BUSINESS/COVER

PARTNERS IN POWER

IN ECONOMIC THEORY, FREE TRADE WORKS, BUT THE REALITY IS MORE PAINFUL, DIVISIVE AND DISTURBING

BRENDA DALGLISH December 14 1992
BUSINESS/COVER

PARTNERS IN POWER

IN ECONOMIC THEORY, FREE TRADE WORKS, BUT THE REALITY IS MORE PAINFUL, DIVISIVE AND DISTURBING

BRENDA DALGLISH December 14 1992

PARTNERS IN POWER

BUSINESS/COVER

IN ECONOMIC THEORY, FREE TRADE WORKS, BUT THE REALITY IS MORE PAINFUL, DIVISIVE AND DISTURBING

BRENDA DALGLISH

Almost 150 years ago, eccentric French economist Frédéric Bastiat devised one of history’s wittiest arguments for free trade. Provoked by protectionist laws introduced by the French government in the 1840s, Bastiat wrote a scathing satire in the form of a fictional plea to the government from the nation’s candlemakers. Bastiat’s petition complained that the candlemakers were “suffering from the intolerable competition of a foreign rival, placed in a condition so far superior to our own for the production of light, that he absolutely inundates our national market with it at a fabulously reduced price.” Indeed, Bastiat, tongue firmly planted in cheek, demanded that the government protect the candlemakers from the unfair competition of the sun. Eventually, electricity replaced candles and gas. But the debate over the merits of free trade continues as passionately as ever.

Without international trade, Canada would never have been invented. Without the explosion of global trade in the 20th century, Canada would not enjoy one of the highest standards of living in the world. But now, like almost every other country in the world, Canada is struggling with the question of how much trade is too much. As frictions in Europe drive farmers into the streets in protest, Maclean’s has prepared a series of reports on experiences in Mexico, the United States and Canada. They demonstrate that although the theory of free trade is encouraging, the reality is painful and divisive.

Little has changed since Thomas Babington, an English Whig historian and contemporary of Bastiat’s, observed: “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular.” And opening domestic markets to foreign goods is still a risky policy, as 25,000 farmers illustrated last week at demonstrations in Strasbourg, France, site of the European Community’s parliament. In recent weeks, bitter disputes have erupted over a host of trade issues, from agricultural subsidies within the General Agreement on Tariffs and Trade (GATT) to European economic integration and the North American Free Trade Agreement (NAFTA).

NAFTA: Despite the heated rhetoric, however, the push for freer trade continues. In Geneva, a GATT agreement seems imminent, and in North America, U.S. President George Bush, Mexican President Carlos Salinas de Gortari and Prime Minister Brian Mulroney, will sign NAFTA on Dec. 17. Economist James McNiven, dean of the faculty of management at Dalhousie University in Halifax, describes the phenomenon, which began a decade ago, as part of a global shift towards “consumer

POWER

democracy,” in which the rights of consumers take precedence over all others. “Look at the fall of the U.S.S.R. and its empire,” declared McNiven. “Nobody got killed because when the dictator turned to the military and said ‘Go out and stop this,’ they turned back and said: ‘Hey, we didn’t get our cars and televisions, either.’ Western commercials and soap operas killed the Communist empire.” Even the current recession has not eliminated support for free trade. Proponents say that the reason for that sustained support lies in the obvious benefits of the steady growth of global trade since the end of the Second World War. Said Michael Hart, senior adviser, trade policies studies, department of external affairs and international trade in Ottawa: “Some believe that the world of international competition is a demeaning rat race and that Canada would be better off to close its borders and become more self-reliant. But the economy as a whole would suffer. We would have to pay more for our products. We would have fewer products to choose from. We would lose access to new technologies. Domestic firms would have less incentive to maintain their competitive edge. Foreign countries would close their borders to our products.” Theory: The economic principle on which the free trade ideal is based is known as the law of comparative advantage, which 19th-century economist David Ricardo developed using Adam Smith’s law of absolute advantage. Smith, who is credited with creating the modem science of economics, said, in the law of absolute advantage, that countries, because of their different natural endowments, are better at producing some products than others. Mexico, for its part, is better at growing bananas, while Canada is a more efficient producer of maple syrup. By trading with each other, both countries will be better off. Ricardo theorized that even in the unlikely event that one country had a natural advantage in producing all goods and services, economic efficiency would still make it preferable for that country to specialize in the products in which it has the greatest advantage. It would then trade with others that had different strengths—even if they are not absolute—for other things. The sturdiest criticisms of free trade fall into one of three categories. First, while freer trade may benefit a nation’s overall economy, opponents argue that some people, particularly 1 those in less efficient industries—like manu2 facturing, in Canada’s case—are losers and pay = a heavy price. Free trade advocates counter

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UNSKILLED WORKERS OF THE WORLD PAY THE PRICE FOR FREE TRADE

that by saying that it is up to the government to decide if and how to redistribute some of the gains from trade. Too often, however, the less fortunate are ignored, leading to a growing gap between the winners and losers. In Canada’s case, economists say that the winners and losers are going to separate into two groups: those who are educated and those who are unskilled and have to compete with the cheaper labor in less developed countries.

Economists can be callous about the economic disparities that such a change creates. Said William Watson, an economist at McGill University in Montreal: “If you are dumb and unskilled, you are going to be paid the same and do the same kind of work as people in countries like Mexico. It does create a big problem for the country, because the poor elements of society will be quite poor.”

The economic gap between the affluent, educated socalled elites of society and their unskilled, less privileged fellows is also likely to lead to political divisions.

Triumph: The second argument against freer trade is one in favor of managed trade. Under such a system, a government uses trade and other policies to implement an industrial strategy and encourage the development of key industries. Japan’s postwar industrial triumph, based on careful co-operation between one-party government and industry, rather than the discipline of free-market competition, is often cited as the best example of a successful managed trade strategy. Japan emphasized aggressive export policies combined with domestic market protection.

Some economists, however, cite two problems with the notion of managed trade. Too often, the government, under intense pressure from special-interest groups, makes uneconomic decisions about which policies and industries to support. And in instances where managed trade has been seen to work, they argue that the benefits have accrued mainly to producers—at the expense of the nation’s consumers. Consumer advocates say, for instance, that the decision to shelter the North American auto industry from Japanese competitors by imposing quotas on the number of imported cars that Japan can sell here pushes up auto prices for consumers in Canada and the United States. But Andrew Jackson, senior economist with the Canadian Labor Congress in Ottawa, points out an obvious flaw in the argument

against managed trade. “The law of comparative advantage says that a country should specialize in what it does best,” said Jackson. “But it turns out that a lot of what makes up a country’s comparative advantage is created by government policies on everything from education to government procurement.” Under the terms of the Canada-U.S. Free Trade Agreement (ETA) and NAFTA, Jackson says that governments surrender the right to implement many of the kinds of policies that would enable them to build a coherent industrial strategy.

Finally, critics argue that although freer

trade may help a nation financially, it also encourages economic, and then political, integration, which ultimately compromises national sovereignty. Stephen Clarkson, a political scientist at the University of Toronto, says that he is an ardent opponent of the FTA because of the possibility that it will force Canada to align itself even more closely with U.S. policies. “The American civilization is a powerful one, but it is the most primitive, violent and unappealing of the great civilizations of the world,” Clarkson said. By contrast, he noted that “Canada has always been a kinder, gentler society with stronger European roots and a much more diverse population.”

Economists argue that the first step to ensuring a strong national culture is to have a healthy economy reject Clarkson’s sentiments. Especially in the European Community (EC), where political integration is an organic part of the drive to economic union, trade has been viewed as an opportunity to link neighboring nations together in a way that will encourage mutual understanding and peace.

But those lofty ideals now look tattered as young Germans give the Nazi salute in demonstrations against foreigners, and French farmers hurl rocks at their police and abuse at their politicians over a tentative agreement on the agricultural subsidy portion of GATT. In a sense, GATT is the ultimate free trade agreement because it involves 108 member countries and its ultimate aim is to remove all trading restrictions among them. Gerald Shannon, Canada’s chief GATT negotiator in Geneva, says that he believes that a preliminary GATT agreement will be reached by Dec. 22, the deadline set for a draft outline. Since GATT was founded in 1947, its members have reduced tariffs on goods, particularly those traded among industrialized countries. But they have been much less successful at cutting tariffs on products, including textiles and apparel, in which less-developed countries have a competitive advantage.

Frictions: Despite the frictions, Canadian observers in Europe are predicting that a new GATT agreement will be reached and Europe will continue to integrate. Said Canadian GATT negotiator Shannon: “We are in a very tense situation—the next two weeks will determine whether a deal is possible. But I believe it is far too important to the European Community itself to have it killed by the French.” Another senior Canadian dipjomat in Brussels, who spoke on condition of anonymity, said that the recent Nazi protests in Germany are providing Europe with a sobering reminder of the need for greater integration. “At the end of the day, the French can’t vote against a final GATT agreement,” he said. “The divisions that would cause within Europe would be absolutely enormous.”

Indeed, if France were to split the EC and subvert a GATT deal, the danger of a full-blown trade war would escalate. The United States already fired a warning shot last month when it threatened France with higher tariffs on a variety of France’s key exports, including white wine.

The failure of GATT negotiators to reach a new deal would also harm Europe’s alreadyshaky efforts to ratify the Maastricht treaty on complete economic unification. But it has proved to be more popular with politicians than with citizens of such countries as Denmark and Britain. Even France, whose government has led the European Community towards integration, voted in favor of the treaty by only the narrowest of margins. Whether it is Bastiat’s candlemakers, or the farmers of the 1990s, the forces of protectionism still seem hard to resist.

BRENDA DALGLISH

TALKING TR DE

GATT The 108-nation General Agreement on Tariffs and Trade is engaged in the Uruguay Round of trade negotiations to reduce agricultural subsidies and set rules for trade in services. Deadline: March, 1993, when U.S. congressional approval for fast-track ratification expires.

The Free Trade Agreement implemented in January, 1989, to gradually eliminate tariffs between Canada and the United States.

Canada’s cultural industries exempted. Includes a mechanism to settle trade disputes. Deadline: Jan. 1,1999, for tariff elimination.

Draft North American Free Trade Agreement reached in August,

1992, to phase out most tariffs on trade among Canada, the United States and Mexico within 10 years. Scheduled to take effect Jan. 1,1994.

EC 1992 Agreement in 1987 by the 12-nation European Community to create, by the end of 1992, a single European market—one with fewer restrictions on the movement of goods and services than among Canadian provinces. Negotiations on a few difficult issues remain to be resolved.

MÂASTRICH' Treaty named for the Dutch city where it was signed by EC countries in December, 1991, to move towards monetary and political union. Calls for the creation of a single currency and a central bank for Europe. Opposition to treaty ratification has arisen in several member countries. Treaty calls for single currency by Jan. 1,1999, at the latest.