To achieve free trade the government raised tariffs

This year, for the ritual pre-budget donning of the new shoes photo op, Finance Minister Jim Flaherty took himself to a Roots manufacturing plant in Toronto to try on some made-in-Canada product. What a coincidence when, a day later, Mr. Flaherty announced new higher tariffs on goods imported from 72 countries, many of which are leading shippers of shoes to Canada in competition against Roots.

The official reason for the new tariff levels had nothing to do with shoes or Roots. Still, the tariffs — expected to raise $330-million a year in new revenue for the government — were immediately seen as evidence Mr. Flaherty had produced an “anti-trade budget” that would boost the retail cost of imported goods to Canadian consumers and serve as added protection for at least some Canadian manufacturers.

The new tariffs would also dwarf the $76-million in tariff cuts Mr. Flaherty granted for baby clothes and hockey equipment. What kind of policy is this? Why is an alleged free-trading nation and government fiddling with tariff rates, moving some up and others down as if Ottawa were fine-tuning the trade protectionist balance of an 18th-century mercantilist economy?

The main answer is that forms of mercantilism — exports are good, imports are bad — still loom large throughout the world trading system. If the budget tariff measures serve any purpose, they offer proof that the international system of free trade negotiations and deal-making is a farce and that Canada should just get out of the business.

The short and absurdly plausible reason Canada is raising tariffs is because it fits with the overall objective of free trade. In the mind-spinning world of trade negotiations, such contradictions keep the wheels of bureaucratic deal-making in motion. They also appear to be the main reason Canada maintains a wall of tariffs on thousands of products — from shoes to sweaters and coffee makers — worth $4-billion in 2011 (see table). We need to keep those tariffs in place as bargaining chips in free trade negotiations.

That, apparently, is one of the major justifications for a budget move that raises tariffs on imports from 72 countries. Those countries — including China, Thailand, South Korea, Brazil, Bermuda, Indonesia, Singapore, Qatar — are among about 170 original countries that today receive special tariff-free or preferential tariff treatment when they export to Canada. Known as the General Preferential Tariff, it’s been in place unchanged since 1974, the idea being that the countries on the list were “developing” and deserved some kind of trade boost to help them develop.

Ottawa has identified 72 of the original 170 that can no longer be classified as struggling nations, including China. The remaining 100 will continue to receive preferential GPT treatment, which is no big deal since Canada imports little or nothing from any of them.

But if low tariffs are a good idea, why not leave the GPT tariffs in place? If the preferential tariff on shoes from Thailand is, say, 13.5% instead of the going rate of 18%, why change it?

Michael Hart, professor of International Affairs at Carleton University, has two perspectives on the tariff moves. The first is that these preferential rates should have been raised for some countries years ago. “Hong Kong, Singapore, South Africa, South Korea, Thailand really aren’t developing countries and should have been graduated long ago.”

At higher tariff rates, these GPT countries would then have an incentive to negotiate trade deals. “If they want to get back to a lower tariff rate — I guess what the government is really saying, between the lines— is negotiate a free trade agreement with us. As it is, the incentives for a lot of these countries is: Why bother?”

That kind of strategy in Ottawa, however, encourages maintenance of the Wall of Tariffs now in place. “The better answer to all this that I’ve been touting for some time,” said Prof. Hart in an interview, “is go to free on everything for everyone. Then you don’t have to negotiate these silly free trade agreements anymore.”

Now we’re talking real free trade. Why not do it? Prof. Hart believes a key reason is the maintenance of a grand negotiating bureaucracy that serves to avoid making real decisions. “It’s the substitution of activity for policy.”

And so the great international trade negotiating regimes keep marching slowly to nowhere. Trade deals talks drag on for decades. Will raising tariffs — as a sort of trade war tactic — force action? Seems doubtful. And the government acknowledged as much in its budget. The $330-million in tariff increases is slotted in for the next four years, and no cut in tariff revenues is anticipated in the future, except for baby clothes and hockey equipment.

Original Article
Source: financialpost.com
Author: Terence Corcoran