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Another old-economy trade fight with Trump looms, but services matter much more than aluminum

By on August 16, 2020 0 128 Views

Chrystia Freeland, who marshalled Canada’s troops during the North American trade wars of 2017-19, revisited her greatest rhetorical hits when she returned to the field of battle last week, threatening to hit back if Donald Trump goes ahead with punitive duties on Canadian aluminum this weekend, which he surely will.

“We do not escalate, we do not back down,” Freeland, now the deputy prime minister, said (again) in front of cameras in Ottawa on Aug. 7.

The suggestion that an alleged surge in unwrought aluminum from the Canadian operations of global behemoths such as Alcoa Corp. and Rio Tinto Ltd. represents a threat to American security was “absurd,” just as it was when the United States targeted Canadian metal in the spring of 2018 on the same grounds.

“I think Canadians will agree with me, it’s very important to react,” Freeland said.

So here we go again. Prime Minister Justin Trudeau’s government might have turned the other cheek and left an industry dominated by a few massive corporations to fight its own battles. Instead, Trudeau took the bait. That means Canadian consumers will be punished with higher prices in order to “protect” exports that were worth some $609 million in June, or about 1.2 per cent of the $47.8 billion in goods and services that Canada sold abroad that month, according to Statistics Canada’s most recent figures .

If the deputy prime minister is comfortable going into this new fight with refried talking points, then I’m going to recycle some old columns. This Canadian doesn’t agree that it’s “very important” to react. We’re suffering from this tit-for-tat nonsense, all for the benefit of a few industries whose lobbying muscle exceeds their contribution to gross domestic product.

The tangle over revising the North American Free Trade Agreement was disappointing because Canada’s “wins” were scored by legacy interests, such as auto-parts manufacturing and milk production. That means that during negotiations, Freeland cashed her chits on economic engines that have probably maxed out, rather than insist on rules that might benefit sectors more closely aligned with the digital economy.

It’s fine that supply management was preserved, and that the makers of auto parts and their unions got much of what they wanted, but what advantages did companies such as Inc. and Facebook Inc. retain? We have little idea, because the Canadian political class put farmers and autoworkers ahead of everyone and everything else.

All the momentum in trade is in services, which represented 24 per cent of total trade in 2019, compared with 19 per cent in 1995, according to a report published this week by Western Union Business Solutions and Oxford Economics. Those numbers are based on official statistics, which tend to undervalue services because things such as research and development get wrapped up in the price of goods. The Western Union study estimates that services actually represent about 55 per cent of total trade.a close up of a map

The trend is the same in Canada. The value of commercial services exports surged to $6.8 billion in February, roughly equivalent to oil exports and greater than auto exports, according to Statistics Canada data. That was six months ago, before COVID-19 changed everything. There is no longer any contest. The recession hammered exports of every kind, but commercial services had recovered to 85 per cent of their February value in June, while oil shipments stood at thirty per cent of their worth at the start of the year.

“Services have been under the radar,” Roy Farah, head of North America at Western Union Business Solutions, said in an interview earlier this week. “To a certain degree, that’s a good thing,” he added, given the Trump administration’s tendency to harass exporters of tangible goods such as steel, automobiles, airplanes and wine.

Instead of getting bogged down in a new trade war over aluminum, we should focus on the future.

A friend of mine runs IMBA Medical Inc., an Ottawa-based developer of billing applications for physicians that realized its software could be rejigged to help hospitals, schools and other institutions manage all the new COVID-19 requirements. IMBA started cold calling U.S. school boards by the dozens and is starting to get traction. That is what trade looks like now. The Western Union study projects that global trade in services will increase 30 per cent by 2025.

Canada is good at the services game, but not great. Western Union and Oxford Economics identified Japan, South Korea, Australia, New Zealand, Saudi Arabia and the United Arab Emirates as “hot spots,” while the U.S. stands out because of its size and collection of world-beating companies. Canada and some other rich economies are in the second tier.

“It wouldn’t take much for Canada to get where Japan and the U.S. are,” Farah said. An emphasis on education and research and development is key. We’re strong on the former, while the latter is a matter of reallocating resources. Farah also noted that the cost of telecommunications here is “much higher” than in other countries. “This is having a big effect on technology readiness,” he said.

Fixing that problem will require a tough fight with the telecom oligopoly. The payoff would be far greater than another scrap with Trump over aluminum.

Financial Post – Kevin Carmichael

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