Protection Barriers; The Canadian Experience

You cannot protect something by building a fence around it and thinking that this will help it survive.
~Wim Wenders

People advocate for trade barriers when they feel that:

1) Local industry needs protection from abroad

2) Industry from abroad is playing dirty tricks (i.e. dumping, protecting their own industry, sending lower quality products)

3) The industry is of strategic importance (i.e. banking, communications, farming)

What are the cost of proteccionism? Let’s analise the Canadian Experience. In 1878, Sir John A. MacDonald’s conservative government introduced the National Policy. The idea was to encourage investment and economic growth within Canada, as well as build an east-west flow of goods to tie the country economically. The policy had two simple components: high tariff on manufactured goods and open market for foreign investment.

The tariff were imposed to encourage the growth of central Canada’s manufacturing industries, hoping that they would reach a scale to compete internationally. Some machinery was exempt, like those needed by the natural-resource industries. The Canadian companies will sell more to other Canadians, increasing the east-west commerce and hence helping to build the very needed TransCanada Railway.

The open-investment policy was intended to attract foreign capital, since locals had not got enough resources. The first invertors were British lending money first to other British, then to Canadians. During the 1900s however, Americans replaced British as the main capital source, and this was not in the form of debt, but equity. The reason is clear in retrospect, the Americans couldn’t sell in Canada due to the tariff, but they were able to open Canadian subsidiaries, which, being Canadian, could benefit from the protection.

The consequences are still affecting us, 130 years after. The Canadian manufacturing sector became a branch plants with no incentive to compete internationally, since they will compete against their parent companies.

A second legacy of the National Policy was the concentration of the wealth on very few hands. the National Policy make Canada a very comfortable place to compete; once established, they were protected by the tariff, and the incentive to be productive was limited. For the Canadian Companies, the profits were huge and resulted in very concentrated industries for each sector: Beer is dominated by Molson and Labatt, retail was dominated first by Eaton’s and Simpsons, then by The Bay and Sears. We only have five banks. You can count one or two large companies concentrating the national production for each sector.

Foreign ownership is not a matter of national pride, but economic sense: The typical organization have a profit of 10% of the revenue, but the lion’s share of the expenses is that 90% used on research, salaries, production, marketing campaigns… and, being branch plants, all those process take place on the main headquarters, outside Canada, so Canada is not only losing the 10% of the revenue, but an important component both of economic and strategic value. While there are exceptions, like companies doing an entire process in their Canadian branch (Pratt and Whitney, ICI explosives), this rule applies to the oil producers, the automotive manufacturers and so on.

The three final consequences of the National Policy enacted in 1878 are, that in 2007:

1) Canada has a very concentrated industry, so the free market rules, where supply and demand set the price, are not valid here, because when one or two companies dominate the market, they are price setters, no price takers. That is why is cheaper driving to Buffalo and buying your stuff there, that going to Eaton Centre or Yorkville and being fleeced up.

2) Canada’s wealth is concentrated within a handful, where 100 individuals or families have got a collective net worth of $141.6 billion

3) Canadian companies are not producing the world’s leading technology. We haven’t got any Microsoft, Hewlett Packard, or Intel. I don’t really now how much Research in Motion is licensing technology or really creating new one, so I cannot comment in this one, but the general rule is new technology being developed somewhere else and then being copy or license here.

So, protectionism has resulted harmful in the long way for Canada. We will measure some other trade barriers soon.

Free / Fair Trade Barriers

NAFTA and GATT have about as much to do with free trade as the Patriot Act has to do with liberty.
Michael Badnarik

Another reason to promote fair trade: In a recent article by Peter Hakim written for Foreing Affairs, the author describes some of the barriers that the United States imposes on agricultural products:

“Most Latin American governments want to negotiate free-trade accords with the United States. Knowing the trade politics of Washington, they are even prepared to accept conditions they consider to be less than fully fair or balanced. Still, they resent Washington’s unwillingness to compromise on most issues, such as the trade-distorting support payments the U.S. government makes to U.S. farmers, harsh U.S. antidumping rules, and Washington’s demands for new standards of intellectual property protection. Sky-high tariffs and quota limitations on sugar, orange juice, cotton, and many other high-volume Latin American exports make the United States seem ungenerous and breed cynicism about Washington’s advocacy of free trade.”

I think I don’t need to add more, along the States considering promoting free trade as a one-way street.