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The Trumpites have got it wrong on trade, and Canada shouldn’t shy away from pointing it out

By David Crane      

The U.S. administration's idea is that eliminating or sharply reducing trade deficits would not only create more jobs, generate stronger economic growth, and reduce much of the U.S. budget deficit, but also improve national security and strengthen U.S. global power. Most economists strongly disagree.

Prime Minister Justin Trudeau and U.S. President Donald Trump at the White House on Feb. 13, 2017. The Hill Times photograph courtesy of the White House
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When Canada and Mexico sit down with the U.S. to renegotiate NAFTA, it’s important to understand what America First really is: an attempt to blame America’s economic woes on its trading partners, rather than itself. Through its bullying threats and actions, it is working to unilaterally rewrite the world’s trade and investment rules to its advantage, even if this means risking a global trade and currency war at a time when the global economy is still in a fragile state.

This is why it’s important that Canada and Mexico push back. While we should be open to changes that bring mutual NAFTA gains, we should not allow ourselves to be arm-twisted into unfair concessions.

Renegotiating NAFTA is not just about softwood lumber, supply management, intellectual property rules, or other bilateral issues; it’s the first step in the Trump administration’s plan to demand concessions or threaten trade penalties on a worldwide country-by-country basis to reduce or eliminate bilateral trade deficits.

The Trump administration starts from the false assumption that trade is a zero-sum game, believing that gains for one country have to come at the expense of the other, and that there has to be a winner and a loser, rather than mutual benefits. There seems to be an idea that simply put: exports are good and imports are bad. In this view, U.S. trade deficits come from what are seen as unfair, predatory or mercantilist policies of its trading partners, not because Americans like what they can buy from other countries or refuse to responsibly manage their own affairs.

Trade deficits, the Trumpites believe, also threaten national security. The suspicion is that other countries (think China), through their allegedly nefarious trade practices, are accumulating vast reserves of U.S. dollars from their trade surpluses and using these dollars to acquire control of important U.S. industries and their technology, putting future U.S. national security at risk.

The U.S. administration’s idea is that eliminating or sharply reducing trade deficits would not only create more jobs, generate stronger economic growth, and reduce much of the U.S. budget deficit, but also improve national security and strengthen U.S. global power. Most economists strongly disagree.

Much of this thinking was outlined in a recent speech by Peter Navarro, director of the White House National Trade Council. In it, Navarro argued that net exports (the difference between exports and imports) were a key factor in economic growth, along with consumption, government spending, and business investment. Reducing a trade deficit, he argued, would boost the rate of economic growth. Yet net exports represent a very small part of the U.S. economy. Last year, the U.S. had a trade deficit of about US$500-billion in a US$18.65-trillion economy—obviously consumption, government spending and business investment are much more important.

But “suppose Americans successfully negotiate a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the United States that it now purchase from the rest of the world,” Navarro said. “This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.”

But would it? If U.S. manufacturers were forced to buy more expensive and perhaps less-efficient domestically-produced components and parts, they would be less competitive in international markets and U.S. exports could suffer. Boeing is an example: it is more competitive because it can look to specialized and lower-cost suppliers around the world to help make its made-in-the-USA aircraft more competitive against Airbus, and hence support more jobs in the U.S. Likewise, if American consumers are forced to pay higher prices for imports or, alternatively, more expensive domestic products, they would be worse-off since they would have to pay more for what they want to buy, hence poorer in real purchasing power terms.

Overlooked are the mutual gains from trade: greater consumer choice, greater opportunity for specialization, and more competition to encourage innovation and productivity.

Navarro also argues that trade deficits are a national security problem. However, much foreign investment actually improves U.S. economic growth and job creation. Look at all those European and Asian automotive and auto parts plants in the U.S., which U.S. state governments relentlessly pursue.

Without mentioning China by name, Navarro warned, “suppose the purchaser is a rapidly militarizing strategic rival intent on world hegemony. It buys up American companies, technologies, farmland, food-supply chains—and ultimately controls much of the U.S. defence-industrial base.”  He has painted a picture where the U.S. could lose a cold war because of Chinese control of the U.S. economy, and lose a military war because it had lost its defence-industrial base because of Chinese purchase of U.S. industrial assets and technologies.

The self-serving solution? A protectionism that eliminates or sharply reduces U.S. trade deficits through U.S. threats of border taxes or tariffs and other measures to subsidize U.S. exports. It would also penalize imports, perhaps through a border tax or other trade penalties, to make them more expensive.

This approach blames foreigners for the U.S.’s economic woes, rather than taking responsibility for its own mismanagement of its affairs—from under-investing in education and infrastructure, to refusing to face up to the fiscal challenges it faces, to a lack of recognition for fundamental structural changes such as an aging population and a growing threat to jobs from technology.

The Trumpites have got it wrong. We should not shy away from telling them that when we sit down to negotiate the future of NAFTA or participate in G7 and G20 meetings. Too much is at stake.

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