How “free” is the free trade in agricultural equipment?

Canadian farm equipment manufacturing got a boost from free trade in 1944. What can we expect from today’s trade agreements?

In the last few years, we’ve heard a lot of passionate political speeches about so-called free trade agreements. It’s a topic that is really more than a century old in this country, going back as far as 1911 when the failed push for “Reciprocity” between Canada and the U.S. made headlines as a hot-button issue.

But it wasn’t until 1944 that we made our first free trade agreement with the U.S., and even then, it was strictly for duty-free trade in farm equipment.

At the time, there was an urgent need for updated farm machinery on both sides of the border to keep food production up. Wartime demands virtually put a stop to the manufacture of anything other than military material. So the deal met an urgent, shared need at the time, and there hasn’t been any real political wrangling over it since.

None of that is quite true of 21st century “free-trade” deals. To start with, they’re political footballs. But equally important, they’re much too complex to be called “free.”

“Free trade implies there are no barriers to trade in goods and services or labour mobility,” says Ryan Cardwell, professor in the department of agricultural economics at the University of Manitoba. “We certainly have nothing even closely resembling that. What we’re talking about… is moving toward freer trade.”

In 1944, North America was all the trading area that many farm equipment manufacturers were interested in, at least in the near term. There was ample demand here to keep order books filled for a long time, and the rest of the world was in turmoil anyway.

Today, by contrast, most Canadian farm machinery manufacturers have a global vision, which explains why recent trade agreements like the new Trans-Pacific Partnership (TPP) have caught the attention of manufacturers’ associations.

Ron Koslowsky, vice-president of the Canadian Manufacturers & Exporters, Manitoba, sums up the impact of TPP, saying it will put his manufacturers in a better position to make sales.

Because the TPP includes emerging Asian economies, ag equipment companies may be among the most likely to see new opportunities in that region.

Adds Koslowsky: “There’s a saying that Europe is Canada’s past, the U.S. is its present, and Asia is its future.”

In fact, most global machinery brands have had their eyes on all the emerging world economies, including Asia, where farm mechanization is just beginning and future profit potential is high. Using a trade agreement advantage to help stake a claim on machinery markets in Asia could offer Canadian companies a handsome share of those profits — if they can provide the kind of equipment these countries need, which for most won’t likely be the typical broad-acre machines many Canadian firms currently build.

Koslowsky thinks the TPP could give all types of Canadian manufacturers a leg up in that market. But companies will have to step up and take advantage of any opportunities the deal presents.

“Vietnam now applies tariffs of up to 20 per cent; Malasia, 30 per cent…,” Koslowsky says. “Over time, those tariffs will come down… (and)… they’ll be hungry (for equipment), because they’re growing like China.”

“The challenge is going to be to ensure our companies are aggressive and tackle those opportunities. It doesn’t help if we have a deal and the companies don’t act on it. That’s going to be the next thing

But not all manufacturing sectors are fully onside. Think auto parts, for example.

“It’s a heated debate,” says Gordon Betcherman, professor in the School of International Development and Global Studies at the University of Ottawa. “There are people that argue very strenuously for free trade and people who argue strenuously against it. The truth is somewhere in the middle.”

There are also political considerations, partly because politicians sell trade deals as job makers. “Free trade is not about jobs,” Betcherman says. “Even the most doctrinaire advocate of free trade among economists would not argue it creates jobs.”

The University of Manitoba’s Cardwell agrees. Most mainstream debate over trade agreements misses the point, he says. With trade deals, it’s actually consumers who are the real winners.

“As we listen to political debates and press coverage of trade agreements,” Cardwell says, “it’s painfully frustrating, because it’s always a focus on what will happen to dairy producers or what will happen to cattle ranchers. Of course that’s important. But what’s never brought up are the much, much larger benefits that can fall to consumers because of freer trade.”

“I think, as consumers, it would be very hard to argue that we’re not better off,” adds Betcherman. “We can get higher quality products at a cheaper price if we’re not limited in terms of where we can buy them from. But there are a lot of people, industries and communities that can be displaced by freer trade if other people in communities in other countries can do (their jobs or manufacture products) more efficiently.”

What determines if an individual sector wins or loses is whether or not it has some kind of comparative advantage.

So, do Canadian farm equipment manufacturers have any comparative advantages? Koslowsky thinks so. Their quality and their lean manufacturing management systems should give them an edge — or at least put them on par with those in other developed nations.

“On average, the products that are produced here are pretty world class,” Koslowsky says.“They’re pretty sophisticated, right up there with the Americans, Europeans and Japanese. If (Asia) is anything like China, the Chinese were hungry for quality goods and services. They didn’t have those in their own country.”

But could those Canadian companies with comparative advantages still conquer world markets without trade agreements? Maybe. But Koslowsky thinks they would face a steep uphill climb by being less price competitive.

“If we don’t sign up, everyone else in the agreement (for example) will be able to sell to Vietnam, but Canada will still have that 20 per cent (tariff),” he says.

Overall, economists can’t really confirm that trade agreements actually increase the total amount of trade between countries. Even extensive studies of the effects of Canada’s most important such deal, NAFTA, hasn’t led to any firm conclusions.

“There’s a long history of debate on whether NAFTA, for example, increased trade between Canada and the U.S.,” notes Cardwell. “A lot of economists have tried to study that. It’s really difficult to attribute changes in trade to NAFTA. There are a bunch of other things that could be going on. The reality is there are a lot of moving parts.”

One thing is certain, though. Industry and trade in this country and others involved in the TPP will likely look at least a little different in the future if the agreement comes into force. The losses could be more noticeable than the gains, although perhaps not more significant.

Explains Betcherman: “The losers are extremely visible, whereas the industries that create new goods and services are much harder to get your hands around.”


Tariff fraud?

This cartoon, which appeared in The Grain Growers’ Guide in 1911, suggested free trade with the U.S. and Britain was inevitable.

This cartoon, which appeared in The Grain Growers’ Guide in 1911, suggested free trade with the U.S. and Britain was inevitable.
photo: Supplied

Today’s polarized political debates about expanded international trade agreements paint them as either a boon to the national economy, certain to create wealth, or as sell-outs that are bound to damage or even destroy us.

Political parties each have their own stance on that. A century ago, the arguments in favour of eliminating import tariffs were coming primarily from farmers and consumers. There was a strong belief they were being treated unfairly by industry, which was backed by protectionist government policy.

The July 26, 1911, issue of The Grain Growers’ Guide, a predecessor of Country Guide, published an extensive editorial that summarized public sentiment. Reading through it was instructive about what defined the issues back then.

Several pages were devoted to the “Reciprocity” (free trade) debate of the day. The magazine reflected the opinion, apparently shared by many of its readers, that the free trade between Canada and the U.S. and Commonwealth countries, was not only essential, it was also the only moral choice. It suggested domestic manufacturers profited unfairly by charging farmers inflated prices for machinery in a protected market.

It didn’t pull any punches when criticizing the federal government’s protection for industry. In fact, the article’s title “Tariff Fraud” couldn’t be more blunt.

It cited a letter written to the Johnston Democrat, a Pennsylvania newspaper, in which a U.S. engineer railed against the fact he could buy U.S.-built farm machines in Australia for one-third less cost than in Ohio, and the Grain Growers’ Guide claimed that similar unfair pricing existed within Canada as well.

“This is what protection does to benefit the farmer,” the editorial says. “Protected manufacturers milk the home market and sell at competitive prices abroad.”

It goes on to criticize the then-head of Massey-Harris’ objection to reciprocity:

“Sir Melvin Jones, president of the Massey-Harris Co., who has just been knighted by the King on the advice of Sir Wilfred Laurier for his ‘service to the Empire,’ has written as follows to the Canadian Century (another publication), the organ of special privilege:

‘I have read the Canadian Century for some weeks past, and congratulate you upon the articles that have been appearing. They are well written and to the point.’

“Sir Melvin thus strongly favours the protective campaign the Canadian Century has been carrying on.”

Ironically, Massey-Ferguson, the company that Massey-Harris would later evolve into, would be one of the primary Canadian companies to benefit greatly from a free trade agreement struck between Canada and the U.S. in 1944, which saw the full removal of import tariffs on farm machinery, allowing free flow of equipment across the 49th parallel.

This article first appeared as “Deal or no deal” in the January 2016 issue of Country Guide

 

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