PINDER: What's at risk, as Trump demands tariff talks

First in a series of three, in which Herb Pinder reviews the state of trade as the end of the year approaches.One of the important and controversial issues of the day, and likely much more so after the election of Donald Trump, is trade. In our current bifurcated and hostile world with its increasing economic nationalism, trade relationships are at risk. There are academic principles to this positive global dynamic, now facing challenges to the status quo ante. As well, the military requirements of facilitating the physical movements of goods are in question as America, evidenced by Trump's return to the White House, may be withdrawing from its strong role in protecting democracy and global trade.This article, the first in a three-part series, reviews trade principles, the amazing levels of global economic growth, current threats to the sophisticated and often complex structure of trade and questions about its future.The theoretical underpinning of the benefits of trade is very simple. Trade between countries is an extension of Adam Smith’s “invisible hand.” If consenting parties make decisions in their self-interest to exchange goods and services, such transactions benefit both parties as well as their communities by enhancing overall prosperity. But there are often many political crosscurrents that can work against the benefits of trade.No one has a problem with neighbours bartering a lawnmower for a snow blower; or acquiring an implement with cash. Such exchanges benefit both parties, and millions of transactions ultimately benefit millions of counterparties.But city councils are well known for choosing a local service provider over a neighbouring city, to enhance local employment, notwithstanding potentially higher costs. This does satisfy the short-term needs of political decision making. However, over time, as other cities reciprocate, namely also favouring local firms, costs increase for everyone and the overall growth in prosperity is impeded.This is even more prevalent at the provincial level where politics can demand support for provincial businesses. Among the many provincial trade impediments in Canada, one of the most blatant is the dairy industry, (which is unlikely to survive forthcoming negotiations.)This is an often underrecognized and significant issue. The Canadian Federation of Independent Business [CFIB] has estimated that inter-provincial trade barriers in Canada cost the economy approximately $14 billion annually.One of the most important concepts for understanding international trade is comparative advantage.This is described by ‘Investopedia’ as “a foundational principle in the theory of international trade.” Comparative advantage within one country versus another involves many factors, including specialization, natural resource endowment and governance stability. It also introduces opportunity costs — or the cost of missing out. This in turn requires trade-offs by individuals, businesses, and governments.The theory suggests that countries should follow their comparative advantage of producing goods and services which result in the lowest opportunity cost or, what they do best.An example — a lawyer who's also a better transcriber than her lower cost assistant, enjoys an absolute advantage for both. The higher opportunity costs of transcribing [more lost revenue] instead of legal work drives an easy trade-off. Thus, comparative advantage leads her to continue legal work and discontinue transcription.Although countries have been trading throughout much of modern history, in the last 70 years or so often led by the United States, there have been many formal international regional trade agreements — the General Agreement on Tariffs and Trade [GATT] in 1947 began the development of a multilateral trading order. Less than five years later another trade agreement respecting coal and steel between France and Germany was the first step towards many further comprehensive arrangements, and ultimately political integration as the European Union.Also extending the early initiatives of GATT, regional agreements have proliferated, including the North American Free Trade Agreement [NAFTA] linking Canada, the US, and Mexico. Renegotiated by the first Trump administration, it is now USMCA. Another important agreement for Canada is the Trans Pacific Partnership [TPP] which facilitates trade among Pacific nations, deliberately excluding China.Other regional trade agreements exist in Africa, the Caribbean, central South America, and elsewhere.Accompanying these trade agreements are many organizations that provide necessary architecture. These include the World Trade Organization (WTO,) World Bank, International Trade Organization (ITO,) International Monetary Fund (IMF) and others.International trade reached more than $30 trillion in 2023, before accounting for global trade finance of $10.52 trillion, commercial services of $6.8 trillion, and digital services of $3.82 trillion. For context, global gross domestic product (GDP) in 2022 exceeded $100 trillion. These trade dollar volumes are big and have grown by an inflation adjusted factor of 6 since 1995.Again, according to Investopedia, Canada is the 12th largest exporter in the world at $600 billion. China is the largest, the US 2nd, and Mexico 13th. Canada is the 14th largest importer totaling slightly less than $600 billion, leaving Canada with a small trade surplus.In Canada, exports account for 30 to 35% of our GDP. The main export sectors are directly or indirectly linked to the comparative advantage we have from our natural resource endowment, notably oil and gas and related petrochemical products, mining, and minerals.Canada’s prosperity is directly linked to our comparative advantages in global markets. This is crucial to understanding our standard of living and future prosperity for all Canadians. As outlined above the layering of issues from the simple proposition of exchanging implements leads to highly complex policy issues involving significant financial and strategic consequences.The second article in this series appears on Sunday, December 1.

PINDER: What's at risk, as Trump demands tariff talks

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