True North American free trade

2008-09-06

in Canada, Economics, Law, Politics

Amazon.com is superior to Amazon.ca in several ways. Firstly, it has a much broader selection. Secondly, it has some special features, like the Amazon Prime subscription that gives you unlimited shipping for $79 a year. The process of ordering things from Amazon.com, having them sent to places in the US, and then having them relayed to me has left me wondering what the effect of a true North American Free Trade Agreement would be.

In the simplest form, it would work like this:

  • Anyone in Canada, the United States, and Mexico can purchase anything sold by any company in any of the three countries.
  • The item can be shipped directly to them, and they will not be charged any customs fees, duties, or other border-related charges.
  • Some simple system is sorted out for sales taxes. It could be (a) you pay the tax of your local jurisdiction, which may send part of the revenue to the sending jurisdiction (b) you pay the tax of the sending jurisdiction or (c) you don’t pay sales tax.

Such an arrangement would obviously be beneficial for consumers. They would be able to buy from whatever physical or web-based store offered them the best arrangement. It’s less clear what the effect on businesses would be. Those that benefit from having consumers who are more likely to buy from a firm in their own country would get hurt, at least temporarily. Those that would be more attractive to outside consumers in the absence of duty fees would likewise benefit in the near-term. In the near term, this alternative approach should produce net economic benefits. While some actors would lose the benefits of a captive market (like drink sellers at concerts), the larger market would be more efficient overall.

In the longer term, there would be effects on firm consolidation, tax revenues, currency values, and macroeconomic conditions. Both from the perspective of what would benefit readers personally and from the perspective of what would be best for society overall, would readers prefer (a) for the current system to continue (b) having the current system replaced with one akin to the one above or (c) getting rid of North American free trade entirely?

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{ 34 comments… read them below or add one }

Tristan September 7, 2008 at 2:07 am

Why exactly would the larger market be more efficient over all? How is efficiency measured? Would externalizes be reduced somehow? What about the future of transportation, how would facilitating long distance trade help the transition to more expensive transportation costs? Aren’t such transitions inherently inefficient? Isn’t regional trade something that we should encourage in anticipation of higher transportation costs?

Milan September 7, 2008 at 12:37 pm

Why exactly would the larger market be more efficient over all?

Two reasons.

1. More division of labour. In a very small town, it is inefficient to have specialized businesses for all tasks. In a big city, there is enough business to sustain them. The same is true for smaller and larger economies.

2. The current reasons for buying from a firm in your own market are sometimes just because of artificial barriers. If not for the border issues, I would use Amazon.com instead of Amazon.ca. The artificial barrier is like a roadblock – it provides economic benefits to those who control it – as well as those on the same side as consumers – but it worsens the efficiency with which buyers and sellers interact overall.

How is efficiency measured?

Basically through minimizing transaction costs (the time and money spent making a deal between buyer and seller) and deadweight losses (resources that are expended for the benefit of nobody).

Would externalizes be reduced somehow? What about the future of transportation, how would facilitating long distance trade help the transition to more expensive transportation costs?

It doesn’t seem to me that first order changes would affect externalities. It’s not clear to me whether truly free trade would increase or decrease the environmental impact of transportation. It is possible that more goods will flow short distances North-South, rather than longer ones East-West.

Aren’t such transitions inherently inefficient?

Transportation costs are just like any other element of production: raw materials, labour, etc. If the price effectively falls, manufacturers can be expected to use more of it. Looked at in economic terms, reducing the costs associated with transport (especially deadweight costs, like time spent waiting for customs clearance) should increase the overall economic efficiency of transactions.

Isn’t regional trade something that we should encourage in anticipation of higher transportation costs?

Not in and of itself. Regional trade isn’t necessarily more efficient than trade over longer distances. The thing to do is price externalities appropriately. Once carbon taxes, reasonable pricing for water and water pollution, and so forth are established, if it still makes more sense to ship lamb from New Zealand to Germany, so be it.

Milan September 7, 2008 at 12:41 pm

Another economic benefit is that a merged economy would make it harder for firms to behave in monopolistic and oligopolistic ways.

First, there would be more active firms that would need to coordinate to form a cartel. There is a higher chance that it wouldn’t happen or that someone would blow the whistle.

Second, there is more incentive for new entrants into the market. It is easier to justify setting up a new firm for the joint population of Canada, the US, and Mexico than for the population of any one alone.

We might even get some decent cell phone plans in Canada…

Tristan September 7, 2008 at 2:11 pm

“In a very small town, it is inefficient to have specialized businesses for all tasks. In a big city, there is enough business to sustain them. The same is true for smaller and larger economies.”

this is true only when its economically feasible to ship things across the country on highly subsidized interstates. You do make a good point about the short north/south versus long east/west transport though.

“Once carbon taxes, reasonable pricing for water and water pollution, and so forth are established, if it still makes more sense to ship lamb from New Zealand to Germany, so be it.”

Even with the “real costs” of these externalities included in prices, you still completely refuse to consider the costs of changes in costs. It is economically feasible now to ship goods from China to North America, but this is contingent on the cost of oil (despite how ludicrously cheap it is to move things by sea, the cost of shipping a container from Shanghai to Vancouver has gone up three times, and it would go up a lot more if nations banded together to ban the use of the ludicrously polluting “Bunker C” oil they burn, which is far cheaper than light sweet crude).

Another change could be to the peacefulness of the world. Why does it not make sense to encourage the economy to be self sufficient enough to sustain itself during periods of possible future conflict? Doesn’t not having a self sustainable economy make the state in principle no longer sovereign because some diplomatic options are no longer possible to engage? What possible repercussions come from a world in which some super powers have economies which are self sustaining in themselves but which also play an essential role in the functioning of other superpowers’ economies? To speak less abstractly, what power does the west have to say to China “stop these human rights abuses”, or “stop invading Taiwan” or “stop invading sovereign country X for its oil”, if sanctions or military action against China would spell demise for your western economy?

In other words, why shouldn’t some degree economic nationalism be considered a necessary part of sovereignty.

Milan September 7, 2008 at 2:42 pm

In other words, why shouldn’t some degree economic nationalism be considered a necessary part of sovereignty.

National borders have no fundamental relevance, when it comes to economic resilience. It we were to divide North America up into areas that could sustain themselves with limited trade or no trade, the division wouldn’t resemble the present borders.

That being said, our inability to control what happens in economies with which we trade does raise some issues of resilience. The question is where the best balance can be struck between being able to weather the unexpected and doing well in normal times.

Milan September 7, 2008 at 2:45 pm

On the matter of international shipping, it again seems like true free trade within North America would be beneficial, especially if oil prices rise a lot.

Indeed, increasing shipping prices are already having a significant impact on the attractiveness of China as a manufacturing centre. See:

Export industries, shipping, and the price of oil
Wednesday, August 27th, 2008

Tristan September 7, 2008 at 3:28 pm

Why do you seem to completely ignore the substance of my argument? It is simple: a nations economic dependence on another limits its options when that country threatens it in some way, because declaring war or sanctions on this other country will threaten the health of its own economy. Therefore, economic interdependance infringes on sovereignty. Obviously this is not something to be eliminated, but it does seem something to consider when making decisions about such things as free trade.

“The question is where the best balance can be struck between being able to weather the unexpected and doing well in normal times”

If you lived in any other period in modern history, you wouldn’t consider “peace” to be “normal times”.

Milan September 7, 2008 at 3:31 pm

In the event of conflict cutting off trade with the United States, we will have bigger problems than where we get our imports from.

Canada is only viable as a state as long as the United States continues to have a benevolent attitude towards it.

If anything, enhanced trade with the US benefits our security situation, since it increases their (already strong) incentives to defend us from outside threats.

ToryC September 7, 2008 at 3:43 pm

Since Canada is a member of the World Trade Organization, it has agreed to extend Most Favoured Nation trading status to all WTO members. That means that any advantages we grant to one WTO member (such as the US) would extend to all 153 WTO members.

This is basically a good thing, both because trade is beneficial in and of itself and because it eliminates all the trouble associated with rules of origin. Many of the things we buy from the US or Mexico have components that were made somewhere else.

Tristan September 7, 2008 at 3:56 pm

“In the event of conflict cutting off trade with the United States, we will have bigger problems than where we get our imports from.”

Do you mean, we would have trouble finding markets for our exports? In other words, because of our intimate economic ties, the economy would no longer be viable? I don’t understand how repeating back my argument at me constitutes a counter argument (“Canada is only viable as a state as long as the United States continues to have a benevolent attitude towards it.”), this seems like the fallacy of resorting to the status quo. My question is more abstract than that: do these kind of intimate economic ties impeed on sovereignty? Also, the possible disturbance I suggested was not some conflict with the U.S. but with China, which seems altogether more likely, because I can imagine that the U.S. Administration might in some scenario decide that the economic disturbance would be a fair cost in exchange for the oil which might be up for grabs in a conflict. If this were the case, Canada would be far better off having had economic protectionist policies rather than ones which encourage extreme dependance on China for goods (not to mention, extreme dependence on Japan as a market for natural resource exports).

. September 7, 2008 at 3:58 pm

Customs Unions and Free Trade Areas within the WTO System

“Customs unions and free trade areas such as the EU and NAFTA are derogations from a purely multilateral trading system. They are systems of preference, and they are political alliances. The founders of the GATT 1947 were concerned with preventing the international trading system from breaking down into a system of preferential political and economic alliances. The proliferation of regional integration arrangements appears to carry with it a heightened risk that the multilateral trading system will break down into a world economic system characterized by a series of regional alliances with inter-linkages of varying types…

The legal relationship between the NAFTA and the WTO Agreement is determined by examining the text of the treaties, the context in which the treaties were made, and the rules of international law that govern the relationship between treaties concerning the same or similar subject matter. Both the NAFTA and WTO Agreement are written agreements between states governed by international law, and therefore are “treaties” within the definition prescribed by the Vienna Convention on the Law of Treaties (VCLT).

The NAFTA entered into force on January 1, 1994 and the WTO Agreement entered into force on January 1, 1995. The NAFTA Parties are each original Members of the WTO. Though this temporal sequence might suggest that the WTO Agreement prevails over the NAFTA, there are a number of factors involving the express text of the NAFTA and the context in which the two agreements were made that raise doubts about this general proposition…

The first two cases decided under the NAFTA general dispute settlement procedure, considered infra, reflect the uncertainty surrounding the issue of NAFTA-GATT-WTO priority

Should NAFTA rules as a general policy matter have priority over WTO rules in the event of inconsistency? There are good arguments on both sides. Priority of WTO rules would appear to encourage multilateralism. Priority of NAFTA rules might result in more rapid progress in addressing social issues within the context of regional integration, and the resulting rules might provide a constructive model for the multilateral system.

The present approach which is largely based on application of a “last in time” rule has manifest drawbacks. The NAFTA and WTO Agreement are each likely to be subject to continuing amendment, and this could lead to a rather confused situation about which rule governs in particular circumstances. Some clarification of general principles among the NAFTA Parties would help to avoid misunderstanding and mitigate future disputes. However, in light of the various political and social pressures affecting the Parties, the present ad hoc approach may be the rule for some time.”

Tristan September 7, 2008 at 4:00 pm

“trade is beneficial in and of itself”

This is not an argument. This is an argument:

There are certainly situations in which trade is not beneficial. For example, imagine someone particularly skilled at selling oranges and who rides a bicycle to work everyday. Because his skills are at orange selling and not at bike repair, he uses proceeds from orange selling to pay a mechanic to maintain his bicycle. One day, the bike shop closes down because it was no longer viable, and the mechanic moves to another town. All of a sudden, the orange seller finds himself without the skills he needs to keep himself in transit from home to work, all because he traded for skills rather than developing them himself.

Milan September 7, 2008 at 4:03 pm

Tristan,

I mean that the only plausible cause for a breakdown of trade between the US and Canada is serious conflict between the two. Canada is unlikely to win any serious conflict with the US.

In the event of a conflict with China, deeper trade ties with the United States would be a benefit for us. The same is true for most other imaginable kinds of geopolitical strife. North America could function quite well as a market, even if completely excluded from the rest of the world. That is not true of Canada and the costs of making it so would be extreme. The benefits of trade derive from comparative advantage and specialization. Autarky policies explicitly sacrifice those things.

Once again, trade ties with the US are an alternative and counterweight to trade ties with states like China. If you are genuinely concerned with losing access to manufactured goods from China, the most plausible alternative production location is Mexico.

Milan September 7, 2008 at 4:04 pm

Arguments that trade is good in and of itself are often based on the Ricardo model or refinements thereof. Here are some examples.

Milan September 7, 2008 at 4:07 pm

The general argument “build everything for yourself, because they you won’t be in trouble if everyone else gets annihilated” really doesn’t retain much relevance in the modern world. Like it or not, we are dependent on others for continuing to live the kind of lives we want.

The kind of life we could have without trading with others (subsistence farming in the wilderness) we could always revert to if trade failed. Most people alive now probably wouldn’t hack it in a truly autarkic economy, whether it arose all of a sudden due to conflict or gradually because of policy changes. In either case, the endpoint is a low-population agrarian state.

Milan September 7, 2008 at 4:08 pm

Since Canada is a member of the World Trade Organization, it has agreed to extend Most Favoured Nation trading status to all WTO members.

The issue here is the desirability of free trade between Canada and the US, not whether such a thing could be easily achieved under existing international law. That being said, interactions between NAFTA, the WTO, and trade policy are obviously very important for policy development.

Milan September 7, 2008 at 4:14 pm

Since Canada is a member of the World Trade Organization, it has agreed to extend Most Favoured Nation trading status to all WTO members.

The issue here is the desirability of free trade between Canada and the US, not whether such a thing could be easily achieved under existing international law. That being said, interactions between NAFTA, the WTO, and trade policy are obviously very important for policy development.

Basically, I think it would provide a moderate benefit for consumers, hurt firms behaving like drink retailers at concerts, and benefit firms behaving like the places those concert goers would buy drinks from if they could.

Over the longer term, it would probably produce moderately more economic integration than in the status quo scenario. Quite possibly, it would have less overall economic effect than the successful completion of the Doha Round.

Tristan September 7, 2008 at 9:02 pm

Fine, but you’ve just turned the tables. Now free trade with the U.S. becomes an autarquish “Fortress north america” argument, and you’re just running the economic protectionism as an argument for free trade: “North America could function quite well as a market, even if completely excluded from the rest of the world. ” Very logical, but its still just as much an argument against trade (in one situation) as it is for it (in another).

The difference between your and my accounts are principally, in your account Canada has basically no international sovereignty, and is just an addendum to the U.S. Sovereignty in its foreign policy positions. Specifically because we’ve built a Canadian market that cannot function on its own, we have to ally to a super powerful one to the south, and a less powerful one below that, in order to retain any diplomatic clout with respect to powers like Europe and China.

What disturbs me in this kind of argument is everyone seems to value wealth a lot, but very little value is placed on the cost in independence paid for that wealth (which comes from the “increased economic efficiency of the free market”. Fine, we’re richer, but we’re less (as a nation, not as individuals) free.

BuddyRich September 7, 2008 at 9:20 pm

In your original argument, I would have to argue C…

Just look at stats from 1988 until now, with US-Canada Free trade and then NAFTA.

GDP has gone up. Good.

Income equality has gone down. Bad.

So Free Trade has brought winners and losers, just more losers… is this causation or correlation with the start of free trade? I don’t know.

I think free trade between two relatively equal nations is beneficial, but competitive advantage is too easily “gamed” when there an imbalance of power/wealth between the two.

Look at NAFTA and the softwood lumber dispute. Regardless of whether a few mediators ruled in our favour, the US held illegal duties from our wood products shipped to their country. This caused mills here to go out of business. As the smaller nation, we couldn’t afford to rock the boat (ie. a form of trade retaliation). The US held all the power. I mean look at the “settlement”, the US got to keep all the duty! You could argue then, that in fact was not “free” trade, and I would even agree, but look at who endorses free trade, and who doesn’t, and ask why? These agreements work only so long as they upheld by all parties, and consequently if its in each countries best interest.

Free trade is good in theory, but it only eliminates what few barriers remain from a form of neo-colonialism taking over (for good or bad), with the have countries allowed to hold the have-nots hostage, and even the greater haves push the agenda of lessor-haves.

Not saying that trade isn’t symbiotic and inter-dependent, but certain countries just have more clout, so whether or not an agreement is in place, things just get “dictated” to their favour anyway.

Given that, I think its better to not enter in such agreements and keep control in house.

Just my opinions of course.

Tristan September 7, 2008 at 10:04 pm

As concerns “NAFTA”, which isn’t really free trade at all, my views roughly coincide with Chomsky’s, which can be found quite easily on youtube.

tristan September 7, 2008 at 10:11 pm
Litty September 7, 2008 at 10:11 pm

Personally, I’d like to be able to buy stuff from the States with no duty – especially when the dollar is relatively strong.

I have no idea what the big picture impact would be.

Litty September 7, 2008 at 10:13 pm

BuddyRich,

Just because inequality went up and GDP went down after NAFTA doesn’t mean it actually had any effect on either.

All sorts of other things are changing in North America and the world as a whole.

BuddyRich September 7, 2008 at 11:18 pm

No No… GDP went up…

Still I conceeded that point by stating I don’t know if it was causation or correlation…

As for NAFTA being “free” trade. I don’t think so either. However given general inequality in concentrations of wealth amongst nations, I think it is impossible to have truly free trade… bigger countries will always overtly or inadvertantly bully lessor countries at the bargaining table. Its human nature…

. September 8, 2008 at 5:51 pm

The family revolution coincided with another: a great shift from a national to a planetary division of labor. Inequality within nations is rising in large part because inequality is declining among nations. A generation ago, even a poor American was still better off than most people in China. Today the lifestyles of middle-class Chinese increasingly approximate those of middle-class Americans, while the lifestyles of upper and lower America increasingly diverge. Less-skilled Americans now face hundreds of millions of new wage competitors, while highly skilled Americans can sell their services in a worldwide market.

As long as all Americans were becoming better off, few cared that some Americans were becoming better off than others. But since 2000, something has changed. Incomes at the middle have ceased to rise. The mood of the country has soured. Conservatives who disregard the mood of unease may forfeit their power to defend the more open and productive American economy they did so much to build.

Milan September 8, 2008 at 9:44 pm

Fine, but you’ve just turned the tables. Now free trade with the U.S. becomes an autarquish “Fortress north america” argument, and you’re just running the economic protectionism as an argument for free trade:

I am not saying: “Fortress North America is desirable, so let’s open trade with the US further.” I am saying that even if you believe that protecting against disruptions in global trade is the priority, more open trade with the United States seems to make sense.

In my account, Canada does have international sovereignty. We could certainly choose a North Korean style isolated economy. Sovereignty doesn’t mean an unlimited opportunity to choose whatever you want with no consequences. The responsible exercise of sovereignty lies in striking good deals, including those in which you sacrifice some freedom of action for a concrete benefit.

As for “diplomatic clout,” I don’t think we really have any. Canada isn’t important enough for anyone to feel the need to placate, and it isn’t powerful enough to sway others through economic or geopolitical means.

I agree about the difficulty of ascribing cause and effect in relation to something like NAFTA. At a few points, I took courses that involved fairly involved economic examinations of the issue. Unsurprisingly, they tended to split on ideological lines. There is enough evidence in the numbers to defend either a pro- or anti-NAFTA perspective.

Of course NAFTA isn’t entirely free trade. That is the whole point of the question above. Canada cannot hope to engage the United States on a level playing field, simply because we have far more to lose than they do from a breakdown in trade relations. That is why we lost on softwood lumber and will continue to lose on issues of sufficient political importance in the United States.

Arguably, the best Canada can do is to try to create institutions that produce a more level playing field, in terms of the application of existing rules. Arguably, both NAFTA and the WTO are imperfect vehicles for doing precisely that.

Hopefully, international trade institutions like the WTO will further evolve to the point where they are more effective at enforcing mutually agreed rules against stronger parties.

Milan March 10, 2009 at 11:11 am

You never know how much it will cost you to buy something from the US.

For instance, just today I got a $60 customs and brokerage bill for the photographic lighting equipment I bought back in January. I expected them to charge me the GST ($14.85) but the brokerage fees are always a wildcard. Sometimes, they don’t get charged. Sometimes, they end up being $40+.

All the more reason to have an address in the States to ship this stuff to, so you can carry it across the border later.

Milan March 10, 2009 at 11:23 am

‘Brokerage fees’ are really one of the most parasitic economic activities I can think of. Some firm gets to charge me $43.50 (plus $2.18 in tax) to collect $14.85 on behalf of the federal government.

All this because I had the audacity to buy some photo equipment from a country with whom we ostensibly have free trade.

. March 10, 2009 at 11:34 am

CBC MARKETPLACE: HOME » COURIER FEES
Courier charges leave some online shoppers fuming
Broadcast: December 5, 2000 | Producer/Reporter: Christian Côté | Researcher: Maxine Sidran

Tips: Getting around the fees

R.K. March 10, 2009 at 11:51 am

Was the gear shipped by UPS? They are notorious for charging these sorts of fees. It is almost always worth accepting higher shipping charges or a longer shipping time to avoid them.

Milan March 10, 2009 at 11:58 am

It was UPS. Apparently, they have an agreement with my workplace to contract out brokerage fees to a company called Charles Higgerty Limited.

That means, even though I went for the ‘WorldSaver’ option, which is meant to have no brokerage fees, they got charged because of the agreement.

Of course, I can’t have UPS ship to my home, since I am rarely there during the day.

In the future, I will make sure to use Fedex or the US Postal Service.

Milan March 10, 2009 at 12:08 pm

The Alienbees website explains that, for UPS Worldwide Saver to Canada, “in-house customs clearance performed by UPS, brokerage fees included in price (additional charges apply if clearance is performed by other brokerage offices).”

Of course, I had no way of knowing UPS would opt to use another brokerage office.

Milan March 11, 2009 at 10:42 am

Good news about the brokerage fee:

I called Charles Higgerty Limited and explained the situation (specifically, that UPS said the brokerage fees were covered) and they actually waived the $45.68 fee completely. I just need to pay the $14.85 in GST

My sense is that that they weren’t obligated to do this, so I am very appreciative. In the future, I will avoid UPS and make sure to send anything I order to my home address (despite not being able to sign for it there during the day) rather than a work address.

. November 12, 2010 at 10:16 am

In part this reflects a problem common to all European retailing. Some shops like to segment their markets to maximise margins where they face less competition. Big retailers, in turn, complain that suppliers impose geographical barriers: identical goods produced in the same factory must often be bought at different prices to be sold in different countries. Eurocrats suspect there is much market-fixing going on, in breach of the EU’s services directive. This forbids “discrimination” against consumers in different countries, except where differences are justified by “objective criteria”. How these should be interpreted and enforced is a matter for individual countries.

In part, the obstacles to cross-border internet trading are peculiar to the online world. Price-comparison websites remain obstinately national. A bigger problem is that most online retailers don’t want the hassle of 27 different consumer-protection laws, VAT rules, electronic waste regulations and postal systems. Varying copyright rules hinder pan-European downloads of music and video files, and even sales of music players and blank CDs.

In short, European shoppers and firms still think nationally. Oddly, it is American online traders such as Dell, Amazon, eBay and Apple that are the most active in Europe (though not without problems). Maybe they had an early advantage. Maybe only big players have the administrative strength to cope with so many national rules. Or maybe Europeans just can’t think big. Whatever the reason, European shoppers often find it easier to buy goods from America than from a neighbouring country.

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