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Post-War Growth

First and foremost, the reader should realize that the benefits of free trade are purely theoretical. Free trade is just a theory about how the economic world works and the effect that one variable bears on another. In the most simple terms, and keeping in mind Einstein's observations, free traders assume that an increase in one variable (free trade) results in an increase in another (income, economic growth, or wealth). Not surprisingly, anti-free traders take pretty much the opposite position and propose that free trade leads to higher unemployment, lower wages, and, hence, slower economic growth, although they add the important proviso that benefits accrue to the already wealthy. In any case, both sides work within the trade/growth framework, the difference being that those who support free trade argue that a positive relationship exists between the two variables and those who oppose it imagine this relationship to be negative. Theoretically neither of these propositions is difficult to understand; neither represents a complicated relationship. Maybe that explains their appeal. But just because a model is theoretically simple does not mean the world automatically falls into place to accommodate it.

Supporters of free trade know few bounds when it comes to their enthusiasm for open markets. In order to bolster their case they attribute all kinds of wonderful things to free trade. The WTO traces the post-war peace to the claim that trading nations do not fight, although there is scant evidence to support this. European countries traded vigorously from 1910 to 1913, yet they fought the First World War anyway. Free traders also like to credit the post-war boom to the parallel increase in trade. Yet tariffs were still relatively high in the beginning of that era, and now that they have been substantially lowered, economic growth has also slowed. Again, such evidence taxes the credibility of the free trade theory. Furthermore, there are many instances, including Canada's National Policy of 1879, where protectionist policies were practised for over a century without apparent ill effects to the economy. Even this cursory overview illustrates that the theory of free trade takes some questionable liberties when it comes to tracing its benefits.

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The fact that the evidence for the benefits of free trade is, at best, tenuous has failed to dissuade both opponents and proponents from their respective causes. The belief of the superiority of free trade is deeply ingrained into the psyches of its supporters. But since substantiating data are hard to come by, proponents have been compelled to circumvent the cause and effect relationship altogether. Instead, researchers have resorted to fuzzy logic and selective evidence to back their claims. Rather than measuring the success of free trade by economic growth, which, arguably, should be its ultimate objective, researchers marshal statistics showing the amount of goods and services traded. As evidence of the success of a series of bilateral trade negotiations between the United States and selected countries after the Second World War, Michael Hart, a senior associate of the Centre for Trade Policy and Law at Carleton University provides trade statistics and writes that "Economically, the program was a success."6 In other words, increased trade is presented as evidence of the success of a free trade agreement, which is questionable to begin with, but to further characterize this as an economic success is disingenuous, as it conflates increased trade with economic well-being. Similarly, Sidney Weintraub contends that the proper way to assess the success of a free trade agreement, in this case the North American Free Trade Agreement (NAFTA), is to measure the amount of trade that has transpired under the new trade regime.7 This makes one wonder why have free trade if its sole benefit is more trade? These are not isolated examples but are indicative of an emerging trend, noted by Graham Dunkley, in which trade is no longer a means to an end (economic growth), but an end in itself.8 In this sleight of hand, free trade and economic growth become synonymous. Free trade is economic success. No need to examine further evidence about economic growth, as trade itself becomes the objective. This melding of the free trade/growth relationship conveniently circumvents any difficulties that one might have showing the relationship between the variables of free trade and economic growth. Voluminous trade is economic success. Full stop.

Not surprisingly, the relationship between trade and economic growth has proven much more difficult to verify empirically. For this, let us examine what turned out to be a heated topic of discussion throughout the free trade debate in Canada in the late 1980s: jobs. One of the rallying cries during the campaign for free trade, a period of high unemployment, was the promise of more and better employment. Jobs in this case can easily stand as a proxy for our dependent variable, economic growth. In Canada, proponents of free trade point to an increase in trade with the United States in order to demonstrate its benefits, and from there make all kinds of extrapolations about the jobs that have been created. Brian Mulroney writes that "trade means jobs [and it]has created four of every five new jobs since 1993."9 Of course, this argument completely ignores the jobs destroyed by free trade. Enumerating jobs created while ignoring those lost is akin to giving only half the score in a hockey game. And no one can deny that there are two sides to this story, that free trade cost at least some jobs. As American branch plants relocated to their home base, jobs went with them. At the heart of the issue is whether the jobs lost were replaced or exceeded by the jobs created. Put slightly differently, has there been a net gain or net loss in jobs? This is a critical point, and while it may be difficult to confirm, it does not make for very good science to ignore it. In other words, in the absence of free trade, Canada would in all likelihood be manufacturing more products for the domestic market, which would mean fewer exports but at the same time fewer imports. The resulting wealth could well be comparable, if not identical. A similar criticism can be made of studies that point to the number of jobs that have disappeared because of free trade. They ignore the number of jobs that have been created in export industries. A job loss in the tire industry might have been replaced with a job in car manufacturing, a job in the fruit industry with one in the wine industry. In the end it becomes impossible to keep track of how many jobs have been created and how many have been destroyed and to arrive at an accurate net figure.

Furthermore, not all jobs are the same and how does one compare jobs lost with those gained? Is a job gained in the service industry selling books equivalent to a job lost assembling tractors? How does one assess good jobs and bad jobs and should such a distinction be drawn in the first place? The issue gets even more complicated. Even if one were able to arrive at some reasonable estimate of net job losses or gains, it would be a logical leap to then attribute this change to free trade. Let us refocus our attention on our original relationship between free trade and economic growth. There are so many other factors that dilute the impact of free trade that it not only overwhelms our minds but also confounds statistical models. The post-war economy will serve as an instructive example. In both Canada and the West, the economy experienced rapid growth in the immediate post-war era up until about 1975. As a matter of fact, this period was the most prosperous ever for the world economy, Canada included, and consequently is frequently referred to as the Golden Age. After 1975, that growth slowed, again not only in Canada but around the world. But to blame that slower growth on free trade would be unfair. Many other factors contributed: Mechanization made many jobs redundant and employment opportunities decreased dramatically in primary industries, such as forestry and mining, and secondary industries, such as manufacturing.

In other words, throughout the decades following the Second World War, the rich economies underwent a transition from industrial to post-industrial, or service, economies. On top of some misguided political decisions, this has meant a sea change in the composition of the labour market, from well-paying and secure manufacturing jobs to part-time and temporary service jobs. Canadians are also much better educated now. Those with little education are faring worse than their uneducated predecessors of the 1950s, and the chasm between the less educated and the well educated is continually widening. In short, Canada's labour market is becoming increasingly polarized, and while it is able to boast some very good service jobs (lawyers, engineers, teachers), there are just as many, if not more, less desirable ones (clerks, short-order cooks, telemarketers). Meanwhile, the number of well-paying industrial job markets is decreasing steadily. Technology appears to have played a more important role in this realignment of jobs than has free trade.

If this were not already complex enough, other factors need to be considered. Millions of baby boomers are at a point in their lives when they are no longer buying big-ticket items and investing their savings in the stock and money markets. Booming stock markets in the 1980s and 1990s are a testament to this. As millions of people have voluntarily curtailed their consumption over the past decades, fewer people are needed to produce goods. And so the list that explains the economic downturn goes on seemingly without end: The energy crisis in the 1970s meant that inflation firmly entrenched itself into the economy; high interest rates to fight inflation led to increased unemployment; increased private debt meant consumers had less discretionary money to spend, which further contributed to unemployment; mounting debt has forced all levels of government to lay off workers and implement cutbacks; a lower dollar has led to higher costs for imports; shrinking incomes has meant that one-income families are no longer viable, compelling an unprecedented number of women to join the workforce in order to make up for the shortfall.

Now comes the difficult task of determining whether the economic slump of the past decades was due to free trade, a general downturn in the business cycle, jobs devoured by technology, a trend towards a post-industrial economy, a slowdown in consumption by baby boomers, or demographic changes such as an aging population or smaller families. In other words, we need to establish a relationship between free trade and the economic decline. The above only hints at the huge inventory of variables that can be implicated here. Furthermore, variables often interact and it is difficult sometimes to tell which is cause and which is effect. Is unemployment the result of a slowing economy or is the slowing economy a manifestation of increased unemployment? Shrinking wages have meant that those with jobs are working longer hours, which has directly translated into a falling demand for workers, higher unemployment, and even lower wages. This reveals that variables interact, and as seems to be the case here, once everything impacts everything else we are stuck in an epistemological nowhere land. This is further complicated by the fact that there has been relatively little change in the dependent variable, economic growth (measured according to gross domestic product, or GDP). Since the mid-1970s, the Canadian economy has neither crashed nor regained its Golden Age splendour. In other words, how can trade be responsible for an increase in economic growth when there has been no substantial increase in that economic growth? As a matter of fact, growth has slowed, but, admittedly, not drastically enough to be able to link to a specific variable. Unfortunately for both those who support and oppose free trade, when it comes to the relationship between trade and economic growth, the evidence is far too thin to draw any definitive conclusions. And given the relatively small changes in economic growth that we have experienced in the post-war economy, it is more likely that it is the effect of trade that has been negligible rather than our inability to detect that change.

The variables just examined point to two important conclusions. One, the rapid post-war growth cannot be directly linked to free trade. As a public policy issue, with the exception of the General Agreement on Tariffs and Trade (GATT) negotiations, free trade was very much on the back burner throughout the first three decades after the Second World War. This resulted in relatively little trade, yet economic growth was substantially more robust than now. Variables like high employment, vast increases in productivity, and a better educated workforce were obviously much more consequential here than free trade. Two, the gradual contraction of the economy that began in the mid-1970s cannot be blamed on free trade either. Again, there are many other variables that can be implicated and probably had a more profound impact. If the effects of free trade are likely to be negligible, why has there been all this commotion for nearly twenty years? This is difficult to say, but it is likely that the free trade enthusiasm itself was brought about by a slowing economy. As markets around the world, including Canada's, became saturated, unimaginative politicians and bureaucrats found it easiest to offer some platitudes about free markets. Such a policy is always easy to follow and involves essentially nothing more than putting one's faith in some supernatural force. In this case, little action has resulted in little change, just what the safe politician ordered.

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