Here's a way for Prime Minister Justin Trudeau to prove he's the anti-Trump.
The Liberal government could signal in Tuesday's budget that it's ready to embrace unilateral tariff disarmament on a vast array of imports – a move that could make Canadian businesses, particularly smaller ones, vastly more competitive.
Donald Trump, the front-runner in the race to be the U.S. Republican presidential nominee, has famously vowed to rip up NAFTA and slap a 45-per-cent duty on Chinese imports.
The time is ripe for Canada to go in the opposite direction, according to a provocative new study by economist Mike Moffatt for the University of Toronto's Mowat Centre. Mr. Moffatt recommends that Ottawa get rid of 90 per cent of the roughly 15,000 tariffs it imposes on imported goods.
It's not just that the costs of protectionism generally outweigh the benefits. Tariffs also impose a heavy administrative burden on companies and governments. The vast majority "generate little revenue for the government and have no obvious value to Canadian manufacturers or strategic value in trade negotiations," points out Mr. Moffatt, who sat on an advisory panel that helped the federal Liberal craft their election platform last year.
Most tariffs generate relatively menial sums. Others apply to products no longer made in Canada. Eliminating all tariff lines that bring in less than $5-million would cost the government about $600-million a year in foregone revenue, says the study – Making it Simple: Boosting Canadian Competitiveness Through Selective Tariff Elimination.
Mr. Moffatt stops short of urging complete elimination of tariffs. He would, for example, leave in place a massive tariff wall that protects the dairy and poultry sectors, arguing that removing them raises complex policy issues.
He is not the first to predict substantial economic gains from unilateral tariff disarmament. A 2014 Business Council of Canada report recommended turning the country into a 100-per-cent free-trade zone by eliminating all tariffs. The report, by economists Dan Ciuriak and Jingliang Xiao, estimated that doing so would boost the economy by $20-billion a year, more than offsetting the $4-billion in lost revenue, because the country would be vastly more productive, technologically advanced and attractive to foreign investors as a result.
The idea of going it alone on tariff elimination might seem counterintuitive, even high-risk. Part of Mr. Trump's appeal among U.S. blue-collar workers is that protectionism will bring back offshored manufacturing jobs and "make America great again."
That is, of course, wishful thinking. The complex and arcane tariff system is a relic of a vanishing era in trade – before products were cobbled together using technology and know-how from suppliers around the world. Traditional manufactured goods are becoming less important in global trade, increasingly supplanted by high-value services and intellectual property.
Canada's future lies in grabbing more of the high-margin share of production in global value chains. That will include manufactured goods, but increasingly the most lucrative opportunities will come from the skills, technology and IP built into end-products.
In a world of global supply chains, tariffs can be a massive bureaucratic headache and a hindrance to doing business efficiently.
It isn't just that tariffs inflate the cost of imported inputs. Mr. Moffat points out that companies waste a lot of time and money figuring out what tariff rates to apply on imported inputs, doing the paperwork required and too often battling the federal government over misclassified items. Is an electric toothbrush a toothbrush (duty: 7 per cent) or an "electro-mechanical domestic appliance (duty: zero)?"
Traders can get pretty clever trying to beat the system when tariff rates are excessively high. Canadian pizza chains started importing large quantities of mozzarella-and-pepperoni "ingredient" kits from the U.S. to beat a 245-per-cent tariff on cheese, forcing the domestic industry to cut the price on wholesale cheese. Canadian chicken farmers likewise say they've lost 10 per cent of their market to surging U.S. imports of duty-free chicken from egg-laying birds, an apparent end-run around Canada's steep tariff on regular broiler chickens.
Back in the mid-1990s, B.C. lumber companies figured out they could skirt punitive U.S. tariffs on lumber by drilling small holes in 2x4s and calling the boards "manufactured" lumber, on which there was no duty.
There is a compelling case for doing trade differently.