Canada's Desire for Trade Outcomes Is As Silly As Trump's Trade Protectionism

Given the understandable opposition to U.S demands that would transform NAFTA from a free trade agreement into a managed trade agreement, it is easy to ignore Canadian demands that would turn it into a managed social policy agreement.

One of the biggest underlying flaws in U.S Trade Representative Robert Lighthizer’s NAFTA wish list is the notion that one can manage free trade. But managed free trade is a bit like jumbo shrimp, an oxymoron if ever there was one. It is an attempt to make predictable something which is inherently unpredictable – the economic marketplace. Trade makes a large contribution to economic growth, by forcing people and companies to compete.  One doesn’t promote competition by diminishing the need to engage in it.

Government cannot efficiently micromanage trade between countries any more than it can micromanage trade within countries. If one is opposed to over-regulating a domestic economy, it makes no sense to over-regulate a global one. It doesn’t matter how big a bureaucracy one has, it will never be big enough or pervasive enough to efficiently oversee the billions of economic decisions North Americans make daily. Only the individual parties to an economic transaction can understand their own motivations.

The Canadian negotiating position is significantly different than the United States’. To begin with, Canada would no doubt not have sought renegotiation of NAFTA if the Trump Administration had not demanded changes in the deal.

Moreover, Canada is not seeking balance in trade with the United States or Mexico. In fact, when you take out oil – which the United States insisted be included in the original Canada-U.S trade agreement almost 30 years ago – the United States currently has a positive manufacturing services trade balance with Canada.

However, in a list of 10 demands Foreign Affairs Minister Chrystia Freeland released in August, the Canadian government has made it clear it wishes to pre-ordain some results.

In fairness, some Canadian demands would simply bring NAFTA into the 21stcentury. It makes eminent sense, for example, to expand the list of professions that can easily obtain a visa to work across the border, updating an agreement that was written a quarter-century ago, before jobs like web designer and apps maker even existed. And cross-border supply chains make it more important than ever for international companies to be able to hire and transfer employees across borders.

It also makes sense to expand cross-border procurement opportunities. As Freeland has pointed out: “Local-content provisions for major government contracts are political junk food: superficially appetizing, but unhealthy in the long run.” A wider choice of potential suppliers would allow all three North American governments to outsource more efficiently and bargain more effectively, bringing down the price taxpayers pay and raising up the level of service they receive.

It also makes sense to maintain a dispute-settlement mechanism, which provides the secure access companies need to build and maintain cross-border supply chains.

However, it is hard to see how the Canadian government’s other demands make much sense if the goal is to expand trade.

A new chapter containing tougher labor regulations would only supplant national policies that national governments must have the power to determine. It would drive up the cost of production in Mexico, and make Mexican jobs less secure – thereby making cross-border investment less efficient. International trade is largely based on the Theory of Comparative Advantage, which only holds if wage rates and standards can differ across borders. It is especially hypocritical for a Canadian government to pursue more uniform labor standards, given how often it has pursued a cheaper Canadian currency – which means lower real wages – to hold and attract jobs.

Similarly, tougher environmental standards are largely a tool employed by developed countries to make it harder for developing countries to grow. Protecting gender rights and the rights of Indigenous people are things that national governments can try to do now. Attempting to introduce them into NAFTA only makes sense if one is seeking to turn North America into a national political union. The goal of a free trade agreement is to facilitate trade among countries, not to give some countries the opportunity to impose their values on others – especially when all three countries involved in the agreement are democracies.

Let’s not forget that the purpose of free trade is efficiency – to give consumers the widest choice at the lowest price.  To achieve that, one should not impose pre-ordained social goals on a free trade agreement any more than one should try to impose pre-ordained job protection goals.