The issue is back in the news yet again. In the Globe and Mail debate on the economy, Stephen Harper committed to successfully concluding the Trans-Pacific Partnership. Saying,
“We’re entering the final stages of a trade discussion in the Asia Pacific that I think frankly is going to conclude successfully, that is going to be the basis of the global trade network in the Asia Pacific for the generation to come,” (source)In pitching the deal, he had specific words for the auto sector:
"What I say to the auto sector in particular — I am not suggesting they will like everything that is in that — is we simply cannot afford as a country to have our auto sector shut out of global supply chains. That would be a disaster."The reaction was swift. Ontario's Minister of Economic Development Brad Duguid, for example, came out strongly against the deal. So strongly that he thinks accepting the deal displays a "lack of economic leadership". The impression among media coverage is that the industry is up in arms (for example, here). Those who are fearful are (usually) not making statements about Canada's economy as a whole. (I'm being charitable here). They are concerned with the well being of a particular set of workers or the size of a particular industry.
These concerns are not crazy, but they are based on old ways of thinking about trade. A modern understanding of international trade thinks seriously about global value chains (traded inputs, such as parts).
In all that follows, I'm going to use a standard quantitative model of international trade. All data comes from the World Input-Output Database. If you want details of the model, see here or a forthcoming CJE paper here.
In the old way of thinking about trade: Lowering import costs always harms the import competing sector; lowering its employment and lowering its sales. On average, for each 1% reduction in import costs, sales of the import competing sector fall by just under 1% (but of course that differs by sector).
BUT, these simple models abstract from a very (very!) important aspect of current global trade flows: inputs are traded. Canada's auto sector doesn't just use workers to make cars, it also uses manufactured parts. About 55 cents is spent on motor vehicle parts for each dollar of output of the motor vehicle manufacturing sector as a whole (see Canada's Input-Output Data). Cars need parts and about 80% of all auto parts used by auto manufacturers in Canada are imported from abroad (two-thirds from the US and one-third the rest of the world). See my previous post for further details.
The new way of thinking about trade: think seriously about traded intermediate inputs. Let's incorporate such inputs into our model and see what happens. I'll focus on the transport equipment sector (basically autos).
This changes everything. Canada's auto sector is so highly integrated globally, with many of its inputs coming from abroad, that lower import costs in that sector are a good thing for that sector!
The key takeaway message here is simple: Concerns about Canada's auto not gaining from lower import costs in that sector are based on old and out-dated ways of thinking about international trade. Most trade around the world is in intermediates, not final goods. We must change the way we think. The gains from trade are so much larger than we previously thought.
It gets even better! Trade agreements don't just force Canada to lower its import costs while other countries do nothing. Exports from our country to theirs also become easier. The gains from lower import and export costs are even larger. Let's take a look by simulating a 1% reduction in export costs and import costs in Canada's auto sector.
The gains are very large! For each 1% reduction in import and export costs (together), employment and production in Canada's transport equipment sector increases by about 0.3%! The overall effect on Canada's real GDP is about 0.05% -- or $1 Billion in increased GDP for each 1% reduction in trade costs in the transport equipment sector. A lot of money to leave on the table if we don't succeed in liberalizing international trade.
Of course, these numbers are only illustrative. While they do represent the newest techniques in international trade research used to quantify the effect of policy changes at the sector level, I don't want to hang my hat on any specific number. The key result to take away from this analysis is that Canada's auto sector likely stands to gain -- not lose -- from lower international trade costs.
The gains from trade liberalization in autos is large, but so are the gains in many other sectors! If I repeat the model exercise as above but for all sectors, I find the following:
I've highlighted the transport and equipment sector in orange. Improving trade in resources (mining, oil, and gas) yields even larger gains. Lowering trade costs in agriculture and processed foods yield also yield sizable gains, highlighted in green, on the order of $100-300 million per 1% reduction in trade costs in those sector. For the sake of Canada's overall economy, I hope TPP negotiations lower agricultural trade costs substantially. They may, but battling the entrenched interests of Supply Management is a daunting challenge that no politician seems yet capable of handling. (As an aside: even agriculture stands to gain, with increased employment and higher sales if trade costs fall in that sector. So, it's really a battle between unproductive producers and productive producers within agriculture.)
Let me end by saying that almost no credible economist thinks trade is harmful to an economy overall. There are small exceptions and nuanced policy positions, of course. But lowering trade barriers is widely and generally found to be a good thing on average. We should have policies that compensate losers or facilitate adjustment, but not policies that block trade liberalization outright. Trade agreements also incorporate clauses that go beyond the mere trade in goods and services. These may or may not be of concern, but it they are a separate issue from the gains from trade.
Don't let confident political rhetoric fool you, there is only room in reasoned debates for careful analysis, evidence, and data.
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