Why politics is driving a new wave of protectionism: Don Pittis
Economics likes to claim free trade is bias-free and rational. It's actually about politics and interests
You've likely heard the concern that Twitter and Facebook have divided the world into separate camps because many of us unfollow the social media voices that disagree with us.
I thought of that as I flipped through my old-tech newspaper yesterday morning, reading several pieces about Canada's own domestic trade dispute, vainly looking to see if any of the commentary would take the view that the Trans Mountain pipeline expansion should not proceed.
Perhaps the unanimity meant there was only a single rational point of view.
More likely it was just another reminder that trade issues, or those arguments couched as trade issues, are actually about politics and interests.
No pipeline, no wine
There is no question that the squabble between the provinces of British Columbia and Alberta — that pits the transshipment of Alberta bitumen from the oilsands to the coast against the importation of B.C. wine to Alberta — is political.
Part of the politics is that, according to B.C., the delay in approving the pipeline expansion is not about interprovincial free trade at all.
B.C. is not refusing to buy an Alberta product, just trying to regulate that product's movement over its territory.
Alberta's refusal to accept B.C.'s wine as retaliation is a much clearer violation of the classical case where free trade is supposed to be to everyone's benefit.
The argument for trade traces its history back to 19th century English economist David Ricardo, who proposed that everyone wins when they trade the things they make best. So convinced are economists of the truth of the principle that they consider it a law, namely the law of comparative advantage.
Nearly a decade ago I tried to explain that law with a homey example of partners in a marriage where both could cook and both could walk the dog, but each could do so with different levels of skill.
The protectionist paradox
Everyone was better off if the one partner traded superior dog walking — exercise that left the dog truly exhausted — for the other partner's superior cooking that left both well fed.
"If we were to divorce, I would have a well-walked dog, but a boring diet," I explained in January 2009, "I would be forced to eat meals out."
"My wife would eat well, but during the weeks she had custody of the pooch, it would be restless and inclined to chew shoes."
By stopping our trade relationship, both of us would be poorer.
"So widespread is the theoretical support for free and open trade, that economists face somewhat of an embarrassing paradox when they analyze the reality around them," Luca Ferrini wrote in a 2012 paper examining the causes of protectionism.
Indeed, despite the absolute certainty expressed by so many economists that trade is an absolute good, U.S. President Donald Trump isn't alone in choosing protectionism.
Many British politicians — and according to the Brexit vote, a majority of the U.K.'s citizens — preferred separating from the European Union even though many experts, including Mark Carney at the Bank of England, warned it would be costly in trade terms.
Steel for Kentucky bourbon
Similar to Trump's recent national security argument for potentially blocking imports of steel and aluminum, Australia has given itself the power to protect its economy from those two commodities that currently face a global glut. Although it hasn't been used since the Second World War, national security is often listed as one of the valid reasons for protectionism.
But it may be a dangerous precedent since other countries could use it, too. And as Canada's domestic wine and oil dispute shows, for every perceived protectionist threat, there is a counter-threat of retaliation.
"If the final decision from the U.S. hurts China's interests, we will certainly take necessary measures to protect our legitimate rights," a Chinese trade official told the Financial Times of the possible metal tariffs.
Europe is creating its own list of retaliatory trade tariffs, announcing that it may target Kentucky bourbon, Wisconsin cheese and put the squeeze on Florida orange juice, all products that would affect Republican or swing states.
The question is whether what we are seeing is the beginning of a wave of protectionism that is an ominous stage in the economic cycle, or whether it is just Trump stirring the pot, encouraging others to think the same way.
According to trade critics, the perfect world where "all actors in the exchange have the same bargaining power" may not be true in the real world, says Ferrini.
Values climate
In fact, the country that in recent decades has led the push for free trade, the United States, has been its biggest beneficiary. Perhaps the feeling that it is no longer in that position has been one of the factors motivating Trump's protectionist stance.
One more feature of the idealized free trade described by classical economics is its lack of values. A good is a good, whether it is made by well-paid workers or in a sweatshop.
One of the greatest complaints about free trade rules is that they prevent voters from making politically valid decisions about labour or the environment, putting all the emphasis on the dollar value of the goods and failing to recognize things such as the carbon footprint of those goods.
Using trade as a weapon may be dangerous because it can escalate. As Ricardo insisted, that can make everyone worse off.
But the wine-for-bitumen battle is a reminder that many voters actually want a say in what constitutes a valid trade issue, and for some of them, the potential cost of environmental damage dwarfs the value of B.C. wine and the value of the Alberta oilsands combined.
Follow Don on Twitter @don_pittis
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