We must take the tariff debate back to first principles
Imagine the following scene: you are seated with another individual at a table in a nice restaurant. For whatever reason, you enter into a heated and bitter argument. Voices get raised. At some point, your companion reaches into a bag and pulls out a hammer. He then proceeds to smash himself with it, hard, on the forehead. So much so that he now bleeds profusely, with a deep and visible cut over his left eye.
I don’t know exactly how you would react to such a situation, but I doubt very much that you would grab the hammer out of his hands and proceed to hit yourself in the face even harder as a “retaliatory measure” to what your interlocutor just did to himself. That is, assuming a minimum level of sanity on your part.
Well, for Canadian governments to retaliate to potential tariffs to be imposed by the Trump Administration with tariffs or blockades of their own against American exports would be just as unproductive and misguided as you hitting yourself in the face with that hammer. It would not constitute a “show of strength,” but rather a display of abysmal stupidity and economic illiteracy.
The reason for this is that trade is always good when it occurs voluntarily. Okay, maybe it would have been a bad idea for the Allies in the Second World War to sell the results of their research on the atomic bomb to the Nazi regime, even in exchange for a very large payment. But aside from these kinds of extreme, hypothetical examples, free trade is an inherently good thing. And this remains true even when the country from which the goods and services originate doesn’t reciprocate in terms of purchasing products produced in your own country.
Thus, a first principle we should definitely keep in mind during these turbulent times is that, except for the specific case of government procurement, or when a state-owned company (such as Hydro-Québec, for example) sells products, “countries” or “governments” do not actually trade with each other; corporations and individuals do.
For example, when I, a Canadian individual living in Alberta, buy salt pods from Rhino Systems, an American company based in Ohio, for the treatment of my chronic nasal congestion, we are the ones trading with each other, not “Canada” and “the USA.” The only relevant thing that is happening here is that I am happy to buy their products, and they are happy to sell and ship them to me at an agreed-upon price. This voluntary transaction might create a “trade deficit” in favour of the United States, but the real gist of it all is that I get Rhino Systems products, and they get my money. We’re even.
For Canadian governments to retaliate to potential tariffs to be imposed by the Trump Administration with tariffs or blockades of their own against American exports would be just as unproductive and misguided as you hitting yourself in the face with a hammer.
The reason why trade is economically efficient is implicit in what I said. If two individuals or two corporations trade without coercion or fraud, it is because each side thinks that it will benefit, compared with not trading. If that were not the case, one side would decline the trade. And remember that only individuals or firms trade. (Note that corporations are always intermediaries serving consumers because whatever they sell is ultimately for the purpose of producing something that some consumers want.)
Trade is the essence of economic life, and there is no difference if it occurs across two streets, between two towns, or over a border between two provinces or two countries.
Trade is moral because it confirms that the two traders have equal freedom. To be blunt, if a political authority forbids an individual to trade on his own conditions, it means that the latter does not live in a truly free country.
Finally, someone urgently needs to provide basic economic education to President Trump.
Indeed, in his recent speech to the Davos Conference, Trump made several statements that show that he has no understanding whatsoever of the central notion of comparative advantage. For instance, he said during that speech that America doesn’t need Canadian lumber because the U.S. already has lumber. This statement completely disregards the fact that if American consumers often buy Canadian lumber instead of the lumber made available by American producers, it is because it’s available at a better price and/or is of better quality. Otherwise, they simply wouldn’t do it.
Even if American producers were somehow able to produce everything that Canadian producers are able to generate, and even if they were better than Canadian producers at producing everything (which is obviously not the case anyway), it would still make sense for American producers to specialize in what they are especially good at, because of this central notion of comparative advantage. British economist David Ricardo explained this most eloquently some 208 years ago.
Trade debates often take complex twists, and are accompanied by a flurry of statistics. However, it would be a grave mistake to let these obscure the key concepts and first principles that are upstream of these debates. We simply will not be able to adopt the right approach if we forget about them.
Michel Kelly-Gagnon is Founding President of the MEI. The views reflected in this opinion piece are his own.