(PREMIER OF ALBERTA)

Trade in the Trump Era

In volatile times, Alberta looks to Asia

By Trevor Tombe

Canada’s prosperity depends on trade; Alberta’s even more so. The province exported over $100-billion worth of products last year, generating roughly one of every three dollars earned by Alberta workers and businesses. That’s a share higher than Ontario (roughly one in four), Quebec (one in five) or British Columbia (one in six).

As you might expect, Alberta’s massive energy exports are a big part of the story. At $70-billion last year, the province exports more oil and gas than the total exports of all products from seven other provinces. Our exports are so large that, though our population is barely more than 1 per cent of the combined Canada–US total, Alberta accounts for 60 per cent of the energy trade (including oil, gas, electricity and coal) between the two countries.

But this reveals our key trade challenge: a lack of market diversification. The risks of sending 99 per cent of our energy exports to a single market are obvious. Political and regulatory decisions south of the border can have substantial economic implications for Alberta—both negative (when president Obama rejected Keystone XL) and positive (when Trump reversed that decision). Lately, it’s been mostly negative.

The current White House occupant has introduced many new and potentially existential risks to our economy. “Trade wars are good and easy to win,” Trump tweeted earlier this year. The rising instability and protectionist sentiment he creates, and a NAFTA deal that’s on shaky ground, mean we must hedge our bets and look elsewhere. Luckily there are many opportunities and much our federal and provincial governments can do.

Alberta’s government wants to diversify the economy. “Finding new opportunities, encouraging investment and getting our products to new markets” is its stated goal, and expanding trade is an important part of the strategy. For good reason.

The Asia-Pacific region accounts for two-thirds of Alberta’s non-US exports. That was over $8.3-billion last year. Two-thirds of this is from products that Alberta excels at making, including canola oil and seeds ($2-billion), cereals ($980-million), wood pulp ($840-million), meat ($750-million), and ethylene glycol ($800-million). This petrochemical product alone accounts for 20 per cent of Alberta’s exports to China and is used to make polyester and antifreeze as well as being a key component of air conditioning systems.

Albertans also benefit by importing from Asia-Pacific countries. We buy $4.7-billion worth of goods and services from them, and with business inputs such as machinery, equipment, casings and tubes topping the list, easing access to imports from Asia lowers production costs here. Our competitive position and living standards both benefit.

And the opportunities to deepen these trade relationships will only grow. Asia’s economies are among the world’s fastest growing. China, Japan, India, Korea and Indonesia alone will account for over 40 per cent of global GDP by the end of the next decade, according to OECD projections. By 2050 these Asian giants may account for half. Not to mention the thriving economies of Vietnam, the Philippines and so on.

The question for Albertans is how we can capitalize on these opportunities.

Government-led junkets abroad are increasingly common, especially to Asia. In spring 2018, Alberta’s Economic Development and Trade Minister, Deron Bilous, travelled to China with nearly three dozen oil and gas companies in tow. This marked the fifth such trip for the Alberta government since late 2016, and followed on the heels of Bilous’s trip to Silicon Valley, which some 80 Alberta companies joined.

This “Team Alberta” approach, as the minister puts it, aims to increase trade and investment links between markets abroad and businesses back home.

Such trips are nothing new, nor unique to Alberta. Nationally, so-called “Team Canada Missions” began in 1994 under Prime Minister Jean Chrétien and continued for years. The 2001 Team Canada mission included over 600 companies, the prime minister and various federal ministers, and all but two provincial or territorial leaders, including Alberta’s own Ralph Klein. The then-premier not only participated in many Team Canada missions, but went to China multiple times on Alberta-led trips, and his various ministers and staff travelled on many more.

Personal trips are a staple of international trade, and participants swear by their effectiveness. Following Rachel Notley’s 2016 trade mission to Japan and China that included 86 businesses, Paul Whittaker, president and CEO of the Alberta Forest Products Association, said the mission “opened doors and will help our future efforts in these critically important markets.” The president of Canadian Rocky Mountain Beef, Ted Haney, said “meeting existing clients and new prospects during the mission adds credibility to our company and industry. Particularly in China, aligning with our government representatives is valuable.”

The instability and protectionist sentiment Trump creates—and a NAFTA deal on shaky ground—mean we must hedge our bets.

Between April and November 2017, nearly 400 companies participated in similar Alberta missions abroad, reporting over $500-million worth of trade and investment transactions.

It may be tempting to conclude that trade missions caused this activity—and our government regularly touts such figures as evidence of success. But these numbers are difficult to verify, and it’s tough to measure the true effect. Perhaps commitments made don’t materialize later. Perhaps they would have been made anyway, and the trip itself caused nothing. Indeed, research by UBC economists Keith Head and John Ries suggests these missions have no detectable effect on Canada’s trade flows, as neither total exports nor imports change following political visits. At least, as far as they could measure.

A cynic may say the junkets play only to the domestic audience. News coverage of trips demonstrates the government’s economic bona fides. In tough economic times this may be particularly important.

But some benefits are intangible and not immediate. Improving cultural awareness and exchanging knowledge and information—even just showing off one’s merchandise—can be invaluable. Other important outcomes include foreign investment, multinational production, brand-building and potentially smoothing regulatory barriers and minor irritants that might not otherwise rise to the level of a minister or premier. The trips can illuminate what regulations exist, facilitate negotiations and informal discussions for broader trade deals, and bring potential buyers and sellers together.

Also, personal networks matter. Industry already knows this. Conferences, trade shows and other similar events abound, even without government support. Importers search for export suppliers and, once found, tend to remain committed.

Recent research by US economists Ryan Monarch and Tim Schmidt-Eisenlohr found that 80 per cent of international trade is between importers and exporters with pre-existing relationships. They showed that almost half of US imports are within relationships that are at least three years old. As trade relationships age, the volume of trade and strength of the partnership grows.

This effect is especially strong in Asia. The same researchers found relationships between individual importers and exporters are twice as important for trade with Japan than with Spain, for example. So when politicians and businesspeople trek to Asia to promote trade, there may be something to it.

For smaller and medium-sized businesses, such missions may also help overcome significant costs. Meeting clients, building relationships and learning about foreign markets can be expensive. A trade mission spreads these costs and leverages the attention a government-sponsored trip can generate.

Perhaps more important than trips are the policies that can result. Government leaders—meeting face to face—can push deals over the finish line. Consider Prime Minister Justin Trudeau’s visit to China in late 2017, when the two countries agreed to a deal that should facilitate more beef exports from Alberta to China.

Previously, only frozen boneless beef was permitted, and Alberta exported $73-million of those products to China last year. This is not nothing. But the province’s largest beef exports are fresh, not frozen. Of the $1.2-billion in fresh or chilled beef already exported, none went to China. This was a missed opportunity that can now, thanks to the new deal, be realized. The government’s estimate is for increased sales to China of perhaps $125-million within five years. Still not huge, perhaps, but headed in an encouraging direction.

These narrow, one-off agreements matter, but comprehensive ones such as the Trans-Pacific Partnership (TPP)—a new trade deal involving 11 Pacific Rim countries—are particularly important. The markets opened by the TPP aren’t as large for Canada as a whole compared to the free trade deal with Europe (CETA), but for Western Canada the former deal matters more. The Prairies produce grains and meats that are in high demand in Asia. And with lower tariffs come lower prices to the buyer, and potentially higher sales and higher revenues for producers here.

The TPP will also diversify our markets. Agricultural exports from Alberta totalled $10-billion in 2017, and our largest market is—unsurprisingly—the US. TPP countries account for only $2.2-billion of that, three-quarters of which consists of canola, wheat, beef and pork. The opportunities for growth in Asia are difficult to overstate, as the TPP will significantly lower tariffs on these exports.

Japan, for example, will lower their tariffs on meat from 38.5 per cent today to 9 per cent once fully phased-in. For Japanese consumers, that’s a more than 20 per cent price drop for Alberta meat. In Vietnam, another large market (93 million people), beef tariffs will fall from 15 per cent to 0 per cent within three years for boneless cuts and 20 per cent to 0 per cent for bone-in. Except for a relatively small amount of frozen exports, Vietnam is essentially an untapped market for Alberta producers.

During Justin Trudeau’s 2017 visit, China agreed to a deal that should facilitate more beef exports from Alberta.

This is indeed a unique opportunity. In 2017 more than 43 per cent of the beef imported into Japan came from the US, while Canada supplied only 2 per cent. In Vietnam the opportunity is similarly large, as Canada’s current share of their beef imports is only 0.5 per cent, compared to 19 per cent from the US. With falling tariffs on Canadian exports, producers here are primed to take market share away from their US competitors.

We can also export more animal parts that have less consumer demand here than in Asian markets. Gio thu, for example, a type of Vietnamese head cheese dish, combines pig ears, tongues, snouts, cheeks and hocks with various spices. Currently, such items from Alberta face a 27 per cent tariff in Vietnam. Under TPP, these fall to 0 per cent within a decade.

It’s not just agriculture that stands to gain from increased Asian market access. Alberta exported $1.7-billion in forest products in 2017, primarily lumber. Currently, over 93 per cent of this is destined for the US, while Japan and China were the next-largest markets. Japan’s tariffs can be as high as 6 per cent for certain types of lumber that Alberta exports. These will fall to 0 per cent under the TPP, providing opportunities for producers here to either shift away from the US—especially important given the latest softwood lumber dispute—or expand production to service Asia.

Consumers benefit too. Canadians annually import over $3.6-billion in regular-sized cars from Japan, for example, and the current 6.1 per cent tariff we pay will be phased out. The many shoes we buy from Vietnam currently have a 16 per cent tariff, which will be immediately eliminated under the TPP.

These large, multilateral trade deals are difficult to negotiate and implement. Even the TPP isn’t yet guaranteed, as many countries (including Canada) have not yet ratified it. Luckily, our ability to liberalize trade goes beyond deals abroad. Alberta’s (and Canada’s) prosperity can also be enhanced from within.

Canada is one country but not one economy. Businesses and consumers that buy goods from other provinces face costs. Countless thousands of different rules, regulations, standards and certifications get in the way, as sometimes do explicit restrictions on trade—witnessed recently when Saskatchewan banned Alberta licence plates from its construction sites or when Alberta stopped buying BC wine after that province proposed to block a bitumen pipeline.

These irritants add up and cost the Canadian economy dearly. My own research, with co-author Lukas Albrecht, suggests internal trade costs add between 8 per cent and 15 per cent to the cost of goods and services Canadians buy. We further find that this hidden tax—two to three times the GST!—inhibits trade, lowers productivity and saps from $50-billion to $130-billion from the economy each year.

Alberta is as much to blame as any province. Its recent policy of subsidizing local craft brewers on their sales within Alberta, for example, places other provinces’ beer at a competitive disadvantage and is the subject of an ongoing dispute. Multiply this and similar policies by a few thousand and you begin to sense the scale of the problem.

But there’s hope. The new Canada Free Trade Agreement, in force since July 2017, covers the entire economy by default—though there are many, many specific exemptions—and establishes panels and task forces to identify and propose solutions to various trade obstacles. Over time, the deal may gradually ratchet down Canada’s internal trade barriers. At least that’s the plan.

No discussion of trade would be complete without recognizing the trade-offs. Expanding trade, whether internationally or interprovincially, raises average incomes and lowers average prices. But not everyone benefits. Some sectors expand, others shrink; some regions do well, others don’t; some workers receive raises, others lose their jobs; some prices fall, others rise. To ensure that liberalized trade is politically and economically sustainable, we must mitigate the losses borne by the few.

Consider the US. Recent polling by Pew Research Center found four in 10 Americans see NAFTA as bad for their country—including 49 per cent of those over the age of 50, and a strong majority of Republicans. Similar views can be found in Canada. Jerry Dias, the head of Unifor (Canada’s largest private-sector union), has called the TPP “a mockery” and “the worst trade deal ever.” If the legitimate concerns behind these views are not addressed, protectionist sentiment may only grow.

A growing body of research, for example, links import competition to jobs and earnings. Recent work by economists David Autor, David Dorn and Gordon Hanson looked at US regions and compared those that produced more goods in competition with Chinese imports to those that made fewer. If employment fell in the more exposed regions relative to others, then imports may have been the cause. It’s a clever and robust empirical design, with stark results. The researchers found that rising imports from China between 1990 and 2007 led to over 1.5 million fewer US manufacturing jobs. They also found that unemployment grew and average wages fell.

In other work, they showed that voters in affected regions were more likely to support less moderate candidates, and may even have swung the 2016 presidential campaign in Trump’s favour.

Alberta, though, has less reason for such concerns. Much of what’s imported here from TPP countries, for example, isn’t also produced in Alberta. Ontario’s auto manufacturing sector, on the other hand, may face pressures from more Japanese imports. And depending on how NAFTA is renegotiated, Canada’s heavily protected dairy farmers may not be able to compete with their generally more productive and more subsidized US counterparts.

While there is no free lunch—as economists are fond of saying—expanding trade creates more wealth, jobs and economic activity overall. Increased funding for income-support programs, retraining or apprenticeship programs, regional development or a host of other options can help mitigate (though perhaps not eliminate) the adverse consequences of trade.

We’re moving quickly into a new global reality. As trade networks deepen and supply chains stretch, headwinds are blowing harder. Rising protectionist sentiment and an uncertain future for North American free trade creates challenges for Canada that are hard to overstate. But so far we’re navigating these winds well.

The new deal with the EU, a successful completion of the TPP, an agreement among federal, provincial and territorial governments for expanded trade within Canada, an active presence of leaders abroad to both open new markets and maintain current ones—each approach may work in its own unique way. As our prosperity depends on trade, an all-of-the-above approach makes sense.

Trevor Tombe is associate professor of economics at the University of Calgary and research fellow at the School of Public Policy.

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