Should Canada adopt unilateral free trade?

[Machjo]

Of course Canada could still respect UN sanctions against certain states, ban the importation of products the manufacture of which it bans on its own soil, and impose the same standards on imports as it does on domestically-produced goods.

Beyond that, I do think Canada could only benefit from unilateral free trade with the world.

[-1=e^ipi]

No, one should engage in reciprocity (i.e. retaliatory tariffs) while pursuing free trade.

 

It is actually possible for a country to benefit from tariffs, but only if the other country refuses to retaliate.

Let's take a simple example: Market for oranges in Canada, where 100% oranges are produced by the USA.

In the market equilibrium, the benefit to Canada, called the consumer surplus is areas 1 + 2 + 3.

In the market equilibrium, the benefit to USA, called the producer surplus is areas 4 + 5 + 6.

Under tariffs, the consumer surplus is area 1, the producer surplus is area 6, and the tax revenue is 2 + 4.

Areas 3 + 5 is called the deadweight loss, the loss in economic activity due to the tariff.

From Canada's perspective, Canada only cares about consumer surplus and tax revenue. This sum is 1 + 2 + 4.

So Canada loses area 3 and gains area 4. If area 4 is larger than area 3 (which is certainly the case for small tariffs) then Canada net benefits from the tariffs.

[Machjo]

Let's take the scenario in which Canada adopts unilateral free trade and the US decides to tariff all Canadian imports at 10%.

 

Now let's say I'm thinking of importing a US-made machine to improve the productive efficiency of my business. To do so, I want to buy US dollars. Since Canada would impose no tariff against US products, I would find trading CAD for USD so that I could buy that machine attractive. The person holding the USD would find the CAD less attractive since it's of less use to him since he'd have to pay a tariff to use it to buy a Canadian product. As a result, he will want to trade his USD for my CAD at a rate that will compensate for the tariff so as to make the CAD more attractive to him.

Since I would now need to trade more CAD for the same USD to buy that US machine, I might no longer find that machine worth that kind of money and so might decide to buy a similar Canadian-made machine instead.

Assuming that the US-made machine would have fit my business needs better than the Canadian one, the US tariff would thus have hurt me as a consumer.

However, the US tariff would also have hurt the US-producer from whom I'd initially intended to buy the machine by pricing him out of my market.

Furthermore, we can reasonably presume that at least some loopholes would exist in the US tariffs. With a drop in the CAD relative to the USD, foreign consumers might find Canadian maple syrup better priced than US oranges and might find Canada a more attractive tourist destination than the overpriced USA too.

The US could counter this by imposing a border-crossing processing fee for anyone crossing the US border into Canada and impose a tariff on any product US travellers bring back to the US with them. That would just further reduce the value of the CAD relative to the USD and so just price US products out of the market even more.

 

Remember, no one just gives something for nothing. So if Canada adopts unilateral free trade and the US raises tariffs by 10% across the board, USD holders won't even want to give the USD Canadians need to buy US products to us, so how will we even buy US products? So in fact an import tariff's negative effect just boomerangs right back to the tariffing country.

Edited June 16, 2018 by Machjo

[Machjo]

Let's also assume that the US subsidizes agriculture by 10% to boot. The US taxpayer just subsidized this, money that could otherwise have gone to other businesses. In other words, US taxpayers would be subsidizing Canadians' food while other Canadian businesses could pay lower taxes from the savings accrued by not subsidizing Canadian agriculture.

Edited June 16, 2018 by Machjo

[-1=e^ipi]

On 6/16/2018 at 2:58 PM, Machjo said:

Let's also assume that the US subsidizes agriculture by 10% to boot. The US taxpayer just subsidized this, money that could otherwise have gone to other businesses. In other words, US taxpayers would be subsidizing Canadians' food while other Canadian businesses could pay lower taxes from the savings accrued by not subsidizing Canadian agriculture.

Yes, US subsidies tend to net benefit Canada and net harm USA. As it is basically American tax payers subsidizing Canadian consumption of food.

 

But lobby groups which control government tend to represent producers instead of consumers. So as a result, many countries take positions that are against their own country's best interest.

[Machjo]

Perhaps we need a consumers' lobby group.

[Machjo]

Perhaps more Canadians should join organizations like this one to counter the business lobbies:

 

https://www.consumerscouncil.com/

[Machjo]

It's interesting that the poll shows a fifty-fifty split. I wonder how others would vote on this.