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Free trade — but for whom?
By Birgit Matthiesen
Throughout history, there has been much debate about the evils or merits of free trade. More often than not, facts seem to get in the way of a good story.
The first time the rallying cry for free trade was heard in efforts to sway public opinion occurred during the Opium Wars in China when British merchants were importing tons of opium from India to Chinese seaports. The Chinese, worried about the damage opium was inflicting on their well-ordered society, moved quickly to shut off shipments and seal their borders.
The result was a war which left thousands dead. In an impressive public relations campaign to gain the higher moral ground, Britain stood fast in its argument that free trade, the right of passage of goods between nations, could not ever be impeded.
These days, the term free trade in multinational trade circles has come to mean a looser expression of cost free and barrier free. In the first instance, countries typically agree to reduce or even eliminate tariffs on the goods from their trading partner, such as duty costs. In the second, they pledge to break down non-tariff barriers normally associated with border measures, such as compliance costs. The economic argument for agreeing to take less tariff money into government coffers is that free trade pacts expand access to international markets which will stimulate domestic production and generate revenue in the longer term - in short, a win-win scenario for all.
Policy wonks will argue the winners and losers of trade policy, but the recent downturns in the global economy have left few countries unscathed, and are now forcing lawmakers to question how much free trade should be, well, free.
Take the United States, for example - the most important destination for our goods and services. In 2010, Congress passed The Statutory Pay-As-You-Go Act (PAYGO). Briefly speaking, the act requires all new legislation that changes taxes, fees, or otherwise reduces US treasury revenues - such as a trade agreement implementing bill - must not increase projected deficits. PAYGO requires that any legislation that reduces revenues must be fully offset by cuts in mandatory programs or by revenue increases. The US Congress recently approved bilateral trade pacts with Colombia and Korea. Both follow the template of past agreements - elimination of duties and opening markets to one another.
Congressional number crunchers estimate that the reduction of duty collections from imports from Korea would cost the US Treasury over the next 10 years about $660 million, and the loss of tariff revenue from the agreement with Colombia will be about $1.4 billion over the same period - that's $2.06 billion in lost revenue that will need to be somehow recouped.
How will this $2 billion price tag be paid? Largely by increasing the costs for passengers and goods from Canada. That's right: we get to pick up the tab for more competition from Korea and Colombia - two of the world's fastest growing export economies.
For both free trade agreements, the Administration proposes to collect $5.50 from every passenger arriving from Canada by sea or air - a NAFTA exemption of longstanding. In addition, and perhaps more egregiously, a customs import fee on commercial goods, called the merchandise processing fee, or MPF, will be increased by more than 60 per cent.
To be accurate, the passenger fee will be collected from all passengers arriving in the US and NAFTA shipments will continue to be exempted from the MPF, but the volume and nature of our cross-border trade and travel will mean that we will pay a disproportionate burden of paying for these two trade agreements.
It is not for us or anyone else to argue whether and with whom the US should enter into free trade agreements, but we cannot ignore the fact that Canada and the United States have the largest business relationship in the world.
We buy more products from our neighbour to the south than anyone else. More than half of that vibrant cross-border business is comprised of shipments intra-company and intra-industry. Millions of American and Canadian business travellers cross our border each day to do business with one another. Today, that integration is the bedrock for solid, well-paying jobs and expanded business opportunities for companies on both sides of our border.
In addition to these new border costs, we have also seen border "compliance creep" at our shared border - a result of imports to the US from a third country, mainly from China.
NAFTA is now more than 17 years old. But every trade agreement goes through the same cycle - the first exhilarating rush to reap the benefits of duty elimination followed by a long period of political indifference. To paraphrase CME's Jayson Myers, this is where neglect turns to negligence.
Our border transaction costs are now higher than when we signed the NAFTA in 1994.
When Prime Minister Harper travelled to Washington last February, he stood beside the President of the United States when Mr. Obama said: "The United States and Canada are not simply allies, not simply neighbors; we are woven together like perhaps no other two countries in the world. We're bound together by our societies, by our economies. Our focus has been on how we increase jobs and economic growth on both sides of the border. So today, we've agreed to several important steps to increase trade, improve our competitiveness, and create jobs for both our people."
Clearly it is time to re-engage with the Americans. Not just tinkering at the edges, but a broad re-affirmation of the economic powerhouse we have created together, one that builds on our real comparative advantages and guarantees reciprocal treatment in each other's rulemaking - at all levels of government.
Let others pursue traditional templates of trade agreements and let them fight the never-ending "all things trade equals all things bad" arguments. Canada and the United States have evolved beyond them.
Offsetting the cost of the Colombia and Korea FTAs by adding costs on Canada is sheer negligence. It is now up to us to turn neglect into renewal.
