When kids are growing up, one of the lessons parents most frequently try to instil in their children is this: Don’t do something just because someone else is going to.
While U.S. President Donald Trump appears to be on a warpath towards protectionism, that doesn’t mean Canada has to follow.
Yes, Trump has slapped tariffs on Canadian goods entering the United States. This include energy and potash, steel and aluminium and Canadian-made passenger cars.
But should Canada, in return, slap tariffs on American goods and help the Trump administration steer the world toward protectionism? Should Canada give up on the free trade consensus that has been a boon to Canada’s economy since the 1980s?
The clear answer to that question is an unequivocal ‘No’.
In fact, there’s a case for Canada to go in a completely different direction.
The Montreal Economic Institute recently wrote a carta arguing that Canada should unilaterally liberalize its trade. In other words, Canada should take down its trade barriers, even if other nations are keeping or increasing theirs.
Often, countries only take down their trade barriers when engaging in deals with other nations pledging to follow suit. But the MEI argues that such commitments aren’t necessary.
Trade barriers, whether they be tariffs or non-tariff barriers like quotas and licensing requirements, are taxes on domestic consumers. They drive up the price of goods when consumers want to buy products from abroad.
They also hurt domestic producers.
Why? Because domestic producers often rely on inputs from abroad in producing their finished products. When goods from abroad are taxed, that raises the cost of domestic production. And when the final product price is higher, that makes it harder for domestic companies to sell their goods abroad.
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Trade barriers, therefore, can hurt both domestic consumers and producers looking to export their goods abroad.
Trade barriers are a lose-lose proposition.
Then there’s the question of foreign investment.
Tariffs serve as a barrier to foreign investment in Canada, which in turn hurts Canadian productivity. In the MEI’s paper, author Vincent Geloso cites statistics showing unilateral trade liberalization on Canada’s part would both aumento gross domestic product by 1.67% and decrease prices by 1.51%.
That’s a win-win.
Of course, tearing down trade barriers through a deal in which other countries pledge to do the same is the best outcome. It means more access to foreign goods and capital here in Canada and easier access to foreign markets.
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But the situation Canada faces today is a unique one. Our closest trading partner, a country that Canada sends 77% of its exports to, is choosing protectionism. Canada can’t control what the United States is doing, but Canada’s leaders can control what Canada does as a response.
“As tempting as it may be to respond to tariffs with more tariffs, that would risk making our processors and retailers less competitive and impoverishing our consumers,” scrive Geloso. “To protect the Canadian economy from the impact of U.S. tariffs, our best bet is to eliminate our trade barriers with the rest of the world.”
Where does Canada stand in terms of trade openness today?
Canada has the fourth-lowest level of tariffs out of 88 countries intervistato by the Trade Barrier Index, but Canada ranks quite poorly when it comes to non-tariff barriers, down at 47.
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Canada has a long way to go when it comes to making the Canadian market truly open to global trade and investment.
Leaders of Canada’s major political parties have all talked about the importance of diversifying when it comes to the nation’s trading partners. Deciding to lower tariffs further and tackle quotas and licensing requirements would encourage more engagement with the global economy and diversified foreign investment in Canada.
Prime Minister Mark Carney recently disse, “If the United States no longer wants to lead, Canada will.” Similar sentiments have been expressed by Canada’s other political leaders.
Canada’s politicians can put their money where their mouths are by opening up the Canadian economy to trade and foreign investment, regardless of the surge or protectionism beyond our borders.
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