Although Prime Minister Justin Trudeau’s recent visit to Washington seems to have gone well, it’s clear the threat of a renegotiation of our trade relations with the United States still exists.
A document published annually by the U.S. government recently gave us some clues as to which sectors the new administration would push Canada to open up to U.S. imports.
Without surprise, the agricultural sectors under supply management – that is, dairy products, eggs and poultry – are at the top of that list. This legally cartelized sector of our economy was also the key source of disagreements between the two countries up until the very end of negotiations for the Trans-Pacific Partnership. Canada, for its part, has been clear that opening up the U.S. softwood-lumber market is one of its main priorities, after the breakdown of talks last fall to renew a 10-year agreement.
Why should both countries not settle the matter by agreeing to “exchange” the opening of one market for the opening of the other? As numerous studies have shown, there would certainly be huge benefits for Canadian consumers if tariffs of as much as 300 per cent on supply-managed products were scrapped. Lower prices would let them save more than $3-billion a year, according to the Organization for Economic Co-operation and Development. Similarly, U.S home buyers would save more than $1.2-billion a year if the United States did not apply import limits on Canadian softwood lumber, as it did under the agreement that ended in 2015.
It would be in each country’s interest to get rid of these barriers, regardless of any trade renegotiations. In the case of supply management, there would have to be a transition period to allow Canadian farmers to adapt to the new reality, during which production quotas would be bought back (using revenue from a temporary tax imposed on the relevant agricultural products) and tariffs would be gradually phased out.
Given the relative size of the two countries’ economies, this trade-off would be fairly “balanced” from producers’ point of view, which might be attractive to someone such as U.S. President Donald Trump, who is particularly upset with trade imbalances. Mr. Trump wants to restore a balance and “repatriate” the jobs he believes his country has lost. The fact that bilateral trade with Canada is more or less balanced also seems to be a key reason Mr. Trump has not targeted our country.
We can hear the cries of our economist friends here: Wait a minute, this kind of reasoning is based on an economic fallacy! There is no reason to have any “balance” in trade relations. Of course, this is true. There is no reason for one country to have balanced trade with any other one. Even when it comes to a country’s trade relations with the rest of the world, it’s not necessary to have an equilibrium between exports and imports. If a country imports more than it exports, foreigners will have surplus money to invest in that country. Over all, the current account (exports minus imports) and the capital account (funds coming in minus funds going out) will necessarily balance.
Mr. Trump clearly seems to believe trade relations between two countries need to be balanced if they are both to benefit. Given this, why not kill two birds with one stone? Getting rid of supply management and softwood-lumber import barriers would bring considerable economic benefits to both countries. If we can convince Mr. Trump this is also a good trade-off that will reinforce our “balanced” trade relations, and in so doing calm down his protectionist tendencies, then this is just one more reason to make the deal.
Michel Kelly-Gagnon est président et directeur général de l'IEDM, Alexandre Moreau, analyste en politiques publiques à l’IEDM. Ils signent ce texte à titre personnel.