A wave of protectionism?

One Issue, Two Voices series: The AFL-CIO's Robert Baugh and the CD Howe Institute's William Robson offer two opposing voices on a heated topic.

Click here for the full text of Robert Baugh’s and William Robson’s presentations. Click here for the video.

Robert Baugh, executive director, AFL-CIO

One of the things that was very startling when we faced the greatest economic crisis that world has seen since the Great Depression was the expectations upon the United States to take action, because it was our unrestricted, unregulated financial markets – along with those of the rest of the world – that created the crisis we are in.

The starting place for this is Buy America. U.S. Congress passed a $787-billion American Recovery and Reinvestment Act to stimulate our economy and to do something about climate. It was greeted with howls from two communities: the free-market, free-trade fundamentalists who said Buy America violated all our precepts around free market and free trade, and Wall Street, the transnational corporations, Canada, the EU and China. They said we’re protectionists and that this would lead to trade wars.

What we did was absolutely legal under the WTO, and it has protections under recognized procurement rules. The irony of all this is Canada has procurement rules that exceed our own. The EU has procurement rules that exceed the U.S. rules. We didn’t do anything that others weren’t already doing. Yet we were told we were being protectionist.

It’s a case of the pot calling the kettle black. But China in particular was Orwellian. China, in their $586-billion stimulus package, which was all infrastructure, put in an 80% domestic-content rule, and has since put in rules about indigenous innovation. So when you think about us being called protectionists, it’s pretty shocking.

We ran a $3-trillion trade deficit over the course of the past decade, $1.6 trillion of it with China – China, who practises currency manipulation, who has illegal subsidies, where workers have no rights. There’s a litany of things China does. Do I fault China for having a strategy? No. Just like I don’t fault Germany, Japan, Sweden, Denmark, Spain and all the rest of the world, countries that actually have a strategy about why manufacturing is part of their economic base and how to pursue that. We don’t have a strategy, Canada doesn’t have a strategy, and we’re paying the price because of it. We need to think more seriously about our manufacturing sector and what we want our countries to look like. As two economies, we have common problems; we really need some common steps to come to some solutions.

The American Recovery and Reinvestment Act is far from protectionist. We were actually trying to do what we should do to get the world back on track. It seems foolish when we have $600 billion in two-way trade with Canada. We have integrated economies. Half the trade that crosses the Michigan-Ontario border is directed by two-way trade. We have a cross-border manufacturing crisis as a result. And we’re countries that are stumbling toward an industrial policy as we do that. The American Recovery and Reinvestment Act was an industrial policy to invest in our economy and in our country.

The hard cold truth is that the win-win scenario we’ve been promised by the free trade ideologues laws isn’t true. We are playing football and the rest of the world is playing soccer. And nothing we can say is really going to change that. Unfortunately, the argument is, we should be a consumer-driven economy. Well guess what? Consumers are also producers. You actually want to have your employees be able to be consumers and pay them enough so they can buy their own products. We have been doing the opposite. We undermine our working middle class. We shunt those jobs offshore and then we begin to wonder why they live on debt. We wonder why they don’t consume. We wonder why we have a war on health insurance in the United States and why people have lost all these jobs. The idea that the consumer is the ultimate winner and abettor of the economy is absolute foolishness.

If you look at the rest of the world, they don’t look at it through that lens. They strategize on the creation of jobs and a vibrant manufacturing sector. We need to begin thinking of these other factors and what we want our countries to be and the role that trade plays in that.

And how do you do that? Aggressive investment and modernizing your industries, developing and employing new technology, training and skilling your workers to take advantage of these opportunities. It doesn’t have to be the way we’re doing this.

I think all countries should invest in their economies. Buy America and Buy Canadian should help open the door to a serious conversation about the future of manufacturing of our economies as advanced nations.

William Robson, president and CEO, CD Howe Institute

Most of us are free traders in principle. We know we do better exchanging with each other than each growing our own food, making our own clothing, building our own houses and doing our own surgery. The case for free trade among states or provinces or countries extends that logic across borders.

Protectionism in the 1930s – and if the original Buy America Act was a mud patch, the Smoot-Hawley tariff was the killer quicksand – was an economic and, ultimately, a global political disaster. After the war, trade liberalization led by the United States and Canada was a huge success. Incomes and jobs grew faster for longer than ever before.

The correlation between openness and prosperity is a striking feature of the modern world. The growing integration of production across borders is a product of this success, and fosters it. It makes clearer to producers as well as consumers that erecting border barriers is the economic equivalent of shooting yourself in the foot – or, to stay with the swampy metaphor, holing your own boat.

Why is government procurement a swamp? Traditional protectionism is governments putting tariffs and quotas between buyers and sellers. The buyers are directly affected and know who to press for relief. So international agreements have made major progress limiting those barriers.

When a government official buys something, it’s different. He or she is not using their own money, and typically doesn’t directly benefit from the services the purchase will provide. There’s an agency problem. Taxpayer and consumer interests are diluted, and mixed mandates – favouring certain industries or regions – seem normal. So international agreements have had a harder time limiting discriminatory procurement, especially by subnational governments – which, in Canada and the United States, are major buyers.

The threat to Canadian exports arising from the Buy America provisions in the American Reinvestment and Recovery Act (ARRA) finally prodded Canada to move. So we have the February 2010 agreement that gives Canadian suppliers access to procurement covered by the current U.S. GPA appendix, while U.S. suppliers gain access to provincial procurement in a new Canadian GPA appendix. It also expands access on both sides of the border – for Canadian suppliers to a range of state and local public works funded by the ARRA, and for U.S. suppliers to a range of construction contracts across provinces, territories and some municipalities in Canada – until the end of September 2011. Finally, it commits both countries to further discussions within a year to liberalize further.

One priority on the practical end is obvious. Engage at the negotiating table. Cement the gains to date. Ensure that the elements of the GPA governing bilateral relations are the most liberal available. Both federal governments can clean up their own games. More difficult is to deploy the carrots and sticks necessary to bring states and provinces to the table.

Complementary to that would be heightened efforts by exporters and governments in both countries to reach users of intermediate goods, and taxpayer and consumer representatives in the other. There are lots of Canadians who are tax-weary and getting sensitized to problems created by discriminatory procurement, and U.S. representations that better deals are available will get a hearing.

It’s taxpayers and consumers of public services in both countries who will benefit if our governments buy as readily on the other side of the border as they do at home. The stakes are high: non-wage spending by our governments is about one-eighth of GDP – almost half as big as trade in Canada, and as big in the United States.

So far, we have avoided the 1930s-scale disaster we feared 18 months ago. But people are hurting, governments are frighteningly overextended, and security risks increase the temptation to turn inward. Canada and the United States should work together, including in bilateral negotiations to build on the February deal, to keep borders open. And we mustn’t get bogged down in the quagmire. We need to say loudly and without embarrassment that the interests of our citizens as taxpayers and consumers of public services are front and centre. Every concession by a state, provincial or national negotiator is a win for them.

The One Issue, Two Voices speaking series is presented by the Woodrow Wilson International Center for Scholars in co-operation with Canadian Business. Click here for the full text of Robert Baugh’s and William Robson’s presentations. Click here for the video.