Renegades!

Trade Fluency and Influence

In recent days, the Canadian news has focused on a visit to Canada by the most powerful man on the planet earth: George Bush. The trip promises big changes, as the leaders focus on the issues that have divided the two nations in previous years. While most commentators focus on the influence of the pro war/pro peace divisions in the two countries, they neglect to mention that some of the irritants in the relationship are due not so much to 'country-to-country' differences, but the geographic and demographic nature of Bushs' key constituencies. These same constituencies that are driving much of the foreign policy, are also driving the trade policy.
In examining this phenomena, the most obvious place to start is the cattle industry. The US, from a Public Relations standpoint has had a free pass on this one, since they can blame the ban on Japanese policy. Years ago, Canada banned (legally) a type of fish that was being imported from Japan. The reason? The fish was highly toxic if not prepared correctly, and after numerous deaths in Japan, Canada shut down the sales of the fish in Canada, triggering a shutdown in NAFTA sales of the product. This meant a massive hit to Japan in terms of sales, similar to the hit Brazil took after Canada banned its beef.

Japan retaliated to the banning of its fish by banning Canadian beef the instant that BSE was found. The Americans, also sensing opportunity, followed suit. While Canada has attempted to reopen the border, the US has cited the fact that Japan will not allow the imports of US beef into Japan if the border is reopened to Canadian beef. Japan, on the surface, has become leery all of a sudden of Canadian beef. In reality, Japan-US trade is dwarfed by Canadian-US trade, and despite the fact that our beef has been deemed safe, the relationship between Canada and the US has suffered immensely due to BSE.

So the question remains, why would the US use such a flimsy excuse to cause problems with their best and biggest trading partner? The answer lies in following the money in the beef trade in the US. For years, US cattle ranchers have been lining up at the border to protest the imports of Canadian Beef. Under Clinton, gridlock in the US Congress and Senate meant that very little could be done to stem the tide of the beef south of the border. Bush, sensing an opportunity to shore up heartland votes along the norther border, moved in to secure their industry. The voters in the northern Cattle-producing states rewarded Bush with more votes than ever in the recent election. He has also bolstered the vote in these same states with massive farm subsidies, unparalled in any country save France and Japan.

The policy of shoring up the interior states' vote at the expense of allied nations is nothing new, however. The most obvious example has to be the illegal tariffs launched against European steel producers. While Britain stood by the US' side at the UN, the US was implementing tariffs to shore up the Pennsylvanian vote. The policy of steel tariffs was specifically aimed at Ohio and Pennsylvania, which were losing thousands and thousands of manufacturing jobs. These loss of these jobs in Ohio was particularly distressing, since Cleveland was becoming the post industrial ghost town that it is today, and this was the battleground state of battleground states.

Similarly, in the West Virginian hills, steel workers were losing hope in an already depressed state, despite the national focus on 'clean burning coal' that had propped up the state for some time. Still, with the eastern half of the state becoming DC commuters, there were liberals and ex-steel workers who might swing the vote on election day if action was not taken. Steel tariffs were introduced to the dismay of Britain, in particular. A trade partner, that stood with the US at the UN, against the wishes of their close neighbours in France and Germany.

Similarly, the Softwood trade was a dealt a similar blow. Underneath the nose of the Toronto-centric national news, and with Vancouver news outlets barely able to keep up with local news, northern British Columbia was attacked by the tariffs that ravaged the softwood industry. With the Canadian news otherwise occupied, and the constituency unable to influence national policy, the problem crippled what could be a national powerhouse of economic growth. With aluminum manufacturing, the possibility of massive offshore oil reserves, one of the top three deep sea harbours in North America (Prince Rupert), a potentially explosive tourism industry, the huge expanse of forests, a mining industry (currently tied up in red tape) and northern LNG plants, Northern BC sits calm as a bomb waiting for the layers of government to economically set it off. But with the tariffs, and an inactive government at the federal level, and a decentralized (Provincial and Federal) approach to resolving the issue, the problem persists.

In the US, the pain in the softwood industry was acute: Competitively, Georgia and other southern producers of poor quality wood were at a severe competitive disadvantage. The cheap Canadian dollar, highly efficient Canadian production techniques and superior materials made our product unstoppable, and with home building ramping up with the introduction of low interests rates, southern American producers realized they were missing out. With their only competitive advantage they had (lobbyists), the US softwood producers pressed their case on Capitol Hill and won a very unimaginative victory: Pulling out the same complaint they had the previous two times. They again complained that our softwood industry was 'unfairly subsidized'. Despite numerous rulings at NAFTA and the WTO, Bush sensed that he again needed to go to bat for a constituency he needed to solidify. Bush could not have known who he would oppose in the Presidential election, but with the onus on the Democrats to try to recapture Florida and possibly other parts of the formerly 'solid south', he probably sensed there would be a challenger on the ticket from the southern states. In this case, the ticket choice was John Edwards, who turned out to be an incredibly weak southern candidate: he could not even secure his own state.

Of course, trade is not a zero sum game, but there are definitely losers from these trade games that Bush plays. The heartland of America, with a focus on the production of food and goods was the key demographic that Bush has needed for his re election. But who suffered from these trade antics inside the US? Who would pay the price for his intransigence? Which states would feel the pinch of higher consumer goods, but none of the benefits of protected industry? The states that had moved past a reliance on industrial manufacturing and instead focus on service industries. States that do not name their universities after Agriculture and Manufacturing (A&M). States that rely on foreign trade rather than production. In short:

The Blue States.

The calculation of mandatory electoral votes, and the discounting of New York, New England, and the Pacific states/California, meant that trade with foreign countries was an expendable item. Trade, of course, is only one area where Bush has played up the divide in key demographics and regions (remember the words 'The Senator from Massachusetts'?) . While regionalism has long been kept under wraps in the US because of their senate which nullifies some of the weight of populated states, it is now guiding the very visible hand of international trade policy to the overall detriment of the US.

The good news is that re-election is no longer a priority for this president. The Democrats are going to use their considerable braintrust to figure out a way to attack the president in the next election, and with no obvious figure ready to take on the Republican candidacy, there is an open door. The situation will be extremely liquid and an obvious strategy for playing to the heartland may not present itself. The strategy, while barely able to eek out two tight elections, will not hold for a thrird. To widen their appeal, the president might want to tear down the trade barriers and let the Republicans stem the bleeding in the currently Blue states. Canada, for its part, can allow some give on issues like NMD and show some more vocal, if not military support, for the Middle East adventures of the US. Showing up to vote on some US backed issues in the UN would also go a long way.

With nothing to lose, and four years until the next election to get the economic reforms underway, the president has an opportunity for his party and his weary allies to step back from the darkside of trade policy. For the sake of his country and his party, he needs to stop playing politics with trade policy, and start encouraging freemarket economics.

posted by Shamrocks! @ 8:18 PM