Fair trade vs. free trade.

I want to preface my remarks about trade issues by stating my position on free trade and comparative advantage so that there is no mis-understanding about the proposals I make. Since the beginning of organized economic activity, people have traded. Specialization benefits everyone because we are not all blessed with the same skills and productivity. Likewise countries are not all the same. Some have abundant natural resources, others must make up for the lack of these with other skills. The theory of comparative advantage is the basic impetus for international trade between nations. It is a sound theory and if perfectly practiced would result in a much more egalitarian distribution of global wealth. However for comparative advantage benefits to work and be maximized, there must be true open and free trade which has never existed.

What has gone on since WW II has been an enormous expansion of global trade but by no means has it been free trade in the true sense of open global markets for all participants.

Canada's balance of trade in goods has been one of the few bright sides of our economy. In fact, I would argue that the export of Candian commodities has kept us afloat in an otherwise ocean of red ink. The U.S. is our largest trading partner and there the story has been entirely different. The U.S. trade deficits have balooned totally out of control. Because the U.S. was the engine of economic growth in the early postwar years, it encouraged trade with all countries in order to get the global economy back on its feet. This was admirable. It also was good business as the U.S. exported huge amounts of capital goods and agricultural products worldwide. Around the beginning of the 1970's, however, the tide began to shift in a major way. Countries that had previously been major importers of capital goods and machine tools were now in a position to start exporting themselves- Japan and Germany being the principal ones. They had done their homework well. They produced good quality merchandise at competitive prices. They also concentrated largely on consumer market products rather than industrial goods because it was easier to gain market share rapidly in these expanding markets. Autos, consumer electronics,clothing and shoes made up an enormous share of this trade. More recently it has shifted into domination of the generic personal computer products and peripherals.

America, and to a lesser extent Canada, were open markets for these exports from Europe and the Pacific rim. Under the guise of open and free trade the door was open and tariffs were either eliminated or reduced to inconsequential levels. We all know the result. It is difficult to judge whether this was a predatory conspiracy to attack our markets, or we just let it happen out of sheer laziness on our part to wake up to what was going on. We saw cheaper and better made imports available and we decided to buy them without really asking ourselves what the long term implications were. The implications were many but the most important one was that we exported an enormous amount of wealth that will never come back. All those new factories you see on TV in Singapore, Bangkok, Seoul, Taipei and other cities in Asia were for the most part financed by Canadian and American export of capital to purchase their products. For a few cheap beads of consumer goods, we exported the heart and soul of our consumer goods manufacturing industries. If you think the Dutch fooled the Indians over Manhattan....

We took the easy road and now we are going to pay for it. We have to re-industrialize and begin making things at home. Akio Morita, the Chairman of Sony Corp., has said that the only true way to produce wealth in an economy is through value added manufacturing. I agree. There are many who argue we are in a shift towards a knowledge economy and manufacturing doesn't matter. This is pure sophistry. Canadians must work and the knowledge economy is simply not going to provide jobs for all Canadians at higher salaries equivalent to the lost manufacturing wages. It threatens to divide our country into a nation of haves and have nots. More importantly, I would argue that the knowledge based industries are going to be global ones and they may be a lot more competitive and volatile than even the manufacturing industries. Technology changes so rapidly, the winner today can literally be out of business tomorrow. To concentrate an economy on knowledge based industry alone is imprudent at best and suicidal at worst. It is far better to diversify the economy's development into manufacturing goods for home consumption as a stable basis for your economy and on this base build a tier of service and knowledge based industries. Our apparent abandonment of the manufacturing of basic consumer commodities, be they shoes, shirts, or the myriad of other mundane products used everyday has been a travesty. It has denied a livelihood to thousands of people who need one and condemned them to welfare and unemployment. As I write this the government has again announced deep cuts in duties on a whole list of consumer products.

All this has been done in the name of free and open trade. Of course, you can hire labour cheaper in a sweat shop in Sri Lanka to make shirts, but has this really benefitted Canadians. By allowing these goods into our country under the guise of the benefits of trade is plain stupid. Under this misguided principle, the only possible way to compete with third world labour is when our labour rates decline to their levels. If the leaders of Canada want to bring us to the lowest common denominator, this is a sure fire way to do it.

The old argument is always made that free and open trade keeps domestic manufacturers competitive and on their toes. This is another fallacy. Smart domestic manufacturers will immediately recognize the threat and move production overseas. Dumb ones will founder here or attempt to hide behind a curtain of grants, subsidies, and eventually a declining currency as the trade deficits begin to mount- look at how our dollar has depreciated not only against the U.S. but against Japan.

The Japanese exporters in theory should have raised prices in response to the dollar's drop versus the Yen. They preferred to keep market share until they could build factories here to produce domestically. These will indeed become Canadian based factories and employ Canadians but we could have owned them and the profits could have accumulated domestically instead. No, our industries have not benefitted by the currency devaluation nor will any country benefit it's manufacturing base through continual currency erosion. A weak currency just lowers you further down the rung of economic status in the world.

Another argument is the old level playing field. In business there are no level playing fields. There never have been. Anyone who falls for this one is naive, and will be swept aside quickly. Eliminate all tariffs and you will have free trade. Hogwash again! All sorts of non-tariff barriers are used to protect domestic producers such as labelling laws and environmental standards. The U.S. for years has been barred from Japan's agricultural markets by all sorts of regulations. If you want a lesson in comparative advantage and reciprocal trade that doesn't work, look no further than rice production. The U.S. is the most efficient and low cost producer of rice on a global scale. In theory they should be allowed to use this comparative advantage of low cost production to gain entry into the Japanese market. Not on your life! The claim is always made that Japan wants to be self-sufficient in food production and they get away with this argument as they sweep in and dominate industry after industry in the U.S. in which they have competitive advantage. Level playing field? You be the judge whether we are fooling ourselves in the long run or not.

Yes, I believe in global competition. I believe in free trade if it is fair. But what we have is no longer free and fair, it is predatory and it is well co-ordinated at many levels. Therefore, I am going to propose a little heresy here that many readers may find runs counter to the conventional wisdom. It is time to put up major tariff walls on many items not only to protect what is left, but to enable the re- establishment of Canadian production of many consumer goods that we now import. Yes, costs are going to escalate and we are going to pay more for a lot of things but if at the same time as we begin to establish new trade parameters, we also establish some new regulations and laws at home to re- invigorate competition, we will keep price levels under control.

I will also make the prediction that the United States is very soon going to wake up the the fact that their open market policy has destroyed their manufacturing base and they are going to do an about turn on the whole matter of free trade. It hasn't been free. It has been one sided particularly in favor of the Pacific Rim exporters. What they have had is a free ride on our markets and it will soon be over. A lot of Americans including chief executives of American based multi-nationals now realize the error of their ways. How can you have a strong domestic demand if you gut out all the high paying jobs? You work against yourself. The old argument that it is good for consumers is a circular paradox. The average working Canadian or American is the consumer. He can't consume if he doesn't work.

Implementation of the North American Free Trade Agreement is anticipated just as soon as the legislation passes through the Congress in the United States. At the time of writing, there is a growing movement in the U.S. to head off this agreement. It appears that the environmental movement may well have a case to force a delay until a thorough environmental impact study is carried out. During this delay the opposition forces will gain an upper hand as more and more of us realize the implications of free and open trade with Mexico.

I would ask the reader to ponder these final thoughts on international trade. Trade must be balanced to be of any long term benefit to multi-lateral parties engaged in it. Canada has benefitted greatly from trade in the past but we have entered a new world in the past twenty years in terms of trade. Canada has a strong positive balance of trade in goods but the outflow in services is overwhelmingly negative. This overall negative balance of trade will probably be with us for a long time. Like the spending deficits of our governments, this overall trade deficit must be worked down. We can become more self-sufficient in a myriad of ways but one way which never fails to help is local sourcing. Starting at the lowest community level, Canadians must shift their consumption towards local sourcing. I am not advocating that Canada become an isolated nation and close itself off from world markets, but by no means should we allow our communities to be raped by predatory trade.

Trade to be beneficial does not have to be free and open, it just has to be balanced and this might mean that international trade might contract for a time until nations can balance their trade. Japan and Germany have built huge surpluses and this is presents a real danger for backlash. The old corrective methods of balancing trade through gold or currency devaluations do not work in a world where the country with the trade surplus continues to finance the deficit country to its knees. This is exactly what has happened to the United States and Japan in their trade relationship. Japan should have ceased to finance the U.S. trade deficit long ago. The backlash growing is going to be bitter and lengthy. Balanced trade will only come about if the other party realizes you will not put up with running a continual deficit to your own detriment. Elsewhere I have made a case for a return to the gold standard for the U.S. Dollar for precisely this reason. If President Nixon had not removed the gold backing of the U.S. Dollar in 1972, do you honestly think that the U.S. would have run up the huge trade imbalances of the past twenty years? The discipline of balanced budgets and balanced trade is what makes a nation wealthy.

It is difficult sometimes to accept errors of the past especially the errors we have made regarding trade. If you really look back seriously at what has happened over the past twenty years to manufacturing in Canada, you can only come to the conclusion that it has been devastating. It has not benefitted us to have cheap imports. Just look at the thousands of small communities across this country that had locally owned and managed manufacturing businesses. These communities benefitted in a multitude of ways-stability, employment, charity are just a few. Now we can survey the damage and ask ourselves, did we really end up better off? Look in the mirror...the answer clearly is a pitiful no.

Often you spot when a trend is going to reverse itself by the fact that it becomes accepted to such an extent as part of the conventional wisdom, that anyone questioning it is considered out of his mind. Well, if you think what has happened to North American manufacturing is good for you, I have a flat earth to sell you!

Competition.

We are going to have to break up some industries to instill competition at home here in Canada if we adopt a more protective stance on trade.

The first area that has to be seriously examined is the financial services business. It is dominated by the big banks and as such they have an enormous effect on competitiveness in Canada. I would like to see a lot more competition in the banking sector. Banking should be more locally oriented. It has become centred in Toronto and Montreal and as such our banks miss many opportunities on the local level. The international bad debts that they have accumulated over the past decade is a clear indication to me where their focus has been and this problem has occupied their attention to the detriment of the development of local business. While the big banks welcome the deposits of service businesses willingly, they are less likely to re-circulate these deposits back into the commercial loans stream towards manufacturing business development in the local communities where they picked up the service deposits. If you look at the growth of residential mortgage lending by the big banks over the past five years, it has been enormous. This is largely risk free secured lending. In another place I might make the argument that their liberal funding of home mortgages helped fuel the real estate boom and eventual crash. Where they should have been lending was to manufacturing business instead they were fueling a real estate boom. Much is made of the tight co- operation of Japanese banks and industry. Most of us think that this is between big banks and big business in Japan. While this is true, there is an enormous effort made in Japan to develop small manufacturing businesses and they are given enormous support by the banking system. Here in Canada, it is the opposite. Banks literally set about to bankrupt small manufacturing businesses under a deluge of fees and high lending rates. We have denied to ourselves the real truth of lending in Canada. Canadian deposits are being swept up in small communities and used to support loans to multinationals that may eventually force the business in the small town that made the deposit initially into bankruptcy. It is a circle that needs to be broken.

Furthermore, our banks are risk averse. We are constantly reminded that they have never failed unlike the many savings and loans in the U.S. This again is an argument in the art of sophistry. Of course, if you don't try, it is certain that you will never fail. Failure is part of success. It builds experience. Even though our banks are hesitant to assume risk, they have been the recipients of countless bailouts through tax breaks and mergers. The most recent is the Royal Trust fiasco. Of particular outrage to Canadian taxpayers should be the tax break given to the executives of Royal Trust who borrowed huge sums of money to buy stock (sweetheart loans that weren't available to ordinary shareholders) and now that the stock has crashed many faced ruin. They have been given a new life at the courtesy of the taxpayer because they will receive lump sum payments to buy out their loans and this will not be a taxable benefit. I am not void of compassion for these individuals, many of whom have had their lives shattered, but this kind of bailout is a travesty to the taxpayer who must eventually underwrite their loss.

So I propose that we examine the whole field of commercial banking in Canada with the objective of making it more competitive through allowing the establishment of locally owned and managed banks. I would like to see banks spring up across Canada that take local deposits and re-circulate them through the community closest to them. If you want an example of this in action, you only have to look at the Caisse Desjardins movement in Quebec. It is people helping people that they know. Diversifying our banking system also makes it more responsive to innovation. Our big banks lay claim to being extremely innovative, yet when it comes down to a close examination of their operating structure, their bureaucracy is often overwhelming. Anyone who has dealt with loan committees knows what I mean. Decision making can be long and time consuming and very often frustrating for the entrepreneur who wants to move on a deal or an investment. In times of recession, locally owned institutions may have a much better guage of the probable outcome than someone in a tower in Toronto. Big banking has become so impersonal and credit is granted or allocated simply on the basis of formulas. It is wrong. It is part of our malaise. It is time to seriously examine the conventional wisdom of the direction financial services have taken in Canada.

The very downsizing of government and abandonment of areas of activity that I have called for, will have a marked improvement on competitiveness. Many public institutions such as hospitals and schools should be forced into a competitively oriented environment. The monoliths we have allowed to develop are inefficient and devoid of innovation. Who is going to shake the boat in these organizations that are primarily managed by inflexible hierarchy? It is time a paradigm shift took place and deep in our hearts we all know it. The waste in the systems that exist can no longer be afforded. Things like across the province parity of salaries make no sense in the context of different rural/urban costs. We talk endlessly about improving education, yet we have created a structure so impersonal that even at the elementary level, the teacher may not really know the student. Regional high schools necessitate children to be bussed for up to three hours a day. All this has evolved basically because we have accepted the premise that there be no competition for health care and education.

I do not advocate eliminating medicare or public schooling. What I do propose is that we inject some elements of competition into the framework. This can be done in several innovative ways. In hospitals many services that come under the general administration of the hospital should be sub- contracted out to private business. Maintenance, food services, laundry, record keeping, etc. should all be subject to competitive tender. In schools, these same activities could be tendered and schools ought to be able to compete for students. I believe wholeheartedly in an education voucher system whereby the individual student has a voucher that he can spend for education at the school of his choice, public or private. What will happen of course is that many private schools will spring up and the public system will contract. So be it. The student will benefit in the end. Specialized schools will thrive and curriculums will be better. The huge public school boards are dinosaurs as is evidenced by the huge administration budgets that consume over 50% of total school board budgets in many cases.Too many adminstrators and not enough teachers. It certainly doesn't benefit the student. They will fight change until their last breath but parents know now that the system is not working and they want the best for their children. It is time to break up the public education monopoly.

Competiveness can also be fostered in many other areas of public activity such as provincial liquor commissions, prisons, the justice system, licence registrations, and municipal services to mention a few. All that is required is strong leadership to indicate that the taxpayers have had enough of supporting old inefficient overheads and it is time for massive public re-structuring in the same vein as the industrial re-structuring of the past five years.

It just takes leadership to say we will not do it that way anymore but we will do it this way. The incredible thing is that the public is so far ahead of the political leadership on much of this and the political leadership still doesn't see it and continues to founder in endless fruitless discussion and inaction.

The recent disclosures of the rampant fraud in workmen compensation funds in Ontario is the tip of the iceberg and a good example of regulatory bodies run wild. We have subjected employers to these regulatory bodies that force costs upon our wage structure that deem us non-competitive to start. The CSST (workmen compensation) in Quebec is runnning massive deficits not in the millions but billions. This represents an outright theft from private industry as individual employers have little control over the costs and settlements made. Many of these bodies should be abolished outright and replaced with obligatory private insurance. The rate of fraud would collapse.

I also question the governments' role in lotteries and gaming. It is almost as if have established a parallel legalized organization in competition with the mafia simply because we accept the argument that people will gamble anyway and it is better to have the government control it. Just because it is easy to raise revenues through taking a cut of gambling does not mean we should continue to expand government sanctioned gambling without end. We have created our own legalized bureacratic mafia that is intent on increasing its take from gambling every week. This is wrong and I do not think this was the original intent. I think we have a serious problem here in deciding where to draw the line in the seemingly endless expansion of the lottery czars, and I would like to see a new, open and full debate on the societal benefits of gaming. Also I think it is pointless to create one or two millionaires a week out of these schemes. One hundred winners of ten thousand dollars does a lot more for the economy than one million dollar winner. From a personal point of view, I would like to see all lotteries designed to fund charitable activities and a proliferation of local raffles to fund local charities as we used to have.

Industrial competitiveness can easily be fostered through a restructuring of regulations that act as barriers to entry in many fields of activity. We often hear lip service given to the fact we are over-regulated etc. We are, but little is done to change it in a meaningful way. Look at the interprovincial barriers to trade. A Declaration of National Economic Emergency should strike all these barriers down in the national interest. It is patently ridiculous to tear up sidewalks because the bricks were made out-of-province.

Moreover, competitiveness will be fostered through adoption of the types of investment tax credits I am proposing. They will be above board and open to all.

Chapter 12.

Canadian Travel Tax Credit

I have left this for last because not only is it simple to explain but I feel that the only way Canadians are going to build a national pride is through knowing their country and just how lucky they are to hold a Canadian Passport.

We all know that Canadians spend a great deal travelling to southern destinations and it is pretty hard to blame someone for wanting to get out from under winter weather for a couple of weeks. This is free choice and I'm not going to advocate we restrict anyone's ability to take money out of the country to spend while travelling. Neither can an argument be made against the benefits of travel by Canadians in Canada to the national economy and spirit. Dollars spent here are more likely to benefit the country than dollars spent in Florida.

What I am going to suggest that we establish an incentive to reward those Canadians who travel within Canada. I propose a Canadian travel tax credit. This would work as follows. If a Canadian citizen travels outside his province of residency, I propose that he be given a 20% tax credit for all expenses related to travel costs. This means airline, rail or bus tickets, hotel and lodging and food expenses would earn a tax credit. Receipts would be presentable with your tax return in the same manner as medical receipts. We want to encourage travel in Canada where it is often more expensive because of our tax structure than elsewhere and this is one way of encouraging Canadians to stay home and spend their money seeing their own country. Travel for business would still be a deductible business expense and as such would not be eligible for this credit. This is a credit that will benefit the average Canadian who may not have the opportunity to travel on business and has one vacation a year. For the family that spends $2,500 they would get a tax credit of $500.00. For someone in a marginal tax bracket of 35% this means it is worth about $770 in before tax income. It is not an insignificant amount but it will shift some travel to Canadian destinations and that can only be good for Canada. The multiplier effect of spending $2,500 has a lot more impact than giving up the $500 tax credit. It is a lot better than no multiplier on travel funds spent outside Canada. The travel deficit is enormous and published figures by Statscan are useless because of their sampling methods. Encourage Canadians to travel in Canada first!

As I have written above, I am by no means the exclusive oracle of public policy change. There are thousands of great ideas floating around the system that could and should be implemented. Most of us realize that compromise is often the result, and it may mean we have to accept less that we would want but still achieve some meaningful change. However, there are times in history when compromise cannot be made because in order to set out on a new course, the break from the past must be so great.

I think we have reached that point in Canada. We have a wonderful country-the best in the world. Our social problems, while we perceive them great, are miniscule compared to other large countries U.S. or China or India. We have allowed ourselves to become victims in our own minds and this has resulted in a type of economic and political paralysis that does none of us any good. We have become a nation that will not take risks and is afraid of change. This is truly sad in that the limits to our potential our are own doing. It threatens our very nation with break-up. Economically prosperous countries do not break up.

We can prevail. We can climb out of this financial mess and economic inertia. We can put our people back to work. It calls for big change and it means people are going to have to accept less in order to achieve more in the long run. The situation calls for a big heart on the part of a lot of people who have vested interests that are going to threatened by the changes necessary. Strong and, most importantly, ethical leadership can bring about change in a way that is acceptable to all. If only a few of my suggestions eventually make a difference, I will know that my many lobbying efforts have not been wasted. Our children will inherit Canada. Our obligation to change is to them. Let's get on with the job and stop talking about it.

Crystal Falls Economic Forum

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