Why looming trade troubles are bad news for Canada

International trade is slowing. Protectionism is on the rise. For a trade-dependent country like Canada, that spells big trouble.
A Hanjin Shipping Co ship is seen stranded outside the Port of Long Beach, California, September 8, 2016. (Lucy Nicholson/Reuters)
A Hanjin Shipping Co ship is seen stranded outside the Port of Long Beach, California, September 8, 2016. (Lucy Nicholson/Reuters)
A Hanjin Shipping Co ship is seen stranded outside the Port of Long Beach, California, September 8, 2016. (Lucy Nicholson/Reuters)

Kathryn Murray has a front-row seat to the world of international commerce. The manager of Vancouver’s Mission to Seafarers, a charity that supports homesick mariners, tracks all the massive container ships—carrying everything from dishwashers to diapers—that call on bustling ports in B.C.’s Lower Mainland. But lately, she says, the industry looks vulnerable. “They’ve got these really big ships, but they don’t fully load,” says Murray. “They’re capable of holding 2,000 containers, but they’re showing up with only 800 containers on them. A lot of companies just can’t exist on that.”

South Korea’s Hanjin Shipping is the most recent casualty. The company filed for protection from creditors in early September, leaving some 45 of its ships and an estimated $14 billion worth of cargo stranded at sea—including two off the B.C. coast. One of the ships, the Hanjin Scarlet, was finally allowed to come into port in Vancouver on Oct. 27. The 255-m ship’s 24 crew only had 10 days’ worth of stored food left, the fresh fruits and vegetables long gone.

The shipping industry’s woes point to a much larger global economic problem: declining international trade. Since 2012, the global trade in goods and services has grown at less than half the rate of the previous 30 years. While much of the downturn can be explained by the lingering effects of the 2009 recession, some economists fear there may also be more insidious factors at play—namely a growing public backlash against globalization. Two high-profile examples: the United Kingdom’s surprise June vote to withdraw from the European Union and the intensely anti-trade rhetoric routinely being spewed by Donald Trump and Hillary Clinton during their U.S. presidential campaigns.

Even Canada, a self-described “trading nation,” recently got bitten by rising anti-trade sentiment. Ottawa’s seven-year effort to negotiate a free-trade deal with the European Union was nearly scuttled by the tiny, economically depressed Belgian region of Wallonia, which last month initially refused to sign off on the Comprehensive Economic and Trade Agreement, or CETA. There are also growing fears the 12-nation Trans-Pacific Partnership (TPP) trade deal, of which Canada is a signatory, may be dead in the water. That’s a potentially big problem for Ottawa, which was counting on more exports to pull the country out of an oil-induced slump. “More of our export shortfall may be structural than previously believed, rather than cyclical,” warned Bank of Canada governor Stephen Poloz in a recent speech.

Bank of Canada Governor Stephen Poloz smiles during a news conference in Ottawa in 2013. REUTERS/Chris Wattie
Bank of Canada Governor Stephen Poloz. (REUTERS/Chris Wattie)

Why is this happening? While economic theory says a rising tide of international trade eventually lifts all boats, it also brings disruptive change that can leave some feeling as if they’re been left to drown. In the U.S., for example, an estimated five million U.S. factory jobs disappeared over the past 15 years, with many of them moving to China and Mexico. In exchange, U.S. consumers enjoyed heaping shelves of cheap, foreign-made goods at their local Wal-Mart store—a gain, to be sure, but one that likely comes as small consolation if you’ve been handed a pink slip. If all that weren’t enough, today’s trade deals are more complicated—and controversial—than ever, reaching far behind borders to deal with issues of regulatory and legal harmonization. There’s also growing disagreement about how much more benefit they will actually yield.

Yet, despite the challenges, turning our back on global trade seems a recipe for ruin. Consumers are rarely willing to pay more than necessary, and isolationism, even if it were economically desirable, is unrealistic in an era when a growing number of firms like Netflix and Amazon offer products and services via the borderless Internet. “There’s a whole frontier of 21st-century trade issues that are going to have to be discussed, debated and negotiated,” says Lee Branstetter, an economics professor at Pittsburgh’s Carnegie Mellon University. “Otherwise we could face first-order losses relative to a world where we continue to move forward.”

Global trade in goods and services grew at an average annual rate of about nine per cent between 2003 and 2007, according to a recent IMF study. But it fell to just three per cent between 2012 and 2015 for goods, and just five per cent for services. Even more alarming, the slump has been remarkably widespread, with 143 of 171 countries recording trade declines over the same period. Relative to gross domestic product (GDP), the downturn is even more stark: world trade grew on average twice as fast as GDP between 1985 and 2007, according to the IMF, but in the past four years it’s barely kept pace. “Such prolonged sluggish growth in trade volumes relative to global economic activity has few historical precedents during the past five decades,” the report said.

Related: Why free trade is a losing issue for Hillary Clinton

Economists aren’t entirely sure what’s going on. As much as three-quarters of the downturn can probably be explained by weak domestic economies in countries around the globe, from Canada to China. The rest may be due to companies hitting a natural plateau as they fan out their manufacturing footprints across the globe. It’s also possible, according to the IMF, that the slump is being exacerbated by “the waning pace of trade liberalization over the past few years and the recent uptick in protectionist measures.”

It’s certainly easy to see why someone might come to that conclusion. In June, 52 per cent of the British electorate turned back the clock on nearly a quarter-century of European integration by voting to leave the EU, the world’s largest free-trade zone, catching just about everyone off guard. The government collapsed, the pound fell to a 30-year low and snarky economists warned the British may have become the first to vote in favour of a recession. The lesson? “You’ve now got massive globalization critics throughout the world, which you have to take seriously,” says Harald Bathelt, a professor of geography and planning at the University of Toronto.

Closer to home, Republican presidential nominee Donald Trump continues to wage a campaign against the liberalized trade policy that’s been a hallmark of American foreign policy for half a century. He’s promised to build a towering physical wall along the U.S.-Mexican border, tear up the North American Free Trade Agreement and levy huge tariffs on Chinese and Mexican imports (even though Trump’s clothing lines are made in China and much of his real estate business’s steel is sourced there as well). Not to be outdone, Democratic nominee Hillary Clinton has refused to support the TPP, prompting former prime minister Brian Mulroney to recently suggest the trade deal between the U.S., Canada, Australia, Japan and eight others “is not going to fly.” Clinton barely even defends the NAFTA deal that her husband, former president Bill Clinton, signed in 1993.

Branstetter says the anti-trade rhetoric can be explained by the electoral map, with workers in Rust Belt swing states like Michigan, Ohio and Pennsylvania feeling duped by politicians who said global trade would make them richer. “Voters were promised a quick trip to the promised land, but several decades later find themselves in an economic wilderness,” he says. “If I remember my Bible correctly, what followed was a period of flirtation with idolatry—and here comes Donald Trump with his golden calf.”

Canada, for the most part, has so far managed to avoid falling into a similar anti-trade trap—possibly because our more generous welfare system helped blunt the impact of the 500,000 manufacturing jobs that were lost between 2000 and 2009. But that doesn’t mean we’re unaffected by the backlash. By conventional measures, more than a third of the Canadian economy is dependent on trade—mostly with the U.S. and China. That means if we want to get the economy growing again—the IMF is predicting barely-there GDP growth of 1.2 per cent this year—Canadian firms will need to sell more goods and services overseas. No wonder, then, that Canada pushed so hard to get CETA signed last month, with Trade Minister Chrystia Freeland nearly coming to tears when it appeared negotiations were at an impasse.

But CETA still has a long way to go before coming into force. It must be ratified by all 28 of the EU’s member states and scores of regional governments, including Wallonia. And many Europeans remain wary of the pact’s complex Investor State Dispute Settlement system, which could allow multinational corporations to override governments whose policies impact their profitability. “It’s not really about Canada,” says Bathelt. “It’s about a deal that’s been decided behind closed doors, and that people don’t understand.”

President of the European Commission, Jean-Claude Juncker (R), Canadian Prime Minister Justin Trudeau (C) and EU Council President Donald Tusk (L) during a press conference at the end of an EU-Canada summit where they signed the agreement on the Comprehensive Economic and Trade Agreement (CETA), a planned EU-Canada free trade agreement, in Brussels, Belgium, 30 October 2016. (Stephanie Lecocq/CP)
President of the European Commission, Jean-Claude Juncker (R), Canadian Prime Minister Justin Trudeau (C) and EU Council President Donald Tusk (L) signed the agreement on the Comprehensive Economic and Trade Agreement (CETA), a planned EU-Canada free trade agreement, in Brussels, Belgium on Oct., 30 2016. (Stephanie Lecocq/CP)

Not everyone is wringing their hands over the uphill battle Canadian trade negotiators are facing on the other side of the Atlantic. Michael Hart, a professor emeritus at Ottawa’s Carleton University and a former official at Global Affairs Canada, says the nearly 1,600-page CETA agreement has more to do with satisfying Europe’s Byzantine internal rules than opening up brand-new markets for Canadian companies, which already export about $35 billion worth of goods and services to the EU. Even if CETA is signed and ratified, the Conference Board of Canada estimates that only an additional $1.4 billion would be added to Canada’s merchandise exports by 2022—mainly via gains in the chemical, rubber, plastics, agriculture and automotive sectors. “There comes a time,” says Hart, “when you have to do the political and economic arithmetic and ask: how much bending do we need to do for an agreement that, in my opinion, will yield fairly marginal results?”

Indeed, the trade deals of the 1980s and 1990s were largely focused on reducing tariffs and thus captured much of the low-hanging fruit available to Canadian firms. Today’s deals, by contrast, tend to be focused on removing non-tariff barriers—from domestic labelling requirements to government procurement programs—all while taking steps to provide investors with a way to side-step local courts in the event a dispute arises. In short, they often require governments to rewrite laws and alter programs, which guarantees opposition from entrenched interests. “We’re now dealing with the fruit that’s at the very top of the tree,” Hart says.

Hart also warns that dwindling global trade numbers should be taken with a grain of salt due to growing problems with the way they’re measured. Take the iPhone, for example. It’s officially listed as an import from China, where its final assembly takes place. But studies have shown only about US$10 of the device’s US$275 cost is related to Chinese labour since the components are sourced from throughout Asia, and the design and marketing work—which account for the bulk of phone’s price—is handled by Apple in California. The same is broadly true of many other products. The Conference Board tried to account for the phenomenon a few years ago by measuring only how much value is added to a product as it passes through a country. The results were surprising. Under the new calculations, the share of Canada’s trade-related GDP fell to just 24 per cent from 35 per cent, suggesting Canada’s dependence on trade may actually be below the world’s average, not above. The 2011 report suggested the finding may explain why Canada was less impacted by the 2009 recession than other countries: we are far less exposed to the global economy than we think we are. It may also explain why today’s cheap loonie has failed to give the economy much of an export boost.

Another factor that’s weighing down global trade numbers, both in Canada and abroad, is the rising importance of services, which are also poorly measured. Branstetter, the Carnegie Mellon professor, uses the example of a Canadian couple who flies from Toronto to Bangkok, booking beach rentals through Airbnb and taxi rides on Uber. “They’re basically interacting with a global network of computers and servers, and many of the companies providing these services are headquartered in the U.S,” he says. “But very little of this counts as international trade in services.” It also means those U.S. corporations pay almost no taxes for delivering those products.

Of course, just because trade may be happening without being properly tracked doesn’t negate the need for future agreements. If anything, it makes them even more important so that the full value of these new web-enabled services can be realized. But it won’t be easy. “This will require international coordinating efforts because a democracy in one part of the world may value customer data differently than another,” says Branstetter. It will likely also require countries to figure out how to properly assess taxes on the likes of Google, Facebook and others.

Moreover, policy-makers must be mindful of what’s known as the bicycle theory of trade liberalization: if you stop pedalling, you fall over. Put another way, failing to push for future trade deals not only carries an opportunity cost, but threatens to unwind gains made through earlier agreements. It takes far more effort to dismantle protectionist walls than it does to build them up. Yet the trade monitoring group Global Trade Alert warns the number of protectionist measures implemented by countries this year has climbed to the highest level since 2009.

The trend, if allowed to continue unchecked, threatens to raise prices for just about everything—from sweatpants to car tires. Unless, of course, you happen to be in the market for a few dozen (slightly used) ocean-bound container ships.