"We will no longer tolerate the audacious theft of intellectual property,” President Trump said Friday at the Asia-Pacific Economic Cooperation summit in Vietnam. “We will confront the destructive practices of forcing businesses to surrender their technology to the state and forcing them into joint ventures in exchange for market access.” He was referring to big challenges that American businesses face in China.
Finally, he added a more universal problem, also present in China: “We will address the massive subsidizing of industries through colossal state-owned enterprises that put private competitors out of business."
On that last issue, the subsidizing of industry to put competitors out of business, Trump’s words resonate in our own corner of the world. For China’s state-owned enterprises might be more elaborate than Canada’s dairy cartel, but they operate on a similar protectionist principle. Both must be rooted out through free trade agreements, for everyone's good.
As the three North American partners renegotiate the North American Free Trade Agreement, Canada’s quasi-Soviet dairy policy is just one of the many thorny issues making agreement more complicated.
NAFTA has generally been a good deal for all three countries. Businesses in each have either found markets in the other two, or been founded specifically to serve those markets. Thus, since NAFTA’s adoption, American exports to Mexico have more than quadrupled and exports to Canada have more than doubled. Imports from those countries have blossomed as well.
The growing prosperity of all three nations, thanks to the free flow of goods and services, has benefited consumers and created far more jobs and wealth in each country than it has destroyed. For those overly preoccupied with trade balances, America has enjoyed a trade surplus within NAFTA in recent years, if you exclude petroleum imports.
So it would be a big mistake to let this agreement slip away because of poor diplomacy. But that doesn’t mean NAFTA is perfect. And in criticizing Canada’s cartels, Trump is correct. Both the U.S. and its NAFTA partners must cut government-controlled industrial policy. It’s not just cheating us in the short run, it’s making all of the partners poorer in the long run, to everyone’s detriment.
The current regimen has allowed Canada to preserve its antiquated dairy cartel system, embracing protectionism in violation of NAFTA’s spirit if not its letter. The Canadian government’s command-and-control policy over the dairy economy involves subsidizing Canadian dairy products to displace cheaper American products in consumer markets.
This problem has become one of the points on which NAFTA negotiations are stuck. There is no question that the Canadians are in the wrong on this issue. “The United States has a legitimate complaint,” Martha Hall Findlay wrote this year in the Toronto Globe and Mail. “We continue to defend a system, at significant cost to consumers and to other parts of our (Canada’s) economy, that is no longer defensible.”
You can’t blame Canadian politicians too much for being as shortsighted as our own, for adopting harmful and economy-distorting policies to protect their own dairy farmers, even at the expense of their larger economy. But this is precisely the sort of self-harming behavior that free trade agreements are supposed to prevent.
Nationalist industrial policy never really benefits the nation that practices it. Canadians may think they’re being clever, but they shortchange themselves when they resist market forces.
Instead of looking for ways to cheat each other at the margins, the U.S., Canada, and Mexico should continue NAFTA negotiations looking for ways to open their markets and get rid of political arrangements that stunt economic growth. Americans, Canadians, and Mexicans would benefit much more from a constructive and consistent long-term trading relationship, than from incessant attempts to pick each others’ and their own taxpayers’ pockets for the good of a few politically connected lobbies and industries.