Canada and the new protectionism

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When the world plunged into recession in 2008, G20 leaders ostentatiously pledged not to repeat the errors of the 1930s. To hasten economic recovery, they would avoid protectionism and keep trade flowing. Canada's government has been among the loudest voices in this free trade chorus.

This is a gross misreading of actual history. World trade collapsed in the 1930s because of collapsing consumer demand, not protectionism; competitive tariffs were a response to that implosion, not its cause. For the same reason, world trade plunged 12 per cent last year, despite the G20 promises.

More dangerously, the lip service paid by politicians to official free-trade doctrine is contradicted by an increasingly nasty and lopsided world marketplace. Almost universally, countries around the world are becoming more aggressive in protecting and stimulating domestic output and employment. They don't usually jack up tariffs (though that still happens, as in Russia); instead, they use less visible but equally effective tactics. This response is understandable, given the mass and protracted unemployment that now grips most countries. But it's damaging the still-shaky global economy -- all the more so for countries like Canada, which pretend to stay above the fray.

The most recent example of unofficial protectionism was the Bank of Japan's sudden foray last week into currency markets. By aggressively buying U.S. dollars (and selling yen), the bank drove down Japan's exchange rate by 5 per cent against the Canadian dollar. That has exactly the same effect as imposing a 5 per cent tariff on all Japanese imports from Canada -- yet it's entirely "legal." Japan has pledged to keep doing whatever's necessary to weaken the yen and boost exports.

Germany, with the world's second-largest trade surplus (after China), uses different techniques to achieve the same goal. Wages have been suppressed for years, dampening spending (including on imports). At the same time, pro-active government strategies to boost productivity and technology, combined with falling unit labour costs, have stimulated exports. Thanks to the fiscal woes of its European partners, Germany gets further help from a falling euro. The end result is a massive trade surplus that propelled Germany to one of the world's fastest recoveries -- for now.

China, of course, has mastered official mercantilism, through tight exchange rate manipulation, macroeconomic planning (controlling consumption and hence imports), constraints on unions, and lots of fiddling with trade barriers (regardless of WTO strictures). The combined surpluses of China, Germany, Japan and a handful of other successful exporters more than offset the trade deficits of everyone else in the world (including Canada).

And that's precisely the problem with this whole strategy. Until such time as planet Earth learns to export to Mars, every national surplus must be offset somewhere else with a matching deficit. One country's gain is another's loss. Whether engineered through "unacceptable" means (like higher tariffs), or "legal" ones (like currency manipulation, macroeconomic planning, technology strategies, or grey-zone trade barriers), the end result is identical: a beggar-thy-neighbour race to boost trade surpluses that undermines global growth.

Where does Canada fit into this game? As usual, we don our Boy Scout's uniform and pledge to play fair. While China, Japan and others actively manage their currencies, we allow ours to soar unfettered. As Germany and Korea subsidize and direct technological advances, we eschew "picking winners" and leave it up to business. As countries everywhere leverage government spending into domestic jobs, we pursue trade agreements that would undermine our already-weak domestic-sourcing policies.

Our passivity in the face of others' pro-activity has taken us from trade feast to famine. A $55-billion trade surplus in 2004 melted away to a $27-billion deficit last year, knocking a whopping 6 percentage points off Canadian GDP. By that standard, we've registered by far the worst trade performance of any OECD country. As deteriorating trade undermines domestic growth and employment, Ottawa's only response is to chase more free trade pacts -- whether with Panama (economically irrelevant) or Korea and the European Union (potentially explosive).

There's no point finger-pointing and hectoring others to "play by the rules," too. That will get us nowhere. So long as the world trade system imposes no requirements for balance or mutual benefit, protectionism (official or unofficial) will always make sense for individual countries ... and they'll always find ways to do it.

John Maynard Keynes was ahead of his time in recognizing the dangers of trade imbalances for worldwide demand. After the Second World War, he lobbied for a new global payments system, forcing both surplus and deficit countries to address chronic trade imbalances and share the burden of adjustment. He was overruled by free-marketeers who accepted the logic of dog-eat-dog global competition. And it's that logic, regardless of politicians' lip service, that's deepening the global malaise.

Jim Stanford is an economist with the CAW. This article was originally published in the Globe and Mail.

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