Much ado about little

Both of Canada’s current signature international trade pacts are foundering just shy of completion. But given the paltry contributions the TPP and CETA are expected to make to our economy, should anyone care?
By Ian McGugan

Can you hear the gnashing of teeth in Ottawa? Both of Canada’s flagship trade initiatives are in trouble and all the usual suspects are predicting problems as a result. Without the Trans-Pacific Partnership (TPP) to help Canadian exports expand in Asia and without the Comprehensive Economic and Trade Agreement (CETA) to work similar magic in Europe, our national aspirations face serious obstacles. Or so the story goes.

Put me down as skeptical. Like millions of other voters on both sides of the Atlantic, I’ve grown dubious about the payoffs from trade deals. I can’t bring myself to get worked up about the fact that both Donald Trump and Hillary Clinton have declared themselves opposed to the TPP. Nor am I losing any sleep over the realization that CETA now seems trapped forever in the gears of the European Union’s legislative machinery.

Sure, freer trade is usually a good thing. But we no longer live in a world where enormous tariff barriers fence off national economies. Knocking over the low hurdles that still remain isn’t likely to deliver huge gains, at least not for major industrialized countries that already have minimal trade barriers.

Many commentators on the issue have the logic backwards. Pundits typically write that trade deals boost our economy by opening up new markets for our exports. However, “in standard trade theory, most of the benfits from lowering tariffs accrue to the countries that lower them,” writes Dean Baker of the Center for Economic and Policy Research in Washington, D.C. “In trade theory, it benefits their consumers. Overall, trade balances are not affected.”

In other words, theory says the big winners from new trade deals will not be Canada or the U.S., but smaller countries that still have significant tariff barriers in place. Detailed analysis of the TPP, which aims to lower trade barriers among a dozen countries that border the Pacific Ocean, bears out that logic.

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The Peterson Institute for International Economics in Washington, D.C., one of the most consistent cheerleaders for the TPP, published a report earlier this year that estimated how much the pact would boost incomes in each member country over the next 14 years (see table). The biggest projected winner is Vietnam. The institute calculates that by 2030 Vietnamese incomes would be 8.1% higher under TPP than in a world without the trade pact. In contrast, Canadian incomes would be a mere 1.3% higher while U.S. incomes would inch ahead by a nearly imperceptible 0.5%.

To be sure, any increase in incomes is a good thing, but those are rather paltry gains from a North American perspective. Remember, too, that the projections come from a staunch supporter of the TPP. There’s a good chance that reality may fall short of even the modest long-term forecasts put together by the Peterson Institute. The United States International Trade Commission conducted its own analysis and concluded that the TPP would grow the U.S. economy by a mere 0.15% over baseline projections by 2032 and increase employment by only 0.07% over that period.

Whichever projection you prefer, the impact of TPP on Canada and the U.S. appears so small that other factors are likely to overwhelm its impact. And that’s typical of trade deals.

CETA, which aims to break down trade barriers between Canada and Europe, “could boost Canada’s annual income by $12 billion annually,” according to an enthusiastic forecast from Ottawa. That sounds impressive at first glance—until you remember that Canada’s gross domestic product is about $2 trillion a year. Do the math: even if CETA is passed and the government’s forecast eventually pans out, the deal would boost Canadian incomes only about 0.6%.

Given such tiny payoffs, you have to wonder what all the fuss is about. The usual answer is that gains from free trade, while small in any one year, add up over decades.

Free trade deals can also be a good way to keep unhealthy domestic cartels in check. Canadians, for instance, would nearly certainly benefit from the impact of CETA and TPP on this country’s notoriously inefficient dairy industry. By opening the door to more dairy imports, the trade deals would help all Canadians pay less for such goods.

Moreover, free trade has a way of bonding together countries not just economically but politically as well. The more we trade with other countries, the less likely we are to brawl with them.

All these points are reasonable but brush past some difficulties. Most notably, free trade creates losers as well as winners. Employees in less productive industries lose their jobs and have to find new work. Displaced workers may be able to shift into new sectors fairly easily if economies are growing rapidly. But at a time like now, when global growth is sputtering, disruptions from free trade can be agonizing for the people and sectors most affected. Just ask a Donald Trump rally—or a Bernie Sanders supporter.

Trade deals usually have a lot more to say about how tariffs will be lowered than about how displaced employees will be supported. The TPP, in particular, seems more about extending corporate power than enriching workers. It provides for the creation of investor-state dispute settlement tribunals that would allow foreign investors to seek compensation for legislation that hurts them. It also extends patent and copyright protection—a gift to U.S. pharmaceutical companies and entertainment providers but not exactly a recipe for general prosperity.

I believe in free trade but I can summon up only the most lukewarm enthusiasm for either TPP or CETA. Neither pact makes a strong case for how it will help ordinary people. If the architects of these deals were forced to go back to the drawing board until they can present a stronger case, it would be no tragedy.

Ian McGugan is an award-winning business journalist in Toronto and the founding editor of MoneySense magazine. E-mail: imcgugan4@gmail.com.

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