Economy

Trade War vs. Fair Trade Agreement

By Ryan McGreal
Published May 15, 2009

The Washington Post is reporting that the US Stimulus Plan may represent an opening volley in "the first trade war of the global economic crisis":

Ordered by Congress to "buy American" when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions.

In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.

Canadian voices are already calling for retaliation:

Outrage spread in Canada, with the Toronto Star last week bemoaning "a plague of protectionist measures in the U.S." and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts - the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.

Everyone loses a tit-for-tat trade war. It's become drearily fashionable to compare today's economic crisis to the Great Depression, but it's hard to study that earlier phenomenon and not conclude that it was specifically rampant protectionism (coupled with a lack of Keynesian stimulus) that turned the crisis into a depression.

Free trade as such isn't the problem. Trade demonstrably increases overall wealth, as long as it isn't force-mapped into a simplistic Rickardian comparative advantage model. The main problems, as I see it, are:

  1. "Free trade" agreements are not actually free trade agreements at all (which would be limited more or less to prohibiting tariff and non-tariff barriers to foreign imports) but are actually free investment agreements that limit a country's ability to ensure that foreign investment goes into fixed capital rather than, say, destructive currency speculation.

  2. The agreements are coupled with dogmatic neoliberal constraints on the ability of governments to set and enforce environmental and labour standards for manufactured goods moving across borders. This is purely ideological and not intrinsic to the concept of free trade.

    An agreement could just as easily commit all parties to a "race to the top" that would eliminate much of the false comparative advantage of low-wage, low-regulation maquiladoras which, among other things, merely displace the point source of pollution without internalizing the global cost of that pollution.

  3. Through a variety of means, the US has ensured that its own industrial policy is insulated from free trade rules. In addition to such tactics as stalling endlessly on actual NAFTA violations until a friendly Canadian government caves (e.g. softwood lumber) and in moving protectionist measures to lower levels of government that are not subject to NAFTA rules, the USA also hides enormous public involvement in its domestic R&D/manufacturing under the rubric of "national defense", which is exempted from trade rules.

An escalating trade war will leave everyone worse off and could actually slow or stall the shaky nascent recovery in the global economy.

Instead, we should be trying to muster the political will to negotiate a 21st century NAFTA that steers all three countries toward rising standards rather than an ongoing opportunistic race to the bottom.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By Hopeful (registered) | Posted May 16, 2009 at 00:33:31

Well said Ryan. Hopefully the buffoons at City Hall understand this and pull support for limiting their purchasing by boundaries.

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By A Smith (anonymous) | Posted May 16, 2009 at 03:54:11

A trade war is more akin to two or more nations shooting themselves, simply because other nations are doing the same thing. Trade is nothing more than buying the best products at the best price, so when a government decides it's in people's best interest to pay more for less, the result is a reduction in real purchasing power for everyone.

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By Slave labour is alive and well (anonymous) | Posted May 16, 2009 at 12:04:53

Ryan writes: The agreements are coupled with dogmatic neoliberal constraints on the ability of governments to set and enforce environmental and labour standards for manufactured goods moving across borders.


Is it not the government that accepted or implememted these constraints? Who is behind these constraints? I just read an article in which the US has now put a lawyer who represents one of the largest most powerful corporations, who is deemed as one of the worst polluters in charge of the environment.

I guess from where I sit, it is the corporations that are in charge, the people, the workers do not have much of a voice. Somehow it is not fair or realistic that the voices of these powerful corporations have the final say and that governments have failed to duly represent the people.

I agree that we should be working for raising both labour and environmental standards but the reality is that the voices of the people have been silenced for the most part.





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By Mr. Meister (anonymous) | Posted May 20, 2009 at 00:49:04

There are conflicting sides in the free trade debate and I certainly am not an expert in the field but in a trade war with the US like any other war I suspect we will be the big loser. Obama's attitudes should come as no surprise since he made several protectionist remarks during the campaign. I was always confused by the great affinity many Canadians showed for Obama and the great joy in Canada when he won the presidency. I suspect the protectionism will increase, whether it works or not is immaterial it sounds good to many Americans (and Canadians) who have lost their jobs to the far east.

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