A mid all the rhetoric about freer trade and trade expansion, Canadian governments in recent years have been protectionist. Lately it has seemed sufficient for a firm merely to threaten to close a plant or to abandon a proposed new investment to trigger a protectionist government response that is costly to the public purse, or costly to consumers, or detrimental to industrial efficiency.
Among the major protectionist measures have been restrictions on imports – quotas, voluntary export restraints, orderly marketing arrangements and so on. This coming year will see the federal Government re-examining the most important quota arrangements (outside agriculture) that protect Canadian producers. These involve the automobile, footwear and textile and clothing industries. Will the Government opt for freer trade or more protection? The moment of truth is approaching.
Four years ago, Canada and the United States entered into voluntary export restraint agreements with Japan on automobiles, limiting imports from Japan to less than 20 per cent of the market. Before the U.S. agreement expired on March 31 this year, President Ronald Reagan announced that it would not be renewed. Apparently hoping to deflect growing protectionist sentiment in the United States, Japan indicated that it would continue to restrict exports to the U.S. market, but at a significantly higher level than before.
The restraint agreement between Canada and Japan also ended on March 31, but it is not clear whether Japan will continue to restrain exports to Canada and, if so, at what level. The issue is too important to be left hanging for long.
Shoe imports to Canada have been limited by quotas since 1977. The quotas are scheduled to expire in 1986. The Canadian shoe industry, however, wants them extended for five years.
Clothing and textiles have been protected for decades. Producers are protected by import quotas and orderly marketing arrangements under an international Multi-fibre Agreement due for renegotiation next year. The Canadian Textile Institute, supported by three industry unions, seeks even more restrictive global quotas.
Not suprisingly, there has long been widespread criticism of trade restrictions in Canada, including the following: Import quotas impose a heavy cost on consumers by allowing higher prices to prevail.
The protected industry often fails to take advantage of the opportunity for adjustment the quotas have brought. In the footwear industry, for example, domestic producers have generally failed to adopt the kind of new technology that will make them competitive with Third World producers. They have equally failed to adopt the kind of high styling to compete with European producers.
Import quotas lead sooner or later to international repercussions, in the form of retaliatory action or demands for compensation. (The European Community has launched proceedings against Canada for restricting footwear imports.) The repercussions are likely to injure Canadian industries that have been relatively successful in meeting international competition. This is likely to cost jobs in the long run. Thus import quotas reward inefficient firms and industries and penalize efficient ones.
With most of our manufacturing concentrated in Ontario and Quebec, import quotas have seriously divisive implications. The benefits are concentrated in one part of the country but the costs are shared across the country.
Import quotas may cancel out the intended benefits of our international aid programs. Last year, for example, Canada provided more aid to Bangladesh than it did to any other country. Bangladesh is in the process of building an efficient textile industry, but we have demanded that Bangladesh shipments of shirts to Canada be cut in half.
Despite such shortcomings, it appears to be difficult for political leaders to resist the clamor for increased protection. It is easier for politicians to adjust the quotas from time to time in response to criticism.
The Government should adopt a basic change in the ground rules. We need a policy that would make industries think twice before seeking import quotas, that would encourage good use of the breathing space provided by quotas and encourage the removal of quotas as soon as possible.
This could be done by making quotas depend on an undertaking by the industry or company involved to freeze all wages, salaries and fringe benefits and to reinvest all profits, throughout the life of the import controls.
Such a policy would have a number of clear advantages. Because employees would be reluctant to forgo wage increases and because shareholders would be reluctant to forgo their dividends, management would likely seek import quotas only as a last resort. Consumers would thus be asked to subsidize the industry only if management and the Government could see no reasonable alternative.
And once the quotas were applied, management and labor would have strong incentives to improve the competitive position of the industry. This would promote closer co-operation between labor and management and discourage aggressive labor tactics, such as resisting new technology. The prospects for survival of the industry would thus be maximized by the protection afforded from imports, the freezing of labor costs and the reinvestment of all profits to improve productivity and international competitiveness.
If the industry succeeded in turning itself around, there would be urgent demands from employees and shareholders to get rid of the import quotas and end the freeze.
If the industry did not succeed in turning itself around, but merely survived, what then? As time passed, the workers would find themselves falling further behind the national average wage level. In some cases, people would move out of the region, attracted by employment opportunities elsewhere. Some would find higher-paying jobs within the region as new employers were attracted by the low wage scale.
Ultimately, of course, if the industry was unable to retain its work force, it would disappear. But this is as it should be. The consumer would not be asked to subsidize the industry indefinitely. Efficient sectors of the Canadian economy would no longer be penalized by foreign retaliation for the import quotas.
In the long run, the surest way to make certain that we all lose is to allow quantitative trade restrictions to bring about a deterioration of the world trading system. Canada relies on world trade more than most countries and it is already gravely threatened.