Free trade must also be fair trade

The macro-economic complexities of the issue of trade with Pacific Asian countries, and China in particular, are illustrated by the following: First, a recent announcement by a North American-based machinery manufacturer that it had sold several hundred extrusion lines to a company in China. Second, the news released earlier this year that Ohio-based custom injection molder Eagle Plastics Division would be closing a 92,000 sq. ft. plant and laying off 60 workers, mainly as a result of business lost to Asia.

This is the good news/bad news economic enigma that China, the country now dominating the Asian region, has become (see Special Report, p. 11). The U.S. Labor Department estimates that work sent overseas has been enough to raise unemployment in the U.S. by four-tenths of a percentage point or more, to its current 6.1%. The affect this has had on business and employment in Canada, with an unemployment rate of 7.8%, is largely unknown. Also unknown is how many jobs trade with China has created, in North America and elsewhere, as companies rush to do business with a country whose GDP is expanding at a rate of 8% annually.

Many economists and business journalists prefer to emphasize the latter, salutary effects of trade with China. These people argue we should view the negatives, such as the loss of manufacturing jobs, as a small, isolated and perhaps inevitable cost to pay for the much greater benefits of global free trade. Typical of this view is a recent editorial by Terence Corcoran, editor of the Financial Post. Noting that China and Japan now account for 35% of the total U.S. trade deficit, Mr. Corcoran opines, “The proper response to these numbers is a dismissive ‘So what?'”

In a sense he is correct. Trade between any two countries, as he notes, will rarely, if ever, be totally balanced. Protectionism, in the form of duties, quotas and subsidies, should be viewed with a far greater fear because it threatens to undermine the growth of democratic, free markets around the world.

Mr. Corcoran’s macro-economic outlook, however, is overly dismissive of the micro-economic principles upon which the very case for open, competitive trade rests. The first of these is the principle of a fair and level playing field.

How is it companies based in China are able to make, say, a plastic bag, below the cost that a company in Canada must pay for just the raw material to make the same bag? The answer is that China itself is guilty of practicing an elaborate form of protectionism. China’s protectionist policies have many legs, including subsidized or free rent for company facilities, protection from bankruptcy, a currency pegged to the U.S. dollar, and markets generally insulated from free market pressures. Throw in widespread piracy of intellectual property and you begin to understand why North American manufacturers and trade groups have become increasingly vocal in demanding governments play hard ball with China. In the U.S., the Bush administration has responded with the formation of the Unfair Trade Practices Team.

There is no doubt these same pressures are finding their way into Canada. At a recent Canadian Association of Mold Makers meeting there was heated talk of a class action suit against North American-based companies who, after receiving initial design work on a mold from a Canadian moldmaker, send the project (and the design) to China for completion.

China has only been a member of the World Trade Organization since 2001. It is already showing signs of being a much more open, accommodating market for foreign business than Japan has ever been. A vigorously growing Chinese economy will ease the pressure on the U.S. to be the sole engine of world economic growth. In the short term, however, a stick, in the form of possible trade sanctions, may be the only recourse to bring about needed reform.

Michael LeGault, editor e-mail: mlegault@canplastics.com