Tuesday, November 29, 2011

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.


At 11/29/2011 10:43 AM, Blogger Benjamin Cole said...

I would prefer the free market determine the value of the yuan. Let it float.

The Chinese Communist Party has followed stimulative central bank policies, and pro-growth five-year plans.

The Chinese results have been terrific, while Japan has been suffocated in the last 29 years by tight money, and Europe and the USA are showing feeble growth.

I hope our system is better, but unless both US parties shed partisan shibboleths and blinders, I wonder if it will be.

Defense spending and tight money does not work. Social welfare spending does not work.

At 11/29/2011 12:04 PM, Blogger Che is dead said...

"I would prefer the free market determine the value of the yuan. Let it float." -- "Benji"

Two words - capital flight :

"BEIJING—More than half of China's millionaires are either considering emigrating or have already taken steps to do so, according to a survey that builds on similar findings earlier this year, highlighting worries among the business elite about their quality of life and financial prospects, despite the country's fast-paced growth ... The U.S. is the most popular emigration destination ... almost 60% of high-net-worth individuals in China had either arranged for, or were considering emigration. Of those, more than 20% had already completed their immigration applications ... respondents with an average age of 42 and average personal assets of 60 million yuan ... 46% ... were considering emigrating, while an additional 14% had either already emigrated or filed immigration applications ... respondents with assets of 100 million or more were even more inclined to emigrate, with 55% considering leaving China, and 21% already living overseas or having filed applications ... The top destination among those emigrating was the U.S. ..." WSJ

At 11/29/2011 12:23 PM, Blogger morganovich said...

china is over.

they have reached the back part of the massive bubble of over-investment driven by government lending.

money and credit growth are in the mid/high teens and rising while growth is slowing.

they are having to push harder and harder to get less and less.

it's done.

the chinese on the ground see it and are fleeing.

like all attempts at planned economies, you can get a few years of apparent growth by massively inflating investment, but then you get a huge bust as the misallocated capital fails to be able to pay off the debt.

it's not "stimulus" it's a massive debt bubble in fiscally unsound enterprises.

At 11/29/2011 12:32 PM, Blogger Benjamin Cole said...


I have a friend, former Chinese national, now works for IRS (I can't make this stuff up. Her father is in CCP).

She confirms what you have posted. The super-wealthy in China are placing bets in America, if case class tensions or government actions in China make life miserable there.

I hope they come to Los Angeles in droves!

At 11/29/2011 1:15 PM, Blogger Hydra said...

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.


We should be thankful for that form of.... transfer of wealth from relatively poor ..... to rich Americans, as unfair as that might be.

At 11/29/2011 2:16 PM, Blogger sethstorm said...

So Canada's selling their sovereignty for a few pieces of silver? Shame that the US won't act to ensure that an ally is not controlled by Third World despots.

China is not subsidizing the US by taking away the means for the US to produce and prosper. Bring on the tariffs and the pressure for our allies to stand strong against China.

At 11/29/2011 2:41 PM, Blogger Paul said...

"..transfer of wealth from relatively poor ..... to rich Americans, as unfair as that might be."

Nonsense. And how the hell does that work in practice?

At 11/29/2011 2:54 PM, Blogger Hydra said...

Hey, all I did was take aout a couple of modifiers.

If you believe the first sentence, you have to believe the second.

At 11/29/2011 3:03 PM, Blogger Hydra said...

"Canada is rare in the Western world for its lack of constitutionally entrenched property rights. The individual protections under the Charter of Rights and Freedoms do not include a right to property or any significant protections for property holders. While statutory protections exist in respect of expropriation (which entails the actual taking of title), and while common law protections have been recognized and affirmed by the Supreme Court of Canada which provide that compensation is payable absent express legislative language directing otherwise, Canada’s legal regime for the protection of property rights remains deficient."


Aspparently there are limits to what Canada believes about free trade, the end result of which is usually property.

At 11/29/2011 3:24 PM, Blogger VangelV said...

The Chinese results have been terrific, while Japan has been suffocated in the last 29 years by tight money, and Europe and the USA are showing feeble growth.

The issue could simply be timing. It is very possible that the Chinese government is making the same errors that the Japanese government made during its own boom phase. China's hope are its people and companies, not its central planners.

At 11/29/2011 3:27 PM, Blogger VangelV said...

Aspparently there are limits to what Canada believes about free trade, the end result of which is usually property.

It is true that Canada still has too many tariffs and too many regulations. But you are mistaken if you think that a constitution protects liberties any better than common law does. It certainly is not the case in the US.

At 11/29/2011 3:49 PM, Blogger Hydra said...

This comment has been removed by the author.

At 11/29/2011 3:53 PM, Blogger Hydra said...

Regardless of how it is done, very little else in the political process will matter if we do not hold governments foot to the fire and ensure that government does its principle job: protecting people and property.

Obviously this is complicated by varying degrees of protection for private property, public property, and communal property, but we are not even having the conversation yet that will allow us to build other institutions on the basic building block of property rights: who pays for what and who gets what.

At 11/29/2011 5:56 PM, Blogger truth or consequences said...

Funny Hydra....the Heritage Foundation (of all people) disagrees with you.

In it's Economic Freedom Index... Canada comes in sixth...the USA ninth... In the specific category of property rights Canada scores 90, the USA scores 80.


At 11/29/2011 11:03 PM, Blogger Hydra said...

They are not disagreeing with me, they are disagreeing with troymedia.com.

Heritage may be using old data. Some new legislation and court rulings have apparently deeply undermined property rights, particularly in Alberta.

As I see it the us sand Canada have arrived in similar places by different routes.

In Canada there is no constitutional basis so the courts held that there is no reason restitution cannot be paid, absent specific legislation.

In the us, the constitution says restitution must be paid when property is taken for public use. The situation here has devolved into an argument over what constitutes a valid public use, and whether property is taken if it is not ALL taken. This strikes me as silly since we know that parts of property can be severed a d sold seperately, like water, mineral, or building rights.

Even so, if government takes one of those kinds of property, they do not have to pay you, since you still have the rest.

I believe this will eventually be broken, but it is extremely hard to get this kind of case to court.

The situation is similar in Canada. They can destroy you without compensation, as long as they leave you with something.

But, in Canada, an attorney will not take a case on spec. You have to pay up front and take your chances. In the us you might find a lawyer who will take the case for a piece of the action, but you might never get to court on account of ripeness.

Niether system is worth a crap to the ordinary citizen with a beef.

At 11/30/2011 9:59 AM, Blogger Jeckab said...

Bed with desk underneath can withstand normal use and abuse by kids. It doesn't rust, dent, or bend

and, it even gets loose less often than the metal bunks. Wood is not malleable

or capable of being reshaped - a plus in the long term. Still, it is very

heavy to move around and transport. The
Bed With Desk Underneath is expensive however, when you are

considering the safety of your children money should not be the deciding.

At 11/30/2011 11:27 AM, Blogger Jeckab said...

It's actually not that difficult to do, and it will save you the most money. You do need plans, though, which can usually be found online or from someone else who has Girls Bunkbeds the challenge. After constructing your own, you'll have to find a mattress, though. There are very cheap options available but be warned: You may sleep so poorly you'll regret the money you saved.

At 12/02/2011 6:57 PM, Blogger Virginia said...

You are right that undervalued juan serves for the sake of all investors using imported inputs. But let´s observe the situation from the opposite side - since China effect stimulates Canadian economy significantly, strong yuan would mean increased Canadian profits from e.g. lumber ventures.


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