The Opposite of a Buy Canadian Policy

Last week, the Minister of Finance announced his aspiration to unilaterally eliminate Canada’s few remaining tariffs on imported machinery and equipment. Saturday’s Globe and Mail quoted me doubting this proposal given the severity of Canada’s offshore trade deficit in that area. I elaborate my case in the following op-ed, which is printed in today’s Financial Post with Terry Corcoran making the reverse case (page FP13).

Readers of this blog may remember Andrew and I questioning the Conservative election promise to scrap some machinery-and-equipment tariffs. That promise led Finance Canada to consult industry in determining which tariffs to remove and which to retain.

Based on this process, Budget 2009 abolished a range of tariffs on machinery and equipment. Now the Finance Minister is proposing to abandon those tariffs which his own department decided were worth keeping less than a year ago.

Of course, actual tariff cuts will come only after another round of industry consultations. However, one wonders if the strategy is to keep redoing the process until the Conservatives get their desired outcome.

Beyond the likely effect on Canada’s machinery-and-equipment sector, further tariff removal is yet another reduction of federal fiscal capacity. While much smaller than many other tax cuts, the costs are cumulative.
 

The opposite of Buy Canada policy

The touted federal proposal to eliminate Canada’s few remaining tariffs on machinery and equipment is a case of symbolic politics rather than of considered policy. The Canadian government seems determined to brandish its unquestioning commitment to unbridled “free trade” going into this week’s G-20 Summit, even at the cost of eliminating more Canadian jobs.

Genuine free-trade agreements entail reductions in Canadian and foreign tariffs. As a result, increased exports could offset increased imports. New jobs in export industries might replace lost jobs in import-competing industries. Theoretically, these changes could boost productivity without a net loss of employment.

By contrast, the current proposal is to unilaterally abolish Canadian tariffs on machinery and equipment without any reciprocal tariff cuts abroad. As a result, Canada would import more machinery without any improved opportunities to export machinery. Canada’s machinery industry would cut back production and lay off more workers.

This outcome would receive a positive spin from supply-constrained economic models that assume full employment. Substituting more low-cost imported machinery for Canadian machinery would allow other Canadian industries to produce more output per worker, implying higher productivity. Jobs lost in the machinery industry would automatically be replaced by additional jobs in these other industries.

In fact, we are living in a demand-constrained world with significant unemployment. Cheaper machinery would not necessarily prompt firms to increase output, which is limited by aggregate demand. Job losses in the machinery industry would not be replaced by employment growth in other industries, but would add to Canadian unemployment.

Statistics confirm the policy’s symbolic nature. Canada imports well over $100-billion of machinery and equipment annually. The federal government’s annual revenues exceed $200-billion.

The latest proposed tariff cuts will cost a reported $300-million a year if fully implemented. That would amount to below 0.3% of machinery and equipment imports and below 0.2% of federal revenues.

Thankfully, the negative effects on output, employment and public finances will be correspondingly minor. Still, the return of trade deficits and budget deficits provides an odd context in which to encourage more imports and further reduce government revenue.

From January through July, 2009, we exported $27.3-billion of machinery and equipment to the United States and imported $29.9-billion from the United States. This trade is roughly balanced and already tariff-free.

During the same period, Canada exported only $12.2-billion of machinery and equipment overseas and imported almost three times as much, $34.5-billion, from overseas. This glaring imbalance of $22.3-billion was our single largest trade deficit. (By comparison, Canada ran offshore trade deficits of $17.8-billion in consumer goods and $8.8-billion in automotive products.)

Removing Canadian tariffs from imported machinery and equipment, without reciprocal tariff cuts abroad, is bound to worsen this huge trade deficit. Indeed, the government is throwing away a bargaining chip that it otherwise could have used to negotiate lower foreign tariffs on Canadian exports.

Specifically, Canada is currently in the midst of trade negotiations with the European Union, a major exporter of machinery and equipment. In effect, the Canadian government has just volunteered a concession for which the Europeans might otherwise have offered something.

The federal government is not only imperilling Canadian jobs and eroding its fiscal capacity to address such dislocation, it is also abandoning whatever gains could have been achieved with a more competent negotiating strategy. In the grand scheme of things, these costs may be small. But the only apparent benefit is giving Canadian cabinet ministers and officials nicer anti-protectionist credentials for the G-20 cocktail circuit.

-Erin Weir is Economist, United Steelworkers, in Toronto.