Bank of Canada Governor Stephen Poloz: “Protectionism does not promote growth and its costs are steep”

Bank of Canada Governor Stephen Poloz: “Protectionism does not promote growth and its costs are steep”

 

May 7, 2017

It’s hard to say whether or not Canada is on the verge of a trade war with the United States. The Trump administration has imposed ruinous tariffs on Canadian soft wood lumber. In retaliation, on Friday May 5, 2017 Prime Minister Trudeau sent a letter to the government of British Columbia saying that it is considering banning American coal exports from the province, and applying tariffs to products originating in Oregon.

Now that it has attacked the Canadian dairy and softwood industries, the Trump administration is also considering aluminum. If Trump does decide to take trade action against aluminium imports, Rio Tinto is going to take a hit because it exports 75% of the aluminium it produces to the States.

As small-minded xenophobia continues to drive economic and political policies in countries around the world, there is much to be feared. Economic protectionism has reared its ugly head with the presidency of Donald Trump. Irony abounds in these troubled times for those who bother to seek it out. During the recent past, American investment in Mexico has bolstered the Mexican economy to such an extent, that it reduced the number of undocumented Mexican workers smuggling themselves into America hoping for work. Now that the Mexican economy is starting to slow down, those numbers will start increasing again.

Trying to evaluate what this may mean for Canada is a moot point. If Trump decides to attack the Canadian car industry, Canada would suffer dire consequences. The car industry is a massive employer in Canada, and employs directly and indirectly one in seven Canadians. The Canadian Vehicle Manufacturers Association estimates that approximately 85% of the vehicles built in Canada are destined for the export market, with the majority – if not all – of those headed to America.

In Canada, Prime Minister Trudeau, has done his best as an advocate for world trade. On March 28, 2017, Bank of Canada governor Stephen Poloz gave a speech in his home town of Oshawa that furthered the argument. In his speech Poloz took six eras from Canadian history to prove his point that when Canada has open borders, the country flourishes and when it erects trade barriers in the form of tariffs, the country suffers. Backing up the points he makes is the observation that Canada needs immigration, open markets and foreign capital to thrive because the country is too large and the population too small to do it by itself.

This broad brush approach should come as no surprise to those who remember their history. Canada was founded on the fur trade. Poloz makes the case that when economies falter and protectionism – in the form of tariffs – increases, national economies stagnate and retreat.

Photo credit: Bank of Canada

Photo credit: Bank of Canada

Poloz’s two most salient points in his plea for the benefits of open trade may well be the miniature studies of the Great Depression and the 1965 Auto Pact. On the Depression Poloz says, “Meanwhile, in a bid to protect American workers and farmers from foreign competition, the US Congress pushed up the average tariff rate on dutiable goods to nearly 60 per cent by 1932. This policy backfired spectacularly. Most other countries, including Canada, retaliated with tariffs of their own. The trade war had no winners; everyone suffered as international shipments collapsed. Canadian trade fell by more than 50 per cent during the Depression; US trade, by 70 per cent.”

In contrast to the failed policies which deepened the Depression Poloz describes the 1965 Auto Pact like this: “The 1965 Auto Pact created a single, tightly linked market for automobiles and parts between the two countries. This gave Canadian producers both the opportunity to develop economies of scale and the ability to specialize production. Over the agreement’s first 40 years, auto production in Canada roughly tripled, while employment in the industry doubled.”

While much of the impetus for Brexit is based on the fear of an erosion of national sovereignty, it should also be noted that Poloz states that in relation to the 1988 NAFTA agreement: “Many Canadians resisted continental free trade, fearing job losses, the possible loss of our health care system, and a general loss of Canadian economic or even political sovereignty. None of these concerns have come to pass, although heightened competition did result in job losses in some sectors. But these losses were more than offset by gains in other areas, and consumers have continued to benefit from lower prices and increased purchasing power as most tariffs were eliminated.”

While the prospect of a punitive trade war looms, Trump is pushing forward with a trade deal between the United States and Japan. Is Trump playing tough to soften countries up for trade negotiations? At this point no one can really say. To read Poloz’s entire speech, click here.

By Noel Meyer

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