I've got a new op-ed in the Globe, arguing that, to pull away from the US, Canada must look to its immigrants.
The first draft of that article was much longer, and begun with a long discussion of the Smoot-Hawley act. I've reproduced that first draft below:
“What ifs” that were unthinkable six months ago are now chillingly plausible.
What if President Trump imposes a big border tax on Canada or Mexico? What if he tears up NAFTA? What if President Trump’s unilateral actions undermine the commitment to multilateralism that is the very foundation of the World Trade Organization? What if international trade volumes collapse, and Canada finds itself rethinking its place in the global economy?
We have been down this road before. The 1920s, like the present era, were a time of profound economic and technological transformation. Electrification, like information technology and automation now, created a “technology shock” that affected every form of economic activity. Productivity soared but, as Laval University economist Bernard Beaudreau argues, real wages failed to keep up. Firms were able to produce goods in unprecedented volumes, but consumers lacked the purchasing power to buy them.
In the US, pressure started mounting for protectionism. Some came from industry; more from the agricultural sector. Farmers were seeing markets for hay and oats collapse, as petroleum-fueled cars and truck replaced bio-fueled horses and mules. What’s more, US farmers were under threat from a booming Canadian agricultural sector. Canada’s population doubled between 1900 and 1929, prompting a surge in agricultural production. During World War I, Canadian products had found a ready market in Europe. As that market started to erode in the 1920s, Canadian farmers began to look south – and US farmers started worrying about cheap potatoes and dairy products flooding in from north of the border.
In 1928, Republican candidate Herbert Hoover campaigned on a promise of higher tariffs to protect American farmers – and won. Getting tariffs through Congress was not easy. Every Senators and Congressmen wanted to make sure their local industries would be protected; lobbyists had their say. The resulting political compromise was the 1930 Smoot-Hawley Act – a piece of legislation that imposed swingeing tariffs on a wide range of goods, with the basic objective of preventing goods from being imported to the US.
Smoot-Hawley was a disaster for Canada. The Liberal Prime Minister, MacKenzie King, anticipating the act, pre-emptively raised Canadian tariffs – but lost the next election anyways. R.B. Bennett rode into power, promising to use higher tariffs to “blast a way into markets that have been closed”.
It didn’t quite work out that way. In three years, from July, 1929 to July, 1932, Canadian exports to the US fell by two thirds, while exports to the UK were cut in half. Something had to be done, and that something was the 1932 Ottawa conference. Representatives of the self-governing countries in the British Empire – such as Australia, Canada, South Africa, and India, as well as the UK itself – met in Canada’s capital, and negotiated (or re-negotiated a series) of bilateral tariff reduction agreements.
Simon Fraser University economist David Jacks argues that the Ottawa conference is worth studying now for what it tells us about the possibility of “defying gravity.” The simplest model of international trade is the gravity model – the forces of trade, like the pull of gravity, are strongest for countries that are large and close. The further away a country is, or the smaller it is, the less trade is pulled towards it. Trying to replace US trade flows with trade to, say, New Zealand, is defying gravity, because it’s trying to pull away from a large proximate country, and shift towards a small distant country.
Partly because tariffs required checking all imports and exports at the border, we have remarkably good records of trade flows during the 1920s and 1930s. What these tell us, according to Professor Jacks, is that it’s pretty much impossible to defy gravity. Trade started picking up after 1932, but that’s mostly because the global economy started to slowly creep out of the depths of the Depression. The attempts by R.B. Bennett and other leaders to revive Empire did not succeed – there is no evidence of special ties between the countries of the British Empire emerging as a result of the Ottawa Conference.
One reading of the gravity model of trade is that, if President Trump increases tariffs, Canada is doomed – our fate is tied to the US, and without the US we are nowhere.
Yet economics is not physics. The gravitational pulls in trade models arise because it’s just easier to trade with someone who’s close to you. Yet closeness, in economic terms, does not just mean physical distance. Closeness can mean sharing a common language, or a common culture, or common values.
The return to Empire envisioned in the Ottawa conference attempted to defy not only the pull of distance, but also the pull of culture. In the early years of the 20th century Canada was – despite the best efforts of overtly racist immigration officials – becoming steadily less British. The number of Canadians claiming Asian origins tripled between 1901 and the mid 1920s; the number of Italian-Canadians increased eight-fold. While the numbers of Canadians claiming British ancestry continued to grow, many of these were second-, third- or fourth-generation Canadians, with fading ties to the mother country.
What we now know about trade suggests that Canada’s profound demographic transformation in the early years of the 20th century should have affected our country’s trade patterns. Twenty years ago, UBC economists Keith Head and John Ries established a connection between immigration patterns and trade networks. Looking at the 1970s, 80s and 90s, they found that, when Canada admitted more immigrants from a country – especially more independent immigrants – trade with that country rose. In the years since Head and Ries’ paper, other researchers have unpacked the immigrant-trade connection, and found that what really matters is the number of immigrants in business networks, especially the number of highly educated immigrants.
The 1920s and 1930s are a dark reminder that responding to technological change and economic displacement with toxic politics and bad policy leads to economic disaster and human misery. But, no matter how bad things are, an economist will always ask, “what are the alternatives?” There are alternatives to trade to the US, but our ability to take advantage of those alternatives depends crucially on our ability to reduce trade costs, and that means not just transportation and tax costs, but cultural costs, language costs, other “transaction costs.”
Yet if we want to take advantage of those opportunities, it’s not enough to welcome migrants from the world’s economic powerhouses to Canada. New Canadians need to be welcome in the nation’s corner offices, not just the nation’s corner stores. Unfortunately, they’re not. Repeatedly, studies have found that job applicants with Asian names are less likely to be called for an interview than applicants with Anglo-Canadian names – even if the Asian candidates have Canadian qualifications.
Yet as long as our corporations look like old Canada, we will continue to have the same old economic vulnerabilities. And that means if the elephant on our southern border decides to roll over in bed, we’ll all get squished.
Worthwhile Canadian Initiative 
Increasing tariffs, especially for small nations, is a lot like (pardon the graphic metaphor) shooting yourself in the head in the hope that the blood spatter will harm your neighbor. It’s messy and it really doesn’t work.
The ideal long-term strategy for Canada is to develop stronger trade links with Europe, the UK, China, Japan, Korea, etc, because, as the repeated softwood lumber wars prove–the threat of Trump tariffs not withstanding–the US is simply not a reliable trading partner. Of course, this would take decades of sustained governmental effort and is about as likely as the US ever taking practical steps to fight global warming.
In the short term, however, I believe the most effective countermeasure to Trump tariffs would be to withdraw from our intellectual property agreements with the US and start domestically reproducing products bound to US IP. US IP is a rentier’s racket in the first place and cutting off the rentiers’ income would hit the US directly while increasing, rather than decreasing, Canadian human welfare and access to capital goods.
Dr. Woolley:
This is a lovely piece of work. I enjoyed reading it immensely. It did stimulate a couple of ideas.
In terms of immigrant acceptance in the workplace, I think it depends on the environment and the language skills. I am a WASP consultant but many of the teams and firms, with whom I work, are well-stocked with first-generation immigrant consultants in relatively senior roles. Of course, I am talking here about the urban consulting market place of Toronto which is very special. Toronto has one of the most ethnically diverse workforces anywhere on the planet.
I am always concerned about the underutilization of immigrants. My suspicion is that the anglo name bias comes from a concern for language skills that unsophisticated employers might have. One way of making sure that they contribute to our labour force fast and effectively is to increase the quality and quantity of government-supplied language training emphasizing communication skills.
On your point about trade diversification, the trade literature you mention is important and there are other examples. Such trade development is obviously going to be a two-way street in terms of imports and exports. We should consider that in our trade promotion activities and target support to immigrant-led startups as well as old-line firms.
Thanks for an informative post.
Could I offer a different perspective, a politically neutral perspective?
Please begin with current conditions considered as the base case. Assume trade between the US and Canada of consumer products that are produced in both countries in some ratio. Either country can introduce a border tariff that would increase the final cost to the customer but no such tax is now in place. Either country can pick whether producer or consumer will write the tax check to government. The choice made will change the relative product prices experienced by both consumers and suppliers.
For the sake of discussion, let’s assume that the US decides to increase the number of workers employed in rural America. Soft wood lumber is a product made in both the US and Canada, entirely originating in rural America and rural Canada. Lumber is mostly used in urban America where economic activity is at currently high levels. Relative use in Canada is also mostly in the urban areas.
A US inspired border tax would be paid by US lumber importers, with the cost passed on to urban consumers in-as-much as American lumber producers were unable to fulfill demand at increased prices and American consumers were able to pay increased prices at reduced consumption rates. (We certainly would NOT expect American lumber workers to increase consumption (due to increased work and wages) at anywhere near the demand drop caused by consumer lumber price increases.) The reverse effects could be expected to occur in Canada (decreased lumber worker jobs and wages; decreased lumber cost to Canadian urban areas).
Why would the combined economies of the US and Canada be reduced by a new border tariff? Because the averaged consumer cost of the taxed product is increased.
The relative economic shifts described would apply to every product blessed with a border tax, no matter which country introduced the tax.
Thanks again for the informative post.
Roger, so lumber tariffs as redistribution from urban to rural Americans? That’s a great insight – thanks.
Pmj – Thanks for your kind words. Yes, I agree completely on the importance of language skills. I think Canadian immigration policy has improved a bit on this score – I think more weight is being placed on language skills when evaluating economic immigrants, and that’s a good thing.
I can’t get your post out of my mind! It illustrates so many important economic basics!
Having offered a rather cold economic analysis of tariff effects previously, maybe I should now offer a political response. Knowing the mechanics of tariffs, what should the “fair” response of politicians be?
My lumber example identified three groups involved with the lumber trade that would be hurt (because the combined total trade was diminished): two Canadian groups and one American group. Only one group benefited – rural America. Would that be “fair”? I would argue it is not fair and remember that this is a political argument, not an economic argument.
Turning to another point illustrated by your post, economics is a study of the balance of human trade. I think of “balance” as illustrated by a mechanical pivot balance. Supply and demand shift from side-to-side constantly (over time) in response to human choices. The addition of government taxation represents a thumb on the scale, creating a tilt in the supply-demand balance.
I believe that government should use as little thumb as possible in collecting revenues for essential government services. That said, some thumb is inevitable so our economic focus (I think) should be on distributing the inevitable supply-demand-balance tilt in a “fair” fashion. Politics based on economic understanding.
Thanks again for your excellent, informative, post.
I would also argue the demand drop would kill rural america as well.
Minor correction: in 1932 India was not a self-governing country in any meaningful sense, unlike the “Dominions” such as Australia, Canada and South Africa.
Almar – sorry, that’s really bad. I shouldn’t have made that mistake.
“Productivity soared but, as Laval University economist Bernard Beaudreau argues, real wages failed to keep up. Firms were able to produce goods in unprecedented volumes, but consumers lacked the purchasing power to buy them.”
I thought there was a good bit of wealth/income equality in the late 1920’s. If so, why didn’t the rich buy the goods?
Also, were the other people able to buy the goods somehow?