A The friction of free trade

As damaging as recent U.S.-imposed tariffs on Canadian softwood lumber and non-NAFTA steel are to the practice and concept of free trade, these actions are a useful antidote to the nave notion that free trade is, or ever will be, frictionless trade.

As long as there are different nations with differing laws, cultures, currencies and customs, there will in fact always be some friction in the practice of free or open trade. This is because the very concept of open trade is fundamentally often at odds with the political machinery of a nation and its instinct to protect the narrow interests of certain constituents.

When trade in a particular market between two nations is “non-competitive” (for example bananas and corn), there’s no problem. It’s when that trade is competitive (steel and steel) that things get sticky, and so we have trade agreements and trade commissions to oversee and ensure that the playing field is level and the only forces brought to bear in the trade of these commodities are market forces. Or so this is the way it is supposed to go.

In reality of course, there’s no way the playing field can ever be completely level. Forget China or the EU. Just consider the nearly constant mumbling and bickering that goes on in our own backyard, between trading partners of NAFTA. U.S. companies say the low loonie and national health insurance gives Canada an unfair advantage. Canadian companies say the strong greenback allows American companies to buy Canadian firms cheaply and move their assets south. Both Canadian and American companies say it is impossible to compete against the low cost of Mexican labor.

Yet, mumbling notwithstanding, all three countries have benefited from NAFTA. Despite transplantation of new manufacturing capacity to Mexico, both the U.S. and Canada are running sizable trade surpluses with Mexico. In the U.S., that surplus for plastic products alone topped $3 billion in 2000. Mexico has also been a bonanza for machinery and equipment manufacturers in the U.S., Canada and Europe.

The fact is that competitive “free trade”, is very seldom the sole culprit in the loss of jobs and manufacturing capacity in a particular country. The U.S. lost 9% of its manufacturing jobs between 1967 and 2001, according to U.S. Bureau of Labor statistics. In that same period, however, manufacturing output actually rose significantly, mainly because of technology, which greatly enhanced productivity and output per worker. Such “deindustrialization”, some economists believe, may be a natural consequence of economic progress in all developed countries.

Closed markets, not unhindered trade, represent a much more serious threat to the health of a country’s economy. Japan is a case in point. For years Japan has racked up overwhelming trade surpluses with the rest of the world, while remaining effectively off-limits to foreign firms wishing to import into it. There are many horror stories of companies which have seen years of effort to develop trade in Japan go down the tubes at the last minute, undermined by the country’s infamous corporate welfare policies. The result: over ten years of economic stagnation and decline in a country that was once in a position of overtaking the U.S. as the world’s economic superpower.

Just as protectionist policies are a long-term threat to the economies of developed countries, patent infringement is a menace to the economic aspirations of developing countries such as China. The term patent infringement dignifies what is actually no more than highway robbery. Many North American and European companies are now hesitant to trade with China knowing there exists a high chance their equipment or product will be cloned by Chinese firms soon after it is delivered.

Governments must ensure unethical and protectionist practices do not grow into frictions that could put the brakes on free trade, and its considerable benefits.

Michael LeGault, editor, mlegault@canplastics.com