As a speaker at next week’s Investment Innovation Conference at the Fairmont Southampton Bermuda Resort (October 24 to 26), award-winning international author and economist Jeff Rubin will speak on Canada, globalization and trade as well as the future of oil. In advance of the conference, we asked Jeff a few questions about NAFTA and other trade issues affecting Canada. To find out more about Jeff’s presentation and the conference, click here
How significant is NAFTA to Canada and has it been beneficial?
It’s a big deal. Trade is 30% or our GDP and over three-quarters of that is with the U.S. So I think it’s significant. I’m not sure Canada has benefited from NAFTA, as much as, perhaps, the federal government tells Canadians that they have. I think that a lot of the concerns that the Trump administration have articulated about NAFTA are valid for Canada as well and maybe in some industries, like auto parts, even more valid.
I think we’re at a very critical juncture here. Up until maybe a year ago, most people thought that further globalization and free trade agreements were inevitable and now I think because of the Brexit vote and the Trump administration, people are questioning that. And I think people are also questioning whether further free trade agreements are necessarily desirable because, while in theory they make everyone better off, in practice the gains have been so few: not only have many people been left behind but if fact they may be worse off and certainly industrial manufacturing workers in both Canada and the United States would be part of that constituency.
But hasn’t there also been a secular decline in manufacturing?
There is a secular decline in manufacturing, certainly among OECD countries and indeed particularly among G-7 countries. They would have accounted for over 70% of world manufacturing output circa 1970. Today they barely account for 40%. What’s happened is that, because of globalization and free trade agreements, it’s migrated to low-wage trading partners, whether it’s China since its accession to the WTO in 2000 or in the Canada and the U.S. case, NAFTA. That of course has been associated with the hollowing out of the industrial sector; it’s also been associated with some other trends that both Bernie Sanders and Donald Trump talked about.
And it’s important to recognize that, because many people think that renegotiating NAFTA is the whim of some politician who by some freak of nature has stumbled into the White House. It’s noteworthy that Bernie Sanders, from the opposite end of the political spectrum, ran a very strong campaign and if he had got the nomination he could have possibly beaten Donald Trump. And he could be doing the same thing – saying that NAFTA and other free trade agreements were not fair, they were injurious to U.S. workers and that the U.S. should dramatically renegotiate them.
So, I think it’s important to understand that if Bernie Sanders had won, we’d still be having this conversation because we’d still be in the midst a very difficult NAFTA negotiation.
And in Britain, Jeremy Corbyn was quite lukewarm about the EU.
In Britain, some Labour and some Conservative voters supported Brexit. In France, Marine Le Pen and from the left wing Jean-Luc Melenchon — both were advocates of France leaving the EU. It was the movement of work from the factories of northern France to Poland as it was in the U.S., with the assembly plant in San Luis Potosi in Mexico for the Trump campaign.
Where does that leave us?
I think that leaves us on the cusp of a very different trade arrangement. I think now there’s a real possibility that we’ll have separate bilateral trade deals between Canada and the U.S. and Mexico and the U.S.
While many people in the business community think that’s a calamity, I think it makes a whole of sense.
Canada and the U.S., for example, have had free trade in auto and parts that goes back to 1965, the Auto Pact and it’s, by and large, worked as a balanced agreement. We run a surplus in assembled vehicles, they run a surplus in parts and, of course, the bigger the surplus in vehicles, the bigger the surplus in parts – the more parts they export. I think the trade surplus with the U.S. is basically the same as it was in 1994, whereas the trade deficit with Mexico for Canada and the U.S. in auto parts has increased five-fold. The competitive dynamics are quite different.
Canada and the U.S. basically have the same wages, save for the Canada-U.S. exchange rate, which trades in a pretty narrow range. Wages in the Mexico are an eight to a tenth of what they are in Canada and the U.S. If I were a shareholder in GM or Magna I would understand, I would want them to move all of their production to Mexico and pay 43 cents an hour instead of $30 an hour. I get that.
But I think the agreements have to balance out in the interests of shareholders in Magna and GM as well with other stakeholders like workers and as well what that industry means for the whole Canadian economy. I think that balance has been lacking in the existing NAFTA agreement.
What about the other trading sectors in Canada?
I don’t think we’re the enemy in autos and parts. We have been targeted in softwood lumber. Let’s remember that softwood lumber has always been dealt with outside of free trade agreements and this is like round six in an ongoing campaign.
What usually happens is a managed trade solution where Canada wants say, 35% of the U.S. Market. The U.S. Lumber industry says you can have 15% — and they saw off at 25% for a six-year deal.
That’s been the way it’s worked in the past and that’s it’s probably going to continue to work. It’s not a free trade agreement; it’s more like the original Auto Pact where we agree on hat the Canadian share of the market will be.
Critics have urged the federal government to put off negotiating TPP until after NAFTA is done.
Absolutely. It’s not going to make any sense to slap a 30% or 35% tariff on Mexican vehicle parts and let China and Korea ship in vehicles and parts duty-free. I think that what we’ve got to do is make sure that we keep all our options open with the U.S., our major trading partner and not doing anything with the Trans-Pacific Partnership agreement that would any way compromise our ability to make a bilateral free trade agreement with the U.S.