1. Geoffrey Hale Political Science 3170 University of Lethbridge September 14, 2010

2. Outline The Trade Policy Continuum Types of Trade Policy The Theory of Comparative Advantage Comparative Advantage in the Real World Factors Shaping the Emergence of the Modern Canadian Trade Policy (Macdonald Commission)

3. The Trade Policy Continuum Unrestricted Free Trade (unilateral) Negotiated free trade  ----------------------------  Greater Restrictions Fewer (Tariffs, Quotas, non-tariff barriers) Mercantilism / Protectionism (“Managed Trade”)  ------------------------------------  UnilateralNegotiated Autarky

4. The Trade Policy Continuum II Protectionism, not free trade, has been the norm through modern economic history (18 th – 20 st centuries) Autarky Minimal trade or economic relations with other countries Emphasis on national self-sufficiency (pre-1840 China, modern N. Korea) “Mercantilism” / Protectionism Mercantilism: unilateral effort by national governments to maximize trade surplus, usually to finance growth of national state Neo-mercantilism: use of protectionist policies to foster economic development through policies favouring domestic firms / industries, encouraging “import substitution”, other trade restrictions.

5. Types of Trade Policy I Import Restricting Policies a) Tariffs – “tax levied on imported goods” b) Export taxes – “tax levied on certain kinds of exports” [e.g. US-Canada Softwood Lumber Agreement (2006)] c) Quotas – “quantitative restrictions” on imports, either by volume, or as share of domestic market. e.g. Cdn. supply managed agriculture] d) “Voluntary export restraints” (VERs) = negotiated quota. e.g. Textiles (MFA): 1970s-90s; Autos (early 1980s) e) Government Procurement restrictions (access, price preferences) f) Administrative Barriers to Trade (non-transparent or unpredictable administrative processes)

6. Types of Trade Policy II Preferential Export Promoting Policies a) Direct export subsidies (usually subject to “Countervailing Duties” under WTO, NAFTA, domestic laws) b) Export cartels / monopolies * e.g. Canpotex; Canadian Wheat Board. c) Production controls d) Other regulations / government policies providing preferential access to key inputs (capital / skilled labour / resources / infrastructure subsidies / technology / intellectual property rules) Restrictions, Conditions on Foreign Ownership Ownership limits, requirements for domestic partner. e.g. Big banks, airlines / railways, “cultural industries” State-ownership or dominance of specific industry sectors e.g. Electric utilities (8 provinces), auto insurance (3 provinces)

7. The Trade Policy Continuum III “Negotiated free trade” Applied through bilateral, “plurilateral” (several partners), or multilateral agreements. Key principles: Reciprocity: mutuality or agreed equivalence of rules applying to economic citizens of each country (usually accompanied by ‘national treatment’) “most favoured nation” principle: best provisions applying to one contracting partner available to all. Often have detailed technical rules determining application of general principles  Colgin’s “managed free trade” (e.g. NAFTA’s “rules of origin)... may be more or less restrictive of trade. Often have sectoral exceptions restricting general application of rules, retaining elements of managed trade

8. Reciprocity vs. Free Trade?? Prevalence of restrictive trade policies creates expectations of government “protection” among major domestic interest groups. Negotiating trade liberalization (fewer barriers to trade) creates overall economic benefits, but also potential losses, adjustment costs for many sectors. Principle of “reciprocity” – or mutuality in trade policy concessions – allows governments to point to similar trade- offs by treaty partners, thus providing political “cover” in selling these trade-offs to domestic interests.

9. The Trade Policy Continuum IV “Negotiated” Free Trade (continued) Problem of compliance / enforcement Potential for negotiated dispute settlement provisions (e.g. NAFTA, WTO) Most countries retain right to use retaliatory trade policies in absence of formal dispute resolution processes. Unrestricted Free Trade (unilateral) Idealized objective of many market-oriented economists. No / minimal restrictions on trade. Unusual (e.g. UK free trade regime: 1840s – 1920s) Usually requires substantial economic strength or adaptability of comparative advantage.

10. Economic Foundations of Trade Policy Comparative Advantage I Under normal circumstances, countries will be economically better off from engaging in trade Trade allows for: More efficient use of resources by allocating more resources (capital, labour, other resources) to areas in which countries have relative or comparative advantage to one another in order to exchange them for goods, services which can be produced relatively more efficiently by other countries. Allows for greater specialization within, between industries, resulting efficiency gains from economies of scale. Allows for greater value, range of choices for consumers. Comparative advantage applies even when one country has absolute advantage across wide range of goods, because of differences in relative advantages in producing one set of goods, services over another.

11. Economic Foundations of Trade Policy Comparative Advantage II Table 1 – Comparative advantage – (before trade)Cost / Unit InputCarsWheatTotal UnitsCarsWheat USA20,00010 ($ 10k)50 ($10k)60$ 1,000$ 200 Thailand20,000 2 ($ 10k)25 ($10k)27$ 5,000$ 400 Total40,000127587 Table 2 – Comparative advantage – (production specialization)Cost / Unit InputCarsWheatTotal UnitsCarsWheat USA20,00015 ($15k)25 ($5k)40$ 1,000$ 200 Thailand20,000 050 ($20k)50n.a.$ 400 Total40,000157590 Table 2C – Comparative Advantage – (after trade)Net Cost / Unit* InputCarsWheatTotal UnitsCarsWheat USA20,00012 (15-10k)50 (5k+10k) 62$ 417$ 300 Thailand20,000 3 (10k)25 k (10k) 28$ 3,300$ 400 Total40,0001575 90* all things equal Adapted from Colgin (2005), The Promise and Peril of International Trade, 27-33.

12. Comparative Advantage in the Real World Usually multi-dimensional, not uni-dimensional Many products, multiple potential markets / sources of supply in modern economy. Frequently dynamic Subject to shifts in Industrial organization and management (at home / abroad) Relative factor costs (capital, labour, input costs, technologies) Introduction / diffusion of new technologies Policy shifts by domestic, foreign governments Exchange rate volatility (e.g. compare Canada, China)

13. Comparative Advantage in the Real World II Canada’s trade surplus with the United States is increasingly offset by its trade deficit with the rest of the world Reflects volatility of commodity prices, exchange rates, etc.

14. Comparative Advantage in the Real World III Goods Balances by Geographic Area Canada – 2006-2010 Statistics Canada 67-001, Sept. 2010

15. Factors Shaping Emergence of Modern Canadian Trade Policies (Macdonald Comm.) Canada traditionally relatively open, trade-dependent economy  growing trade dependence : 1960-80 Moving up value-added chain, but still commodity-driven. Growing dependence on U.S. export markets despite sporadic efforts to diversity  1954: 60%1984: 76% Growing international competition Japan + “Newly Industrialized countries” (NICs)  growing factor in international trade Growth of international investment  changes in industrial organization... growth of “related party” trade  Major adjustment challenges for Canadian industry

16. Factors Shaping Emergence of Modern Canadian Trade Policies II Growth of “Regionalism” Trend towards emergence of regional trading blocs characterized by discrimination against non-members  European Community, Japan + ASEAN, smaller groups Canada “one of few major industrial countries lacking free access to market of over 100 million people”. Growing trend towards coordination of negotiating positions among members of trade blocs.