What's So Bad About Free Trade?

by Steve Vanagas

"Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular."
-Thomas Macaulay, 1824

What is it about free trade that makes the public so suspicious? Is it the fact that we suspect ulterior motives behind any policy supported by both big business and Brian Mulroney? When the public, already cynical about anything proposed by government, is bombarded with "facts" about manufacturing plants shut down by free trade, who can blame them for concluding that the government is screwing us again?

But is there any reason for Canadians to fear free trade?

Is there anything to the claim of the Canadian Labour Congress that half a million jobs have been lost in Canada because of the 1988 Canada-U.S. Free Trade Agreement (FTA)?

First, we have to challenge some of the assumptions of this debate.

The 1988 FTA was a result of the lobbying of big businesses in Canada, meshing with the agenda of the free enterprise Mulroney government. But free trade is an idea that has been espoused by free market economists in many different countries and cultures for centuries and free market economists continue to press for complete freedom of trade throughout the world.. It is not the concoction of big business or Brian Mulroney. And, in fact, it will survive the support of big business and Brian Mulroney.

At the same time, opponents to free trade carry on their battle to stop not just international trade but all competition. This sort of opposition is as old as the idea of free trade itself. The history of economic exchange is a history of producers trying to stifle competition through moral, legal and political barriers to trade. But as these barriers have declined through history, so society has grown more prosperous (for an excellent account and source, see How the West Grew Rich, by Nathan Rosenberg and L.E.Birdzell, Jr., Basic Books, 1986).

Today's opponents to free trade are old-fashioned economic isolationists wrapping themselves in maple leaves. The Canadian Labour Congress (CLC) is struggling to preserve its declining mem-

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Laissez-faire takes hold at U of A Law School

by John O'Reilly, University of Alberta Law

While many students attending Canadian universities have become accustomed and perhaps even reconciled to the domination of left-wing dogmatism in academia, a group of students at the University of Alberta have decided no longer to sanction this imbalance with their silence.

In the fall of 1991, a handful of law students formed the Laissez-Faire Legal Club. Tired of what one of them describes as "the steady diet of unremitting political orthodoxy masquerading as scholarship," these students seek to promote the ideals of classical liberalism.

While members come from various points of the political spectrum, most of them share several core beliefs: in the efficacy of free market economics, in individual freedom and responsibility, in minimal government, and in private property rights. Still, the club encourages discussion. As president Shawn Beaver states, "Our objective is not to censor those who disagree with us, but to engage them in constructive debate."

The club's most important role is in putting forth ideas which are otherwise ignored. As one member observes, "We want professors to know that their left-wing dogma will be challenged, in the classroom and elsewhere."

The reaction to the club has surpassed even the most optimistic expectations. The most recent general meeting was attended by 60 people, a turn-out which represents more than 10 percent of the law school population. Vice-president Tom Ross accounts for this success by asserting that the club provides an outlet that has long been needed. "The club represents the awakening of a silent majority which is tired of being demeaned."

Interest in the club has gone beyond the confines of the law school, with press coverage throughout Western Canada, as well as encouragement from some prominent Canadians, including former Saskatchewan premier Grant Devine.

But the club does have its detractors. As we know, the radicals of the 1960s are now many of the tenured professors in universities throughout North America. These perennially indignant individuals have revelled in their self-appointed role as philosopher-kings (and queens) whose leftist orthodoxy is not challenged. We were not surprised when the Laissez-Faire Legal Club became the subject of professors' derision, both inside and outside class.

The club has also been attacked in the law school newspaper, and its bulletin board has repeatedly been defaced. But far from being deterred, the members plan to turn up the heat still further.

One member promises that the club will "make the left stand back and take a critical look at their favourite sacred cows, and hopefully slaughter a few in the process."

Why Encourage Small Business?

by Filip Palda, Senior Economist, The Fraser Institute

Government programs to help small business are not a proven means of encouraging economic development. This did not stop President Bush from declaring in his campaign that he wanted to give small businesses special tax breaks. There is also a strong movement in Canada to give government money to small businesses, especially those in high risk ventures. For example, the recent federal round of fact-finding known as the Prosperity Initiative makes it clear that Canada's future depends on encouraging the growth of small enterprises. Few have questioned this belief and public policy research on the topic is meagre. Right now, all levels of government spend millions of dollars on small business development. Several questions need to be asked before adding new programs to the existing list.

The first question that must be applied to any government subsidy is whether it does what it claims. Is a subsidy an essential ingredient for success or does it simply go into the entrepreneur's pocket? This same problem applies to R&D grants. In a survey of several hundred U.S., Canadian, and Swedish companies, Mansfield and Switzer [1985] found that for each dollar of R&D tax credit firms increased their R&D by only 30 to 40 cents, and pocketed the rest. The principle is the same for small enterprises. The Small Business Loans Act offers firms with sales of less than $2 million a year important help such as loans, loan guarantees, forgivable loans, and so on. In addition small businesses get special tax treatment and subsidies. Instead of stimulating the desired actions these handouts may simply have been pocketed by private firms.

Those who support aid to small businesses in spite of these potential problems must make the case that the market has failed. Perhaps creditors are

"too timid" to offer small businesses the startup money they need. Or maybe large enterprises deter new entrants by setting their prices artificially low. Neither of these justifications for subsidies have overwhelming academic support [Grossman 1990] but this has not diminished the flow of new plans and proposals for helping small firms. The old fashioned notion that success in business is based on sound management and efficient production seems to have little place in the current policy debate. This reflects perhaps the popular trend of thought that success depends more on strategic behaviour than it does on efficiency.

It may be that government will one day devise a program that helps small businesses grow in number and survive. But it is not clear why doing this is a good idea. Why encourage a business only because it is small? Economic progress rests on enterprises which absorb raw inputs and turn out a product with added value. The size of the firm should have no bearing on how it is judged. In practice the goal of many firms is to grow in order to spread their set-up costs over long production runs. A subsidy to small business may encourage the existence of many small, high-cost enterprises over a few low cost ones.

Enthusiasts of government subsidies might argue that we need many small enterprises in which young entrepreneurs can mature and subject themselves to the judgement of the market. The larger the pool of entrepreneurs the better the chance that a few will go on to form large, low-cost enterprises. This reasoning may appeal to our Darwinian notion that natural selection works best when the pool of competitors is large. Unfortunately, government subsidies are likely to entice only the weakest of entrepreneurs into the pool, lowering its average quality. The best way to encourage entrepreneurs is to do away with restrictive regulations and barriers to trade.

References and Further Reading:

Grossman, Gene M. [1990], "Promoting New Industrial Activities: A Survey of Recent Arguments and Evidence," OECD Economic Studies, 14:88-125.

Mansfield, Edwin and L. Switzer, "The Effect of R&D Tax Credits and Allowances in Canada," Research Policy, 14:97-107.

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bership base while nationalists such as Mel Hurtig and Maude Barlow, who make emotional appeals to "save Canada," are actually ideologues out to save big government and their dream of a socialist Canada.

With that said, let's take a look at the 1988 Free Trade Agreement. Defenders of the 1988 FTA between Canada and the U.S. have been notably silent as Canadians are bombarded with anecdotal evidence furnished by the Canadian Labour Congress that the FTA has caused the dismantling of the manufacturing base of the country leading to the loss of 461,000 jobs since 1989.

______________________________________________________________________
"No nation was ever ruined by trade."
______________________________________________________________________

-Benjamin Franklin

But economists say that attempts to associate the unemployment numbers with the 1988 FTA ignore a global recession (try blaming that on Canada-U.S. free trade!), a recession in Canada, high interest rates, high taxes, and the continued over regulation of the economy particularly by the CLC's allies in the Ontario government.

Moreover, our exports to the U.S. are one of the few bright spots in the economy. A recent study by Daniel Schwanen of the C.D. Howe Institute ("Were the Optimists Wrong about Free Trade?" C.D. Howe Institute Commentary, No. 37, October 1992) reports that data on foreign trade does not support claims that the FTA has led to job losses. Rather, "Canada's exports to the United States over the FTA's first three full years of operation performed the strongest in those sectors that were liberalized by the agreement...."

On the other hand, "Canada's exports to other countries and in sectors not opened by the FTA languished." Economist Schwanen concludes that "free trade with the United States has helped the development of the higher-value-added industries that are crucial to Canada's future economic growth." (A summary of the Schwanen report is in "Howe study finds free-trade winners," in the Globe and Mail, Oct. 20, 1992, p. B1).

The least credible argument against the FTA is the claim that it has allowed the government to pursue its "corporate agenda" to reduce the power of government over the economy (according to Maude Barlow's Parcel of Rogues and Mel Hurtig's The Betrayal of Canada).

This "corporate agenda" consists of reducing the size and scope of government through ending universality of social programs, cutting unemployment insurance, privatization, and contracting out.

This is a cute characterisation of how the Canadian government is reacting to a complex change in the world's economy towards global competition. Our government is scrambling to keep businesses competitive. The FTA is a part of that strategy.

If anything, however, the federal government is moving much too slowly on deregulation and control of the debt. As a result of the ensuing high interest rates, over-taxation, and bureaucratic straitjacket, Canadian businesses are finding it difficult to survive in the world market.

But authors like Barlow and Hurtig hold a benevolent view of government: politicians should be free to intervene in the economy as they see fit. Experience tells us that government must be restrained; to give it power without restraints is, to paraphrase P. J. O'Rourke, like giving teenagers the car keys and a bottle of whiskey.

The 1988 FTA is hardly the ruin of Canada. Nor is it the salvation. But free trade-no exemptions, no barriers, absolute freedom to trade-can give a solid boost to this economy by producing higher incomes, more jobs, more competition and more innovation. It may well save us from ruin.

This past summer saw a remarkable event: a book published by the Fraser Institute was condemned as "insane."

The book that caused such a stir was Poverty in Canada, by Nipissing University economics professor Christopher Sarlo. A Christopher Sarlo lecture on the topic is also available in the August 1992 edition of Fraser Forum and his reply to the critics was published in the August 31, 1992, edition of the Toronto Star. Poverty in Canada is available from the Fraser Institute for $19.95 + GST. Students will receive a 40% discount on all Institute books if they mention Canadian Student Review.Note The outrage came from that community of people known as "social activists." They were upset by Professor Sarlo's challenge to the government's definition of poverty.

Sarlo argues that since the official poverty line actually measures inequality instead of need, actual poverty in this country is much lower than some groups would have us believe. To recognize the absurdity of the poverty line used today, consider that the incomes of everyone could be doubled tomorrow with no increase in prices and there would still be no decline in the poverty rate. It is, then, impossible to eradicate poverty unless we equalise all incomes in society.

However, social activists reacted as if this was a playschool argument: you're wrong and if you try to change my mind I'll plug my ears so I don't have to listen. Lalalalalalalalalala....

I suggest we apply a sincerity test to the poverty industry: if you're truly interested in relieving poverty, forget about this idea of "inequality." Real poverty, real deprivation, needs to be addressed with ingenuity and compassion. It doesn't need to be lost in the battle to makeover Canada into a 1960s-era Sweden.

But when the question is about who is poor in this country and who deserves the assistance of government's massive social programs, we have to demand higher standards of debate. This is not a trivial question that can be brushed off.

Most economic numbers produced by the government are, to the public, trivia. But the poverty line has been turned into a bellwether. It's news. When the poverty rate goes up, the media turns it into a lead story. The government is forced to defend its policies under the withering attack of the opposition. The poverty industry kicks into action with demands for more spending, more social workers, and left-wing redistribution schemes and "job creation" projects.

Then, suddenly, Professor Sarlo came out of nowhere to challenge the social activists' definition of poverty. And now they complain that we shouldn't be discussing such a question!

A "very dangerous" book

When the critics did address the contents of the book, the analyses were, at best, superficial.

Michael Goldberg, research director of the Social Planning and Research Council of B.C., was one who responded disingenuously, calling the book "very dangerous." Why? "[B]ecause it gives solace to governments who try and keep the poor on subsistence levels."

A spokesman for New Brunswick food banks was blunter. He called the book "insane."

David Northcott of Winnipeg Harvest replied, "I don't think this can be looked at too seriously."

Patrick Johnston, executive director of the Canadian Council on Social Development, a group which pioneered the current definition of poverty, said, "[Sarlo's definition of poverty] is essentially destitution, and that would lead Canada to becoming a Third World country."

That Professor Sarlo used the nutritional standards of the Canada Food Guide, hardly a standard that suggests "destitution," didn't mean much to Mr. Johnston.

But the professor's real mistake was that he had the nerve to delete from his calculation of poverty such "social necessities" as a colour TV, a VCR, alcohol, tobacco, and a one-week vacation.

The hidden agenda

It's easier to fathom the reaction when we look at the implications of the book. If Professor Sarlo is right, our market system is in fact reducing poverty very successfully. This means there is no need for more social programs, no need for more social workers, no need to redistribute income on the scale demanded by social "activists."

Ken Battle, formerly of the National Council on Welfare and a "long-time expert on poverty" (according to the Globe and Mail), had a typical reaction. "I find it absolutely infuriating," he chides. "The issue isn't the goddamned poverty line. The issue is what to do about people who don't have enough income. People should focus on solutions to poverty."

Well, good news, Mr. Battle. Professor Sarlo's next project will be a book on reforming the welfare system in Canada. Plug your ears now.

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Last Modified: Wednesday, October 20, 1999.