Thursday, September 08, 2016

Good Advice

Justin Trudeau came home from China with a couple of small accomplishments. First, he made it a little easier for Canadian farmers to sell their canola there. And, second, he gave Canadian merchants access to Alibaba, the electronic portal to Chinese consumers. Nonetheless, Jim Stanford writes, Canada's trade with China has become highly imbalanced:

The bilateral trade flow was broadly balanced until the mid-1990s, with a modest flow going in each direction. But then China's export-led industrialization strategy kicked into gear, and China's exports then took off: first with a heavy reliance on simple labour-intensive manufactures (rooted in China's abundant, then-low-cost labour force). Close state oversight of trade flows meant that imports did not respond accordingly, and China began to generate very large, sustained trade surpluses.

Canada developed a large and chronic trade deficit with China, that really exploded after the turn of the century: quintupling between 1999 and 2008, reaching over $30 billion. It paused for a few years after the global financial crisis.

But since 2013 the deficit has surged once again. From 2012 through 2015 Canada's exports to China grew hardly at all: by less than $1 billion. But imports from China grew by $15 billion.  The bilateral trade deficit has thus swollen by half in three years, reaching $45 billion last year -- an all-time record, and Canada's largest bilateral imbalance. (Mexico is next biggest, at barely half that: a deficit of $24.6 billion.)

That's because, over that period, the Chinese strategy on trade has changed:

The Chinese industrial development strategy is focused heavily on moving "up the value chain." Through a range of policy measures, including state-directed investment, requirements for technology transfer on the part of incoming foreign investment, an aggressive and well-funded higher education and research agenda, and the promotion of concentrated "national champion" companies with a global focus, the government is successfully transforming the country's role in international trade into one that is increasingly high-technology and innovation-based. At the same time, the steady rise in Chinese wages and living standards (also part of the state strategy) means China is not especially "cheap" anymore from a labour cost perspective. Indeed, wages in Mexico in most sectors are lower than in the industrial areas of China.

The Harperite approach to trade was that all trade was good. But, of course what matters -- what has always mattered -- are the rules. Stanford suggests that our trade with China needs to be re-thought:

Instead of blithely pursuing trade for its own sake (no matter which way it goes), our trade approach to China must involve establishing mechanisms to ensure that trade is more balanced, both quantitatively (reducing the large, job-destroying deficit) and qualitatively (ensuring that China buys more from us than just resources). This will require a much more interventionist approach to managing the two-way relationship, than is implied in a standard FTA. Instead, we need to use active policy levers to boost exports to China (especially of value-added merchandise and services), limit the size of the bilateral imbalance, and attach conditions to FDI to ensure that it is enhancing Canadian long-run capabilities in key areas.
In other words, to successfully trade with China, we had better start emulating the Chinese.

Good advice.



Steve said...

The Euros in particular Gemrmany have made labour cost irrelevant. We shoud do the same but our greedy little owners refuse to invest in the future despite overwhelming incentives. when they can find slave labour cheaper.

Owen Gray said...

That's what the Temporary Foreign Workers Program was all about, Steve -- cheap labour.

Steve said...

Owen thats what civilization has been about before Marx. To say communism was a failure is to say the same about the Catholic Church.

Owen Gray said...

Unless labour is organized to push back, Steve, capital will always seek lower wages.

The Mound of Sound said...

Trudeau sneers at opponents of globalism, deriding them as "protectionists." That stance reveals an utterly sophomoric grasp of economics and trade as though he's been reading "Neoliberalism for Dummies." He confuses maximized shareholder profits with the wellbeing of the public. That traces back to a core belief in the now thoroughly discredited notion of "trickle down" prosperity.

Zoombats on Georgian bay said...

Free Trade has always been about cheap labour! Take the jobs away and later create cheap labour at home. That's why we have out of work auto workers assembling Korean made televisions in Detroit for $9.00 an hour and Apple bringing back jobs to Georgia in non union manufacturing jobs. Break their spirit and then throw them a bone.

Owen Gray said...

It's a classic strategy, zoombats. And it's as old as Cain and Abel.

Owen Gray said...

It's remarkable that Trudeau still parrots the usual line, Mound. Trickle down economics died in the wake of the Great Depression. But, like Dr. Frankenstein's monster at the Saturday matinee, it keeps being revived.