Canada: "We Believe in Free Trade" and Will End Dozens of Tariffs on Imports to Help Manufacturing

TORONTO (Reuters) - "Canadian Finance Minister Jim Flaherty said on Sunday the government would eliminate tariffs on dozens more products used by Canadian manufacturers, aiming to lower their costs and encourage more hiring. The initiative would scrap custom duties on 70 items used by businesses in sectors such as food processing, furniture and transportation equipment.

Flaherty, who estimated the tariff cuts would save Canadian businesses C$32 million ($30.5 million) a year, said the cuts were part of the Conservative government's overall free trade policy. "We believe in free trade in Canada," Flaherty said on CTV's "Question Period" program. "Some of these old-fashioned tariffs get in the way. So we're getting rid of them."

As part of its Economic Action Plan to pull Canada through the global slowdown of 2008-09, the government has eliminated more than 1,800 tariff items, providing about C$435 million a year in tariff relief. Its stated goal is to make Canada a tariff-free zone for manufacturers by 2015."

A few thoughts:

1. We sometimes forget that "tariffs" and "duties" are really "taxes" on imports; and therefore eliminating or reducing tariffs or duties is the same thing as eliminating or reducing taxes on consumers and businesses buying foreign products.  In the same way that "tax cuts" can stimulate economic activity, "tariff cuts" do the same, and that's the approach being taken in Canada. 

2. When it comes to helping domestic manufacturers through trade policy, the usual approach is to impose tariffs or restrictions on imports as a way to protect domestic producers from more efficient foreign producers.  But the Canadian case illustrates the reality that domestic producers are often using foreign-produced inputs, parts and supplies, to manufacture products domestically, and in that case reducing tariffs on imports ("cutting taxes") helps domestic manufacturers by lowering the cost of their foreign inputs.  

The chart above displays U.S. imports by category for 2011 (through September) and shows that roughly 58% of imported goods are: a) industrial supplies and b) capital equipment that are being purchased by U.S. producers.  If we were to completely eliminate tariffs on imports, U.S. manufacturers relying on foreign inputs would receive significant benefits, while other U.S. manufacturers competing against imports would be less protected from foreign competition.  

Bottom Line: Even though we usually think of increasing exports as the route to increased domestic manufacturing output and employment, Canada's trade policy of reducing tariffs for its manufacturing sector highlights the important contribution of imports to domestic manufacturing.

Update: By keeping its currency undervalued, China is in effect subsidizing American businesses and consumers buying products "Made in China."   We should be thankful for that form of "foreign aid," or transfer of wealth from relatively poor Chinese to rich Americans, as unfair as that might be.  If the U.S. pressures China to appreciate its currency, it would be exactly the same as imposing (or increasing) tariffs on Chinese products.  And just like increased tariffs would make Americans worse off overall, I would argue that a stronger yuan would have the same result.