Lee Friday – February 24, 2017
In this BNN article (February 16, 2017), CIBC Chief Executive Officer Victor Dodig is quoted: “For Canada’s economy to grow and succeed, we must be unwavering in our commitment to open trade, and to open borders,” he said. “To the free flow of goods, to the free flow of services, and to the free flow of people.”
Dodig speaks of two issues which are completely unrelated. There is a big difference between open borders to facilitate the free flow of goods and services i.e. free trade versus open borders to facilitate the free flow of people. This article is about free trade, which does not exist.
In order to appreciate the enormous benefits of free trade, we must understand the social process which begets free trade. This social process is the division of labour.
To understand the human tendency toward the division of labor, based on private property and voluntary exchange, is to understand how a peaceful, prosperous society is formed. Illegal criminal acts, or ‘legal’ government acts which interfere with this process, are the cause of most of society’s ills. Take 5 minutes to read about the division of labour.
The division of labour is not restricted to specific regions or nations. It is universal. Government interference with the division of labour takes many forms, all of which are economically regressive.
SO-CALLED ‘FREE TRADE AGREEMENTS’
Many countries negotiate Free Trade ‘Agreements’, but this is a misnomer. If politicians wanted genuine free trade, such agreements would be redundant. It is important to remember that countries do not trade with each other, individuals do. Politicians enact these agreements on behalf of specific individuals within special interest groups, not on behalf of consumers.
Free Trade ‘Agreements’ between (and among) countries do not contemplate free trade, but rather ‘managed’ trade. These agreements are lengthy, complex documents, and the devil is in the detail. The largest beneficiaries are multi-national 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 (Jan 5, 2017), referred to the Trans-Pacific Partnership (TPP) as an agreement which “would create a free-trade zone among 12 nations around the Pacific, making it the world’s largest.” Later 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. (Note – The TPP is dead, as the U.S. Government will not ratify it.)
TARIFFS
Free trade is significantly hampered by government imposed tariffs, which result in higher consumer prices and a reduction in overall prosperity. Here is a typical example, courtesy of the Peterson Institute for International Economics:
In his 2012 State of the Union address, President Obama claimed that “over a thousand Americans are working today because we stopped a surge in Chinese tires.”
Our analysis . . . shows that American buyers of car and light truck tires pay a hefty price for this exercise of trade protection. According to our calculations . . . the total cost to American consumers from higher prices resulting from safeguard tariffs on Chinese tires was around $1.1 billion in 2011. The cost per job saved (a maximum of 1,200 jobs by our calculations) was at least $900,000 in that year. Only a very small fraction of this bloated figure reached the pockets of tire workers. Instead, most of the money landed in the coffers of tire companies, mainly abroad but also at home. . . . According to the BLS [Bureau of Labor Statistics], tire builders earned an annual average salary of $40,070 in 2011.
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.[1]
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 the resources more efficiently. However, inefficient producers hate these market signals, and they lobby the government for protection.
Tariffs are a coercive mechanism of ‘life support’ for inefficient producers. 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.
It is not the business of government to ‘save jobs’, and we have seen that the overall effect of a tariff is ‘job losses’. When Obama said “over a thousand Americans are working today because we stopped a surge in Chinese tires”, he was playing fast and loose with the facts. First, he supposes that if the domestic tire manufacturers had gone bankrupt, none of the 1,200 unemployed workers would have found alternate employment. Second, he says nothing about the number of domestic jobs lost as a result of the tariff. Economic regression is always the result when the government suppresses the division of labour, which means to suppress free trade – our standard of living declines.
If country A imposes a tariff on country B, country B should not impose a retaliatory tariff on country A, because this would be economically counterproductive. It is irrelevant whether politicians are aware of this economic principle, because they do not care about the overall economy. They only care about satisfying the economic demands of corporate interests.
CONCLUSION
Unfree markets are anti-competitive markets. Canada’s dairy, poultry, and egg markets are unfree even within the borders of Canada. The government’s ‘supply management’ policy forcibly restricts production, which benefits producers because consumers must pay higher prices. The government is suppressing the division of labour, suppressing free trade.
In fact, within the borders of Canada, there are numerous markets which remain unfree. Government regulations impede inter-provincial trade. It has been estimated that “internal trade barriers add somewhere between eight to 15 per cent in costs to goods and services that cross provincial boundaries. . . . the overall gains from removing internal trade costs are substantial. Canada’s national productivity could grow by . . . a remarkable $7,500 per household per year . . .” [2]
This may sound like a lot, and it is a lot, at $7,500 per household per year. However, the cost of the lack of free trade within Canada goes well beyond the costs imposed by inter-provincial trade barriers. I have written about this here and here.
Free trade is a simple concept. Two parties want to trade with each other. They want to exchange goods for goods, or goods for money. If no one interferes with this voluntary exchange between the two parties, then free trade exists. If a third party 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. Third parties – politicians – are very active. They are active in all countries, and at all levels of government.
We do not need trade agreements or treaties to encourage free trade. Free trade will blossom if governments stop interfering in the marketplace. In every country, there are hundreds, if not thousands of government regulations which interfere with free trade within the borders of each country. Yet, politicians would have us believe they are genuinely interested in free trade between countries.
The TPP is more than 5,000 pages in length. One page with two short sentences would suffice: “People are allowed to trade freely. Governments will not interfere.” I do not think Victor Dodig would welcome this one page document. I think he prefers the illusion of free trade through the ‘free trade agreements’ currently in force (and the TPP), and others he hopes to see completed. Is it possible these ‘agreements’ confer benefits on the CIBC, benefits which they would be unable to achieve in an environment of genuine free trade? You can bank on it.
[1] Gary Clyde Hufbauer and Sean Lowry, US Tire Tariffs: Saving Few Jobs at High Cost (Peterson Institute for International Economics, Policy Brief 12-9, April 2012)
[2] Trevor Tombe, A stunning $7,500 per household is the annual cost of unfree provincial trade (Financial Post, March 28, 2016)
