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17 March 2011

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Rules Govern Trade among Nations

 

Trade among nations is governed

under a complex set of rules and pacts

 

The granddaddy (although it’s comparatively young) of trading agreements is the World Trade Organization (WTO) based in Geneva, Switzerland. It started life in 1995, although it grew out of the General Agreement on Tariffs and Trade which began in 1947. Here’s how the WTO describes its role:

 

“It’s an organization for liberalizing trade. It’s a forum for governments to negotiate trade agreements. It’s a place for them to settle trade disputes. It operates a system of trade rules. (But it’s not Superman, just in case anyone thought it could solve — or cause — all the world’s problems!)”

 

Here’s a little more from the WTO itself: “Although [agreements are] negotiated and signed by governments, the goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives.”

 

Uli Harder

 

The aim of the WTO is to reduce barriers to trade on a global basis. This is founded on the belief that open and free trade among nations without any restrictions is good for everyone.

 

Trading and Comparative Advantage

The economics textbooks base their faith in free trade on something called “comparative advantage.” This is where we meet David Ricardo (1772-1823).

 

Mr. Ricardo was a very accomplished man; he was a British Member of Parliament and businessman, and he built up a large fortune. But, he is best remembered as an economist at a time when this discipline was in its infancy. One of the things he studied was comparative advantage.

 

David Ricardo’s work convinced him that nations should stick to producing the goods they were more efficient at making than other countries. They could then sell these goods to other nations at prices lower than anybody else, and buy products they weren’t as good at making from their trading partners.

 

So, countries with rich, fertile soil would grow food more efficiently than those with stony ground. The states with infertile land, but lots of coal and iron ore would benefit by specializing in heavy industry. Farmers could get their tractors and implements at a reasonable price, and factory workers could get good quality food at lower prices.

 

Everybody wins. At least, that’s the theory. Unfortunately, what looks good on paper doesn’t always work out well in the real world. Governments get involved and sometimes gum up the free flow of goods and services. We can see how this happens by looking at socks.

 

Political Interference with Trade

There was a time when Fort Payne, Alabama could justify its claim to be “The Sock Capital of the World.” The town of 13,000 sits in a U.S. cotton-growing region. With a major raw material close at hand, comparative-advantage theory says it should be a good place to locate a textile business. And, so it was. At one time, there were 150 sock factories in and around Fort Payne, most of them small, family-owned operations. Socks from the area warmed the toes of one in eight Americans. Not so much anymore.

 

Companies such as Montreal-based Gildan Activewear Inc. found a cheaper way to make socks. Gildan opened sock factories in Central America and the Caribbean where labour costs are lower. Its factory in Honduras is described as “state-of-the-art.” Most of the output from this factory is shipped into the U.S. under the terms of the Central American Free Trade Agreement (CAFTA).

 

Cheaper socks from Honduras and Asia suddenly filled the shelves of U.S. retailers. Two thirds of the sock factories in Fort Payne were wiped out and thousands of jobs went with them.

 

The sock makers of Fort Payne were an unhappy bunch and worked to get CAFTA changed. In July 2007, the U.S. House of Representatives was voting on CAFTA. Exactly half the House members were for it and exactly half were against. Congressman Robert Aderholt held the deciding vote. And, guess what district Congressman Aderholt represented; none other than Fort Payne, Alabama?

 

Mr. Aderholt went to see U.S. President George W. Bush who wanted CAFTA passed. National Public Radio picks up the story: “So, Aderholt offered the president a deal: He could get his big free-trade deal only if he rolled back free trade on one industry, the sock industry.

 

“ ‘I told him this was what I needed,’ Aderholt said. ‘This was the one thing I had great concerns about.’

“That night, President Bush agreed to Aderholt’s deal.”

 

Barriers to Free Trade

A tax, called a tariff, was put on socks from Honduras. This made them more expensive than Fort Payne-made socks. What was left of the industry was protected. Not surprisingly, this political meddling is called protectionism, and it’s one of the things that trade agreements are supposed to put an end to.

 

The World Trade Organization has rules against protectionism and the many forms it takes:

 

• Tariffs are taxes placed on imported goods to raise the price of the products to make them uncompetitive, as in the sock example;
• Technical standards can be used to block the importation of a product. The European Union, for example, refuses to allow beef treated with growth hormones into member states;
• A subsidy is government money given to a manufacturer to help reduce its operating costs. This is a no-no under most trade agreement rules. The Canadian aircraft maker Bombardier has been in a long-running battle with Embraer of Brazil. Embraer claims Bombardier receives money from Ottawa that gives it an unfair trade advantage;
• Quotas are set limits on the number or value of a product that may be imported. When Japanese cars started to capture a large chunk of the U.S. market a quota was placed on how many Japanese vehicles could be brought in;
• Dumping is the practice of selling goods abroad below the price charged for the same goods in the domestic market or at a price below the cost of production. Its usual aim is to drive competitors out of the market;
• Residency and citizenship may be used by some countries to keep people from working in their territory. Canada is currently trying to negotiate removal of such barriers to accountants from working in many countries such as: Austria, France, and India.

 

There are scores more ways in which governments and businesses try to wriggle through the fine print of trade agreements. Yes, they sign these trade contracts. Then, they hire small armies of lawyers to find loopholes in them that can be exploited to their advantage.

 

Grievance-settling Procedures

A country that feels hurt by a competitor’s actions can launch a case at the WTO. The trade organization first tries to mediate the dispute. This means getting both sides together to try and talk out the problem and reach a settlement. If they can’t agree at this stage, the disagreement is taken to a panel of experts. This panel examines the issue and decides who is right and who is wrong.

 

Either side can appeal a panel’s ruling. Sometimes both sides do so. Once the appeal is heard and ruled on, the offender is supposed to obey. Note the word “supposed.” Close to home, there’s an example of how WTO final rulings can be ignored.

 

For decades, Canada and the U.S. have bickered over softwood lumber. The American lumber industry complains that Canada’s method of charging for timber cut on crown land gives Canadian lumber companies an unfair advantage. U.S. lumber companies are a powerful force in Washington politics; when they want something they usually get it. In 2001, they asked for and got an 18 percent tax to be placed on lumber imported from Canada.

 

That devastated Canada’s lumber industry, and cost 15,000 jobs in British Columbia alone.

 

Canada wasn’t having this. It called on the World Trade Organization and the North American Free Trade Agreement (NAFTA) for rulings. In August 2003, the NAFTA panel said the U.S. tax was too high. Two weeks later, the WTO said the U.S. should not have imposed an import tax of any sort. But, the U.S. kept playing hardball by launching new complaints and appeals. They lost another NAFTA ruling in August 2005 and yet another in March 2006. However, America continued collecting the import duty and by now had $5.2 billion of Canadian money in the kitty.

 

Ottawa realized this game could go on for ever. No matter how many rulings Canada won, if the U.S. refused to abide by them, they were useless. It was time to talk. In the end, Canada agreed to limit the amount of lumber it exported and allowed the U.S. to keep $1 billion of the duties it collected.

 

There was mixed reaction. Trade Minister David Emerson said he thought the agreement was not perfect but the best that could be hoped for in the circumstances. The Canadian lumber industry gave the deal half a thumb up. New Democratic Party leader Jack Layton was angry. “It’s outrageous,” said Mr. Layton. “It’s a sellout. It’s a crime that the Americans would keep a billion dollars of money that seven decisions have now said they shouldn’t have.”

 

Sources

World Trade Organization

“Well-paid Manufacturing Jobs Disappearing TD Warns.” Canadian Press, April 15, 2008.

“World Sock Capital Suffers from Duty-free Imports.” Adam Davidson, National Public Radio, November 27, 2007.

 

© Canada and the World, October 2008

All rights reserved

 

 

 

THE VIEW FROM THE CANADIAN EMBASSY IN WASHINGTON

 

“In 2006, our bilateral trade in goods and services was $577 billion, with over $1.6 billion worth of goods and services crossing the border every single day.

 

“Canada’s trade with the United States is equivalent to 53 percent of our Gross Domestic Product. The United States represents roughly four-fifths of Canada’s exports and over half of our imports. Canada, in return, represents 22.2% of America’s exports and 16.5% of its imports. To date, Canada is the number one foreign market for goods exports for 36 of the 50 states, and ranked in the top three for another four states. In fact, Canada is a larger market for U.S. goods than all 27 countries of the European Union combined, which has more than 15 times the population of Canada.”

COMPLEXITY

 

To say that economics and trade agreements are complicated subjects is an understatement. The great economist Paul Samuelson was once given a challenge by Stanislaw Ulam, the Polish mathematician.

 

Mr. Ulam asked the economist to “name me one proposition in all of the social sciences which is both true and non-trivial.”

 

Mr. Samuelson’s answer? Comparative advantage.

“That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”

 

 

THE NON-BELIEVERS

 

Not everybody is a believer in the benefits of free trade. Most non-believers gather around the idea that free trade leads to the exporting of jobs to low-wage countries. Displaced workers then have to settle for poorly paid service jobs in exchange for the well-paid manufacturing work that went overseas.

 

However, consumers benefit from cheap imports. Economists say that the benefits of moving production offshore outweigh the costs of unemployment; there are more winners than losers. The ratio is put at two to one, although one influential and often-quoted economist, Stephen P. Magee, says the ratio is 100 to one.

 

But, that’s not going to make you happy if you’re one of the losers. Ken Georgetti, president of the Canadian Labour Congress, speaks for these people. In May 2007, he commented on jobs lost in the previous six months: “We’re losing our best-paying and highly skilled jobs at a rate that should have the alarm bells ringing in Ottawa. They can see these numbers, but I don’t think they understand what the loss of 50,000 good, family-supporting jobs is doing to communities across the country – particularly in Quebec and Ontario where most of the jobs have disappeared.” He points out most of these jobs brought in $21 or more an hour.

 

A Toronto-Dominion Bank study in 2008 found that “While many have found new jobs in the growing services sector…on average the displaced workers wind up making about 25 percent, or about $10,000 a year, less than what they were earning before.”

Knowing that folks can now buy a toaster cheaper doesn’t make those who have lost well paid jobs feel any better. It is perfectly understandable for these people to want their particular industry protected from foreign competition. And, it’s understandable for their political representatives to support them.

 

 

The World Trade Organization has 153 member countries.

 

 

According to American Consumers for Affordable Homes, U.S. taxes on Canadian lumber added $2,000 to $2,500 to the cost of an average new house.