Columnists

Murray Dobbin
Keynes or Friedman? TPP presents an economic choice for the Liberals

| January 22, 2016
Photo: Prime Minister of Canada/flickr

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Place your bets. Will Justin Trudeau and his economic advisers choose a neo-Keynesian approach to the growing economic disaster facing the country or will they stick to the neoliberal ideology that has been the stock response of Liberal and Conservative governments for the past 30 years? Trudeau's planned deficits (though very modest ones) for three or four years suggests the possibility of a return to government intervention in the economy. But his infrastructure program is not really incompatible with neoliberalism: even the most devout free-marketeer will agree, under pressure, that we actually need roads and bridges and sewer and water lines.

The real test of where the Liberals are going to take the economy is tied up in the government's pending decision on the Trans-Pacific Partnership -- the TPP. The fact that the Liberals have not yet committed to the TPP (Trade Minister Chrystia Freeland said recently, "We're very much not there yet" -- a significant retreat from her initial statements) suggests there is a real debate going on in the PMO about signing another investment protection agreement. 

Weighing the promised benefits

There is now a large body of research and commentary exposing just how detrimental the TPP is to Canada's economy and democracy. But there has been little in the commentary that looks at the actual record of these deals -- specifically the first ones signed; the North American Free Trade Agreement (NAFTA) and its predecessor, the Canada-U.S. Free Trade Agreement (FTA). A trip down memory lane will be helpful in understanding where the TPP (and its EU counterpart, CETA) will take us.

We pay a high price for these treaties in terms of lost sovereignty -- but what is the payoff? Do these agreements actually increase trade and foreign direct investment (FDI) -- their stated purpose? Studies looking at the FTA and NAFTA after 10 years revealed that such agreements have little positive impact. While Canada-U.S. trade (imports and exports) did increase dramatically in the 1990s, a study by Industry Canada concluded:

"[T]he impact of [free trade] after controlling for other variables on Canadian exports to the U.S. was modest, [just] 9 per cent.… the strong U.S. economic expansion and the real exchange rate were mainly responsible for the large expansion of Canadian exports to the U.S. in the 1990s." (Eric Beauchesne, "Lame Buck Better Than NAFTA: Study -- Trade deals get credit for only 9 percent of export growth," Ottawa Citizen, 20 June 2001)

As for foreign direct investment (FDI) positive numbers presented by "free trade" supporters are also extremely misleading. While most people assume that foreign investment means new production and jobs, in Canada it doesn't. In 1998, the Investment Review Division of Industry Canada prepared a report that looked at FDI in Canada. In 1997, it reached $21.2 billion -- the second-highest total on record. However, according to the study, fully 97.5 per cent of that total was devoted to acquisitions of Canadian companies. And 1997 was not an aberration. On average, between June 1985 and June 1997, 93.4 per cent of FDI went to acquisitions. In 2001 the figure was 96.5 per cent (Mel Hurtig, "How Much of Canada Do We Want to Sell?" Globe and Mail, 5 February 1998).

Our race to the bottom with these deals reveals that things just keep getting worse. NAFTA resulted in a loss of over 275,000 of the best jobs in the country. By focusing exclusively on exports and abandoning any policy initiative aimed at strategic industrial development, Canada's economy has been going backwards in terms of value-added industries. According to the National Post's John Ivison, "the oil and gas sector's share of total exports has increased to 23 per cent in 2014 from 6 per cent a decade earlier, just as a manufacturing industry like the automotive sector has slipped to 14 per cent from 22 per cent." The trade deficit for 2015 was dismal. From October 2014 to October 2015 it reached $17.4 billion, the worst one-year total on record.

The dangers of corporate rights

Investment protection agreements are not primarily about trade -- they provide "investors" (that is, transnational corporations) with extraordinary rights that trump the sovereignty of those countries that sign them. But it only works at all if you have a capitalist class that actually takes advantage of these rights -- by taking risks, investing in innovation and engaging in aggressive overseas marketing -- such as the nine non-North American countries that are partners in the TPP. Otherwise we simply agree to become a punching bag for transnational corporations doing business here in Canada.

But there is a huge risk in signing these deals because they require a leap of faith in Canadian corporations actually shifting their focus away from the U.S. as a market for exports. If past behaviour is any guide, they won't.

NAFTA was supposed to challenge large Canadian corporations to compete with the U.S. on productivity. It never happened. Two studies on competitiveness (1991 and 2001) by Harvard Business School's Michael E. Porter concluded that "[t]he U.S. is just much more entrepreneurial. ... Research uncovered key weaknesses in the sophistication of [Canadian] company operations and strategy." Some Canadian firms did compete internationally but did so on the cheap. Post-NAFTA they relied more for their profits on "natural resource advantages or lower labour costs than other G7 competitors instead of sophisticated products and processes."

Little if anything has changed. Indeed, with the Canadian dollar at 70 cents and falling, Canadian companies are even less likely to take advantage of the TPP to invest in and export to the Asia-Pacific countries. The one thing that will change if we sign the TPP is that corporations based in 10 additional countries will be able to invest in Canada with new and powerful rights -- including the right to sue the Canadian government for any measure that affects their future profits.

Perhaps Mr. Trudeau believes he can have it both ways: tinker a bit with some neo-Keynsian policies of intervention but stay in the big boys' club and avoid Bay Street condemnation by signing the TPP. Unfortunately it simply doesn't work that way. An examination of what happened to Ontario's effort in strategic public investment demonstrates in spades just how incompatible the two approaches are.

Ontario's Green Energy Act promoted domestic solar and wind generation. However, in November 2012, the "buy local" aspects of the program were ruled in violation of WTO rules. In May 2013, Canada lost its appeal. Ontario immediately announced that the made-in-Ontario content requirements for wind and solar projects would be scrapped. The program was effectively dead. And every time Canada signs another "trade" deal, the noose tightens around any government-sponsored effort to transition to a clean-energy economy.

Achieving real economic growth

Even if these agreements actually enhanced trade, international trade will almost certainly remain in the doldrums for the foreseeable future. This is the case not just because of the slowdown in growth in China but because most developed countries are struggling and following neoliberal policies of austerity and suppression of wages -- the same deadly combo Canada has experienced. It all adds up to chronic low demand and diminished world trade.

One can only hope that Trudeau and his advisers will conclude that when approaching economic growth they should focus on the things they can change and avoid those they can't. Between 75 and 80 per cent of our economy is domestic: good and services produced and consumed here. If the government actually wants to grow the Canadian economy it has to find a way out of its trade straightjacket and stimulate the domestic economy. The country that rejects the ideological extremism of neoliberalism first will have a huge advantage over the next 10 years.

But to do so requires an actual rejection of some key neoliberal policies -- including, of course, rejection of any more investment protection agreements. Additionally, as I argued in a recent column, a return to fair and robust taxation sufficient to bring the government share of the economy back to 1980 levels -- levels necessary to permanently stimulate the domestic economy. 

If the NDP is looking for ways to prosecute a new adversary, the economy is it -- it will dominate the political landscape for the rest of the Liberal mandate. There are compelling arguments: an industrial strategy focused on accomplishing the climate change promises of the Paris summit, a return to strings-attached federal transfers to prod the provinces to reduce tuition fees and increase social assistance levels (or even a guaranteed annual income), imposing a living-wage standard on all federally funded projects, pressing Trudeau on his promises on CPP and EI and ending oil subsidies, eliminating the tax breaks on capital gains and dividends, adding a couple of tax brackets on wealthy Canadians, and perhaps a tax on idle corporate capital (half of 1 per cent would bring in over $3 billion).

Pierre Trudeau's first government faced an NDP caucus and leader that pressed him from the left on numerous fronts. Is it too much to hope that history might repeat itself?

Murray Dobbin has been a journalist, broadcaster, author and social activist for 40 years. He writes rabble's State of the Nation column, which is also found at The Tyee.

Photo: Prime Minister of Canada/flickr

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