Introduction
In an increasingly globalized world, trade barriers are frowned upon as not only restrictive but as agents that reduce productivity and encourage stagnation of technology. Trade barriers are restrictions that the government of a country may introduce to protect its local industries. Many countries such as India and other Asian countries, South American countries, use trade barriers as an effective tool to safeguard local industries such as agriculture, mining, fishing and other sectors. Canada is a signatory to WTO, NAFTA and other trade treaties and has technically removed the tariff barriers like extra import duty, VAT and other punitive taxes that make a product expensive. However, the government has an unfortunate history of equating removal of tariffs as an infraction on the national sovereignty. As a result, there have been a number of non-tariff barriers – NBT that has succeeded in only dragging down various industrial sectors. Since 2000, about 50% of Canada’s GDP is met through exports. Many other industries such as forestry, agriculture, dairy and meat processing and the touchy fishing industry have received overt protectionist policies from the government. It is also to be agreed that the critics who oppose the removal of trade barriers are also partly right since there has been an increase in outsourcing and flight of capital. Fisheries particularly need protection with the Japanese and Korean trawler factories almost wiping the vast nesting grounds of fishes. However, the labor productivity of Canada when compared to that of US is dismally low and it has attributed to the protective policies of the government that causes more harm than good (Feenstra, 2009). This paper examines and assesses the extent of trade barriers, both tariff and non-tariff that Canada has imposed on its trading partners. An assessment would also be performed to understand various sartorial contributions.
Rationale for the Paper
Trade barriers have quickly become the dirty word in international trade and protectionist policies are frowned down in advanced economies. The whole idea is that if manufacturers from other countries can manufacture and sell products at cheaper rates in a target country than the local manufacturers, then the government should not impose tariff barriers and make the imports expensive. By undertaking such a measure, citizens of the target nation are denied access to cheaper products and the local manufacturers continue their low productivity processes since there is no fear or threat for the business. In the case of Canada, an assessment of the existing trade barriers would help to develop a policy that would stimulate local industries and yet allow its citizens access to cheaper products. A proper assessment of the trade policy and trade barriers would help Canada to make its argument strong besides helping to improve the productivity. Hence, the subject is important from a future point of view (Krugman, 2008).
Background
Removal of trade barriers and opening the economy to international trade has been done by the leading communist countries, the erstwhile USSR and China. By opening their markets these countries have vastly improved their cloistered economies and their industries have been changed forever. Till a couple of decades back, capitalist and entrepreneur were hated words in these countries and now these words are high regarded and much sought after. Therefore, by opening the economy and allowing free competition in goods and products, the local industries have grown like never before. In India also, the automobile industry is worth mentioning. Before 1990’s there were just three automobile manufacturers and some three or four, two wheeler manufacturers. The market was very lopsided with complete monopolies enjoyed by the few players. As a result, local manufacturers never bothered to bring in models and therefore the industry stagnated, prices of automobiles were so high that owning an automobile was a luxury that only the rich could afford. When the economy was opened and foreign companies such as Ford, Honda, Suzuki, Yamaha, Chevorlet, Skoda, Mercedes were allowed to set up joint ventures. The resulting boom was truly remarkable with thousands of jobs being generated and the economy increasing in leaps and bounds. Almost all of the older automotive firms that had a monopoly were soon out of business and operate only token services (Feenstra, 2009).
The above factors should serve as an eye opener for the critics who wish to retain trade barriers in Canada in the hope of protecting the local industries. Sadly, nothing can be worse from the truth and if anything, the older generations of industries seem to dying a slow death. At the same time, third world countries such as China, Vietnam, Bangladesh and others hire local workers at very low slave labor rates and make them work in sweat shops. Their government also provides them highly subsidized power, land, tax holidays so that production is boosted. As a result these manufacturers are able to sell their products at very low rates in Western countries, swamping out low technology items such as toys, packaged food, apparel, foot wear, electronic goods and other such items. However, Canada and other developed countries are indeed authorized to set up anti dumping measures against these countries and protect the local industries (Krugman, 2008).
Therefore, removal of trade barriers is a double edged weapon and both trading partners must reciprocate for effective removal of tariffs. When Canada is asked to open its agriculture and dairy markets to manufacturers from abroad, it has to be assured that the ‘tainted milk’ scandal products that killed a few babies in China are not dumped in Canada. It is also fair to expect Canada to ask opportunities to trade in specific areas and to expect that Canadian workers would find appropriate employment in overseas markets.
Research Question, Aims and Objectives
The paper has framed the research question as “To asses the tariff and non tariff barriers erected by Canada; to understand how these barriers have effected the industrial productivity and to make recommendations to remove the barriers if any”.
Aims and objectives of the paper are:
- Extent of productivity gap between US and Canada in industrial output.
- Extent of tariff and non tariff barriers in Canada
- Barriers to competition in Canada
Literature Review
Canada and USA have a lot in common and besides sharing the same borders, have a somewhat similar history and cultural shifts. However, the main issue is that all the states of USA enjoy freedom to trade amongst themselves and one could say that trade barriers are very less for internal trade in USA. In Canada however, there is a lack of free internal trade. Canada has 10 provinces and these provinces have managed to set up a number of trade barriers amongst themselves. Since the provinces of Canada were actually set up by UK in the early 17th century when there were frequent wars and skirmishes between the provinces. These provinces were export oriented and were not very much interested in inter Canada trade. As a result, the legislators set up a number of protectionist barriers for the free movement of goods and labor from one province to another. Incredibly, this mindset has continued till recently. When the 1988 US Canada FTA was signed and this was in turn superseded by the NAFTA in 1994, business and employees in Canada actually had greater access to US and Mexican markets than the internal markets in Canada. It has been estimated that the inter provincial barriers of trade in Canada costs the nation annually about 25 billion USD. Changes have been brought about by TILMA – Trade, Investment and Labor Mobility Agreement, that promises to do away with the internal trade barriers. However, these barriers have been vested by acts of parliament and it is very difficult to obtain the required number of votes to overturn the barriers. Thus, it can be seen that when one talks of trade barriers of Canada, it means not just the country but removal of barriers across all the provinces and states. It is indeed a wonder how these provinces can erect barriers against import of goods and labor from other Canadian state (Sands, 2007). The next section would examine various aspects of the trade barriers in Canada.
Extent of industrial productivity gap between US and Canada
Studies by the OECD groups have shown that policies that enhance competition and encourage a level playing field can provide for higher productivity in a nation. The economic growth would also be more robust as more people find employment, with increased flow of revenue. With increase in trade, there is better resource allocation and utilization, managerial efficiency and effectiveness is encourage and technical innovation is increased. There is also a diffusion of technology that helps to increased the local technology level. Following figure shows the productivity of Canada as compared to US and the trend shows a widening gap between the two with US figure rising up. With lower productivity, the efficiency is much lower and costs of production are much higher. As a result, the per capita basis nominal GDP in Canada was about 85% that of US (Darby, 2006).
It should again be noted that the determinants of productivity are complicated and the gap between US and Canada figures is not due to a single reason. However, the environment in which firms function is important, Productivity performance in Canada is impacted by the global business environment trends such as China. These issues are beyond the control while some influence can be exerted over the international trade and investment policy environment. Productivity is also impacted by organizations, their processes, amount and type of physical capital and employee quality. It is also impacted by the rate of technology diffusion and willingness for technology adoption. There are also the environments in which the firm operates, type of policy framework in which firms operate. Therefore, the openness of the economy for trade and investment, the amount of competition and the type of regulatory regimes guide the productivity performance. It is true that lack of entrepreneurship or innovation often hides by blaming intrusive policies and regulation. However, in many cases, such as that in Canada, the regulatory mechanisms are so intrusive that they stifle participation from foreign investors. In many cases, these policies are not required at all. An example is the 25% cap on foreign investment in certain sectors. Other nations go out all the way to woo foreign investors while the Canadian government in a bid to protect local industries imposes such a restriction that denies management control to foreign firms. As a result, very few firms would be interested in such a set up (Chaitoo, 2008).
The section shows that Canada has a legacy of internal and international protection for trade and commerce. This is turn has inhibited development of competitive markets. Productivity can be enhanced by discarding some barriers that impede effective functioning of markets. This is more true in core primary and manufacturing industries. By adopting such moves, it would yield more efficient allocation of resources, increased economic activity and improved living standards.
Extent of tariff and non tariff barriers in Canada
Overall, tariffs have decreased over the years and almost 50 per cent of products that enter Canada are duty-free. These changes occurred in the past decade, due to Canada’s participation in the WTO and regional free trade agreements, such as NAFTA. In some cases such as agriculture, the level of protection is quiet high.
Tariffs Barriers
Canada has instituted preferential tariffs with different countries under individual free trade agreements. Accordingly, about 100% of goods entering the country from USA are duty free while about 94% of products entering from Mexico are duty free. However, some products have a defined structure of tariffs in different forms. Following table shows Canada’s import tariffs.
As can be seen, products such as dairy and live animals have a high tariff under NAFTA. Dairy products in one of the most important industries and thus a tariff of 237.3 % has been applied while live animals such as poultry and beef as a barrier of 52.7%. In contrast, pulp and paper products have a low tariff of just 0.6%. It has been noted that average Canadian tariff rate is the maximum among USA, EU, USA and Japan regions at 13.1 % while the average rate for MFN nations is 6.8%. Items such as poultry, dairy and eggs are regulated and producers have to purchase quotas to sell in the domestic market. If the quota is exceeded, then large penalties are levied and any imports beyond the quota are subjected to very high tariffs (CCC, November 2008).
Non-Tariff Barriers
Non Tariff Barriers are impediments for entry of products or services made in foreign shores when they enter Canada. Tariffs, custom duties and taxes are not included in NBT. The impediments can assume different forms such as technical specifications, sanitary standards, difficult to meet administrative and legal requirements, expensive formalities and so on. There are four main types of NTBs and they are restriction on investment and controls; quantitative controls and restrictions phyto sanitary, sanitary and technical restrictions and all other NTBs for trading. Investment restrictions include uranium production, minting of currency, stamps, and a few others where the government has absolute monopoly and control. Other areas with limited investment are fishing where fishing licenses is granted to only Canadian fish processing firms with less than 48% foreign holding; airlines where foreign ownership is maximum 25%. Other areas are financial services such as federal bank, federal insurance with 25% foreign investment; broadcasting with 33.3 % FDI and many other sectors (CCC, November 2008).
Internal Trade Barriers
There are barriers to internal trade and provincial and territorial governments can intervene and bring in regulations to protect their economies from external threat. The areas where such tariffs can be erected are Procurement, Investment and Labor mobility (CCC, November 2008).
The understanding is that in Canada, there are barriers in the form of tariffs, non tariff barriers and even internal trade barriers. There are designed to protect certain industries deemed to be of national importance. However, for better flow of goods, internal barriers and tariffs must be reduced. It is also possible that these tariffs act as revenue generation mechanism for local provinces. Non-tariff barriers have to be rationalized and eased in certain cases for foreign investments. Economies across the world encourage FDI while the Canadian government insists in placing stiff barriers for FDI and these barriers should be removed (CCC, November 2008).
Barriers to competition in Canada
Non-tariff barriers are regarded as great barriers to competition and entry in the Canadian markets. NBT serve to lower the competitiveness of local companies in national and international markets as they are faced with excess costs. A survey with 186 respondents was undertaken to find the customers perceptions about the greatest barriers to competition, A majority suggested that NTBs are negative in the impact on their business and that regulations help to constrain the ability to enter other markets (Bradford, 2006).
Standards and regulations as the main barriers were selected the maximum times with 53 responses and these are federal in nature. About 40 per cent of the responses or 61 responses indicated that federal involvement in privacy legislation, marketing boards, and procurement policies. The barrier regarded as being mainly provincial is the restrictions on labor mobility. The three most frequently selected barriers at the provincial level are standards and regulations with 60 responses, procurement policies with 42 responses and licensing with 32 responses. These three items cover over 60 per cent of the barriers identified as originating with the provinces. Some respondents indicated that non-standardized regulations for degrees, credentials, and qualifications that reduce labor mobility and also frustrate product approvals. The resulting shortage of labor market flexibility means that it is difficult to do business across provinces. As an example, in the construction industry, since out-of-province labor is not allowed in Quebec, it brings down efficiency. Thus rival forms are, locked from competing in the market (Bradford, 2006).
As seen in the above figure, there are a number of barriers to competition and these are shown along with the percentage of responses and actual number of responses. The most important impact was loss of business, selected by 51 respondents. The next selection was increased administration costs with 48 respondents and reduced competitiveness at national or international levels with 25 respondents. 22 respondents also indicated higher cost structure and 20 people selected higher costs incurred in fighting or avoiding barriers. There are also instances of reduced innovation and product improvement capacity, higher input prices, and inefficient operation size. Loss of business indicates the sun of the effects of all barriers for competition. This is because regulatory restriction with higher cost structures make companies non competitive. In some cases, the regulatory burden reduced product speed to market and there was a greater cost structure. There were also instances of losing potential customers in US as the barriers for competition in Canada have stunted growth. Thus, the size of operation was made inefficient (Bradford, 2006).
Conclusions and recommendations
The paper has examined and assessed the barriers for trade in Canada. The country has had a long history of not only placing external barriers for trade but also internal barriers that seek to prevent competition from one province to another. The following set of conclusions can be drawn.
Productivity Gap: The increase in trade barriers in Canada has resulted in a substantial drop in industrial labor productivity when compared with US. The gap in productivity between US and Canada has now grown to about 20%. The drop in productivity means that Canadian firms remain inefficient, waste resources, incur higher manufacturing costs and this in turn means lower wages and lower standard of living. When there is no competition due to the trade barriers and protection given by the government, firms do not have the need to innovate and adopt new technology. Employees even create impediment to diffusion of technology and the firms continue with old and absolute system and processes.
Tariffs: Tariffs in Canada are decreasing and about 50% of imported products are deemed duty free. Canada is a member of WTO and NAFTA. These have produced sufficient reduction in tariffs since 15 years. The country is also removing restrictions in some traditionally protected areas. These are opened to the competition. Tariffs on industrial goods are relatively low and this has happened due to the progressive reductions over a large number of preceding years. However, the amount of protection for industries is high. Tariffs for agricultural products are at about 21.7 per cent while the tariffs are 238% for dairy products.
Non Tariff Barriers: The government in a devious way to protect some industries has resorted to non-tariff barriers and these drive trade relationships. NTBs that have bee used are quotas, technical standards, certification requirements, procurement restrictions, licensing restrictions on foreign ownership. There are a large number NTBs and with the federal system of government, many of the barriers are internal and not international. Protection of local interests means NBTs are a reality.
Impact of Barriers on Doing Business: The overall impact on business due to barriers is that the cost of doing business with a Canadian firm goes up. The increase in cost does not essentially yield more revenue for the government. Federal and provincial or territorial governments were actually responsible for the formation of NTBs. The main impact of NTBs was in increasing the costs. In this context, this means lower productivity. Costs include costs of complying, reduced innovative capacity, costs that arise from inefficiency to the size of operations. There were also a number of marketing, lobbying, productions, strategies that have been used to deal with NTBs. In some cases where solutions were not feasible, some markets were abandoned good markets.
Recommendation to remove Trade Barriers
Any suggestion to remove trade barriers and open the market should be closely considered and monitored. However the following steps can be considered.
Tariffs: There is a scope for further reduction in tariffs and the reduction should be done gradually. Local competing industries should be trained in using and adopting new technology and addressing new customer demands.
Non Tariffs Barriers: This is one very crucial area that requires urgent consideration. While it is understood that certain industries such as the mint, posts and telegraphs would be off limit for foreign investment, close attention must be given for other industries. Since majority holding is not currently allowed for foreign firms, a through survey must be done to assess industries that can be liberalized. In such areas, more than 51% FDI should be allowed since foreign firms want to have management control in a firm. The move should be to allow gradually a 100% foreign investment in certain industries. Greater liaison should be expected between government and the trade bodies and requests from such bodies for relief and subsidies should be encouraged. All over the world, governments undertake extra efforts to invite FDIs while Canada wants to inflict as many NBT as possible. Such an approach is not correct.
Areas for Further Research
It is proposed that an interview and a survey instrument should be used to poll heads of business that trade with Canada and within Canada. Such a methods would help to obtain their direct views on what needs to be done to remove trade barriers and at the same time to protect local industries.
References
Bradford, Scott., 2006. Paying the Price: Final Goods Protection in OECD Countries. The Review of Economics and Statistics, 85(1), pp. 24–37.
CCC, 2008. Canadian Chamber of Commerce, Obstacles to Free Trade in Canada: A Study on Internal Trade Barriers. The Canadian Chamber of Commerce, Ottawa.
Chaitoo. Ramesh, 2008. Reducing regulatory barriers to trade: Lessons for Canada from the European Experience. Center for Trade Policy and Law, Occasional Paper Series, 18, pp. 1-61.
Darby. Paul, 2006. Death by a Thousand Paper Cuts: The Effect of Barriers to Competition on Canadian Productivity. The Conference Board of Canada, Montreal.
Feenstra, R., Taylor, A. 2009. International Trade. New York, NY: Worth Publishers.
Krugman, Paul & Obstfeld, Maurice, 2008. International Economics: Theory & Policy, 8th Edition. New York: Pearson Addison Wesley Publication.
Sands. Christopher, 2007. Canada’s Problem: Domestic Trade Barriers. The Journal of the American Enterprise Institute. Web.