Mercantilism at the Globe and Mail

Today's Globe and Mail's editorial on the prospect of a Canada-South Korea trade agreement is just silly:

Free trade? First, lower the barriers: To the dismay of some Canadian exporters, free-trade talks with South Korea have reached an impasse. But that shouldn't be the end of any smart free trader's world, given South Korea's refusal to lower its non-tariff barriers to automobile trade despite almost 2½ years of negotiations. The South Koreans won't even grant the same automotive concessions to Canada that they recently made to the United States, and the U.S. Congress is balking at approval of that free-trade treaty.

The inequity is palpable. Canada currently imposes a tariff of 6.1 per cent on South Korean car imports, mainly vehicles from Hyundai Motor Co. and Kia Motors Corp. North American automotive manufacturers are afraid that the elimination of this duty could trigger a flood of small Korean cars that are not assembled here.

But Korea has far greater barriers, including an 8-per-cent tariff on auto parts and most vehicles and a 25-per-cent tariff on some trucks. South Koreans face tax audits if they buy foreign cars. Korean licence plates are a different size from those elsewhere in the world, so foreign automotive companies must do a separate production run. South Korea applies a tax on automobiles based on engine-displacement size, which disproportionately affects larger foreign cars. It's little wonder that Canada's annual exports of automotive products to South Korea were worth only $11.5-million last year, while the value of Korean automotive exports to Canada was roughly $1.7-billion.

There is much to be gained from a free-trade deal with South Korea, including the elimination of tariff and non-tariff barriers and the easing of restrictions on investment and services. A deal could open doors to other fast-growing economies in that region, if companies used Korea as a strategic base. Canada could snare major export gains in agriculture, fish, forestry, information technology and industrial equipment. After all, with GDP of more than $1-trillion, South Korea is the 12th-largest merchandise-trading nation in the world. No one wants the negotiators to give up.

But while International Trade Minister David Emerson has said the talks have not irreparably broken down, he made it clear that Canada is "not going to rush into a deal." That is an appropriate stand to take. Canada should not sign a deal that allows South Korea to keep such punitive non-tariff barriers in place. Such trade is neither free nor fair.

         

The reason why free trade is a good thing is that it allows us to buy things more cheaply than we can make them ourselves. A Canada-South Korea FTA should be evaluated on the basis of how it affects consumer welfare, not how it affects exports.

 

Comments

[prowsej]

Don't we have to make this tradeoff:

Consumer benefit from lower prices because of cheaper Korean imports
vs.
Consumer harm from loss of Canadian jobs because of said imports

and then only agree to free trade with Korea if the benefits outweigh the harms?

[Adam]

Lost jobs are irrelevant to consumer welfare.

[Stephen Gordon]

As long as jobs are being created in other sectors, then I don't see the problem. And jobs are being created; employment rates continue to set new records. And these job transfers are being accompanied by real wage growth, which is a bit of a change from the stagnant real wages we saw during the run-up of manufacturing employment during the 1990s.

[happyjuggler0]

As Milton Friedman pointed out (and I am parphrasing here), there is one reason and one reason only to export goods. That reason is to have the currency to import goods. Thus if exports are good, then by definition imports are good too. If imports are bad, then by definition exports are bad too.

[Geoff]

"The reason why free trade is a good thing is that it allows us to buy things more cheaply than we can make them ourselves. A Canada-South Korea FTA should be evaluated on the basis of how it affects consumer welfare, not how it affects exports."

Are you serious?

[Stephen Gordon]

Of course.

[btgraff]

for those who say that protectionism is bad - look at south korea or japan over the last 50-60 years.

our problem as a country was that our formula was protectionism but allowing untrestricted foreign ownership in areas where we import/export, unlike those two countries which restricted or discouraged foreign ownership.

[Jim Sanders]

Not sure I understand your logic here. If the only need is lower prices (consumer benefit) then why have an FTA at all - why not just get rid of any tariffs unilaterally?

[Stephen Gordon]

Why not, indeed?

To borrow Martin Wolf's phrase, these sorts of trade deals amount to disarmament treaties between mercantalists: our exporters agree to stop holding our consumers hostage only if *their* exporters agree to stop holding *their* consumers hostage.

[Peter Schaeffer]

I am an American and this is a decision for Canadians to make. However, I must say that we hear nonsense like

"Lost jobs are irrelevant to consumer welfare."

in the US often enough. Which is a key reason why the US public now opposes "free" trade and globalization in general. Note that a recent poll showed that 60% of Republicans opposed globalization. The Democratic percentage would be even higher.

Two salient points that most economists seem oblivious to

1. To get concessions in a negotiation you have to have bargaining chips. Unilateral surrender doesn’t work.

2. Too consume, you must have income. In foreign trade that means exports.

The Globe and Mail should be commended for its common (sadly uncommon) sense.

[Barry]

"Lost jobs are irrelevant to consumer welfare."

Posted by: Adam

That's because major industrial countries are not exporting economics professorships.

[Jacques René Giguère]

Having unequal duty in each country distort relative prices and leads to inefficient factors allocation.
Nobody here remembers the second-best theorem?

[M]

Isn't the point to maximise Total Surplus? ie Producer plus Consumer Surplus.

Evaluating a policy based on PS only is just as dumb as CS only.

Now it's possible that a decision rule to max CS by the government agency in charge of these things leads to a maxTS outcome but that's becuase it balances out lobbying by bussiness who seek to protect PS.

Plus domestic companies import goods too so it's not really clear from the info what the outcome would be.

Lost jobs could impact consumer welfare by reducing wages and shifting demand in. Nothing is clear in econ.

[M]

Isn't the point to maximise Total Surplus? ie Producer plus Consumer Surplus.

Evaluating a policy based on PS only is just as dumb as CS only.

Now it's possible that a decision rule to max CS by the government agency in charge of these things leads to a maxTS outcome but that's becuase it balances out lobbying by bussiness who seek to protect PS.

Plus domestic companies import goods too so it's not really clear from the info what the outcome would be.

Lost jobs could impact consumer welfare by reducing wages and shifting demand in. Nothing is clear in econ.

[Megumi Kyou]

The point of the trade exercise is for both trading parties to benefit from the transaction. This is entirely possible, given the different comparative advantage of each company in production. The point that must be made, however, is that any evaluation based on surplus (whether producer surplus, consumer surplus, or both) only shows a lack of demand for a product.

In this conflict, it is not only Korea and Canada trading- each also trades with other nations. If Korea buys absolutely nothing from Canada, but Canada has funds from exports to other countries, Canadian use of Korean vehicles is simply fine. If Canada has absolutely no incoming funds, it cannot buy Korean goods without its own markets shrinking, and the situation would be better tariffed into oblivion. This is, by the way, roughly the situation being experienced in Korea. Trading with few nations has left Koreans with the substantiated fear that too much import could mean a loss.

In this situation, as far as I can tell, the Korean decision is indeed the right one.