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Commentary New trade deals raise tricky questions about how countries pursue growth

Dan Breznitz is Munk Chair of Innovation Studies and co-director of the Innovation Policy Lab at the Munk School of Global Affairs at the University of Toronto.

In order to understand the true prospects from the so-called "new" trade deals for democratic countries such as Canada, we need to first understand the significant changes in the global production of goods and services, and their impact on the gains from innovation and trade. We need to understand how a society becomes and stays rich and the different implications of the new trade regimes. And we need to understand the changing landscape of trade deals.

Of the highest interest is the move from multilateral to a regional/bilateral trade deal environment in which new trade deals are also called "partnerships." In effect, this is a transition from a global free-trade system to a diverted-trade, regional-blocs, asymmetric system in which asset protection seems to be key.

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Lastly, we need to reflect on the fact that the significant, cumulative and highly positive impact of multiple trade negotiations since the Second World War has reduced virtually all remaining tariffs. Instead, more integrated international trade forces the penetration of domains that are inherently domestic in nature, and intimately entwined with the views of citizens in democratic countries on what kind of society they would like to have. Further, many new deals back these forays into domestic policies and politics by the setting of questionable private arbitration tribunals, investor-state dispute settlements (ISDS).

In short, the new trade environment forces us to think of the following:

1. Why should we seek more of these trade deals and partnerships?

2. How, and if, these trade deals can materially help us in the short and long term.

3. The geopolitical risks and the negative impact new regional trade deals have on the countries we exclude, and the effect these deals have on our position and posture in the world.

4. And, most importantly, how much of our democracy and constitutional sovereignty are we willing to give away for continuously decreasing gains from trade?

The reality of global production and value creation is significantly changed, and many of our trusted theories and policy tools no longer fit. Starting slowly in the 1970s and accelerating since, there has been a long and complex evolution in the way firms create value and organize themselves. The most important is the global fragmentation of production, and the rise of a new global trade landscape in which countries are specializing in particular phases of production in specific industries.

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If we look at the electronics industry, for example, Apple, which used to produce its own products in California, has never engaged in the production of its recent products. Each of these products is now devised, designed and produced in stages around the world. Even components and subcomponents are now manufactured in discrete stages. This should make it imminently clear there are many ways to excel in innovation-based growth.

Different countries require different models, and this new system of stage specialization poses serious and long-term challenges to leaders aiming to ensure sustainable prosperity to all citizens from all backgrounds and skill levels.

Second, the development of information and communication technologies and the fragmentation of production have led to the algorithmic transformation of services: the ability to reproduce them and supply them repeatedly without geographical limitations.

This leads to one extremely good thing: We now have rising productivity in services, something we thought could never be achieved. However, it also leads to an even more rapidly fragmented globalization in services than the one we faced in physical goods. In addition, we also have more influx and uncertainty in the job market, where jobs that not long ago seemed to be secured for life can now easily be done better somewhere else in the world by either software or a human-software combination.

It also means that in order to have gains from trade in services, we need to change domestic laws to a level that raises questions of sovereignty and the limits of democratic choice. This is especially the case when these agreements include the usage of ISDS arbitration systems that operate above and beside national justice systems. The concern these arbitration courts will take precedence above even national constitutions was voiced by no less than U.S. Supreme Court Chief Justice John Roberts, saying that: "Substantively, by acquiescing to arbitration, a state permits private adjudicators to review its public policies and effectively annul the authoritative acts of its legislature, executive, and judiciary."

The changes in the global system of production have already moved us into a world where intangibles are worth much more than tangibles. For example, intellectual-property rights (patents, copyrights and trademarks) now consist of 80 per cent of the value of American firms, and 78 per cent of U.S. exports currently come from intellectual-property-intensive industries.

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When we think about trade, it is crucial to remember intangibles such as IPR are, by definition, a human creation, granting a negative right (monopoly) in exchange for a public good, and as such the debate about what kind of monopolies should be exchanged for what public good has been evolving as part of political negotiation processes over long periods of time.

If we want to have real gains from trade and our own investments in innovation, it is crucial to understand that trade rules about who can dictate IPR usage are not about the high-tech sector.

Think for a moment about our farmers. The changing landscape of what is a seed and who owns it and what is a tractor and who owns it changed farmers' relationship with those who used to be their suppliers. Over the past few decades, changes in the world trading system tilted the power and profits sharply toward the holders of intangibles such as IPR, and away from the toilers and owners of land and other tangible resources.

Even more disturbing is the fact new kinds of trade deals create a static and rigid system instead of promoting evolving, and flexible, organizations and agreements. Only a true believer in the genius of bureaucrats would think they can draw the rules that would fit the needs of the market 10 years from now, let alone 50. This is especially the case in intellectual property, and hence, trade treaties that are specifically designed to freeze the evolution of IPR laws and regulations, domestic and international, are based on a blind trust in the omniscient powers of the bureaucrats who negotiate them. Otherwise, why would any sane society sign on to the equivalent of a legal prison?

In sum, the policy requirements for growth have changed, leading to the creation of a new "growth model," by changing the requirements of competition and productivity.

It is essential to understand two things here: First, we do not have good theories to understand, much less predict, what would be the best set of policies to pursue. In the case of trade, we have no good model with which to predict how much gain or loss from innovation a particular trade deal would grant each of its signatories.

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Second, we need to understand that our current system of education does not give Canadians the necessary tools to comprehend what is at stake and make informed decisions. This is correct for both private citizens and policy makers alike.

If all of that is not enough to urge you to rethink why and how to approach new trade deals, consider that we have also moved from pursuing multilateral to pursuing regional and bilateral trade deals. Thus, we moved from a system that operates to maximize free trade, to one that diverts trade toward specific regional blocs. At best, we can argue that by signing all these deals we will create a normative momentum and a de facto need, which will force all the excluded countries to join the new agreements – making them multilateral, but on our terms.

In short, these trade deals should be viewed as instruments of geopolitical competition, and as such they carry costs; we might have increased trade with some countries, but at the expense of trade with others. We might curry favours with some, but only at the cost of snubbing others.

Furthermore, signing these deals between the powerful countries of the world is a way to effectively silence the poorest countries, preventing them from having a say about the new global system of trade they would like to see.

This is something Canada might decide is worth doing, but we have to publicly acknowledge it. If, to paraphrase Prime Minister Justin Trudeau, we are Canada and we are here to help, then signing trade deals that foster trade mostly between the already rich and powerful countries, while allowing only the rich and powerful to decide the rules of the game, is a cynical way of doing so.

Free trade is the key to economic growth. The rules that govern it decide which and how some societies can become and stay wealthy, and what levels of inequality we are willing to have for more growth. A democratic society should strive to educate all its citizens to be able to understand those choices. It should also enable them to weigh in and have a voice in those matters.

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On both of these fronts, we are doing a terrible job.

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