they find empirical evidence that the government’s policy change has resulted in the material destruction of shareholder wealth, particularly in the case of the smaller oil companies. What is more, given the composition of the global oil industry has changed to one where SOEs dominate both reserves and production, is this a policy Canada can afford in the long term?“When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.” - Prime Minister Stephen Harper, December 7, 2012“…going forward, the [industry] minister will find the acquisition of control of a Canadian oil-sands business by a state-owned enterprise to be of net benefit, only in an exceptional circumstance.” - Prime Minister Stephen Harper, December 7, 2012“A year after the new Investment Canada Act rules were announced in December 2012, investment dollars from state-owned enterprises have essentially stopped flowing into the bitumen extraction business. Energy-directed foreign direct investment – of which SOEs play an important role – fell off a cliff in 2013, declining 92 per cent year-to-year from$27 billion to $2 billion. These are very worrisome statistics for a nation highly dependent on foreign investment to fund its capital-intensive resource industries.” - Sebation Gault, December 2, 2013 Published in Alberta Oil Magazin