A lesson from Canada: trade freely with your neighbours, but don’t go entering a customs union

A lesson from Canada: trade freely with your neighbours, but don’t go entering a customs union

Every relationship requires ground rules to work. Whether it is a marriage or a business partnership, a shared understanding of the ‘terms of reference’ are vital to its longevity and success. And yet, if one argued for full homogeneity – a partnership where a business colleague or a spouse completely acceded to every opinion or demand of the other, would we argue that such relationships are ‘perfect’?

Most people would say that in such situations, forcing one party to the other’s priorities creates a false sense of compatibility, and will eventually fold when it can no longer paper over the differences. Business partnerships dissolve and marriages end in divorce. Relations between nations – particularly in matters of trade – are no different. Indeed, the rise of populism and the phenomenon called ‘anti-globalisation’ are a consequence of this breakdown. But is it an indictment of globalisation, or just globalisation done badly?

For thirty years, free trade conditions have existed between Canada and the US. If there ever was a situation where a power imbalance could lead to the abuse of one party by another, this would certainly be it. One country has one tenth of the other’s population, and roughly one tenth of its GDP. The other is, arguably, the most powerful nation on earth by every measure.

The original Canada US Free Trade Agreement – and its NAFTA successor – did not harmonise currencies, courts or laws. There is no NAFTA flag, Parliament or anthem. There is no customs union, or equivalent of ‘Norway+’ or any kind of plus this-and-that. Any cursory reading of the history of these two nations would readily reveal that the United States places great importance in its ability to act independently of other nations, while Canada’s history is that of a nation where sensitivity to American power and influence is ever-present. Any sort of union – customs or otherwise – would be unacceptable to either side.

Despite this, the bilateral relationship is the most successful of any in the global economy. Not perfect, but better than virtually every other pairing. The two-way goods and services trade between the nations in 2017 totalled US$673.1 billion, with the US enjoying a surplus of US$8.4 billion – the equivalent of US$0.01 per dollar. In other words, it almost reaches the ideal for any trade deal – the ever elusive thing known as ‘reciprocity’.

Unlike the NAFTA experience, Britain has harmonised its economic laws and significant aspects of its governance with other EU members. It has, in a legal sense, “gone along to get along.” One would assume, therefore, that the relationship would be even more mutually beneficial than the North American case – after all, on so many measures, we are comparing ‘apples to apples’.

Yet, in the same year (2017), British two-way trade with the rest of the EU was US$800.8 billion, with a trade deficit of $87.25 billion – a loss of nearly US$0.11 on the dollar. When one subtracts the US$15.91 billion (£12.2 billion) surplus Britain enjoys with Ireland – arguably the most similar and compatible of EU member states absent legislative harmonisation – on US$77.72 billion (£55.8 billion) of bilateral trade, the deficit moves to US$103.16 billion on a total volume of US$728 billion – a loss of US$0.14 on the dollar, or a 21% worsening over the status quo.

Those losses have real consequences for the future of globalisation. They do not accrue to those in professions and industries – like finance and legal services – where incomes are earned on the total value of the transaction. They fall squarely upon those who earn their livings in sectors and activities where the deficits equate to substitution for foreign competition – like manufacturing.

Free trade, as a theoretical construct, considers this and argues that, at some juncture ceteris paribus, there is a levelling out and some form of equilibrium is reached. Canada, having agreed to only a free trade treaty with the world’s largest, most powerful economy, has achieved close to that balance. Britain – even after having outsourced so much of its legal, political and bureaucratic functions to Brussels for four decades – is nowhere close to that elusive goal.

The result of this flawed policy is a perfect storm. Forty years of sweeping trade problems under the rug has led to an electorate increasingly angered and motivated for change. Unfortunately, the only ones who can make a difference haven’t exercised that authority in Britain’s right for decades. The current debacle over implementing Brexit demonstrates that lack of vision and the courage.

Critics of Brexit are correct that it is not a magic bullet for Britain’s problems. It may very well be that it will not fix what is broken with UK-EU trade. What it will do is give Britain both the tools to address the economic dislocations it brings, and the freedom to pursue relationships where the benefits accrue both ways – something we Canadians have taken for granted for over thirty years.

The above was originally written for The Red Cell