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Business Commentary Three economists grade the leaders’ performances on TPP, trade talks

The Globe and Mail: As Trans-Pacific Partnership trade talks near completion in Atlanta, our three economists weigh in on trade issues, which could potentially dominate the final two weeks of the campaign if a TPP deal is signed or rejected.

Jack Mintz: I thought the lowest point of the French-language debate was when all five political leaders supported supply management without any fundamental reason as to why it should be maintained. I was particularly disappointed in Elizabeth May, leader of the Green Party, who has little to lose politically by opposing such an inept policy.

Supply management is like putting an excise tax on necessities – eggs, poultry and milk – and it hits low- and modest-income Canadians the hardest. Parties that seem so concerned about income inequality should be ashamed of themselves for supporting this policy. The argument that this is better than subsidies is callous given that this is a large transfer to a few firms covered by a regressive 'tax.' Australia has shown that supply management can be phased out by reimbursing those farmers who are affected with a tax on the product. With lower dairy and other prices, we could spawn export-oriented products quite successfully once input prices fall.

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Eveline Adomait: I grew up on a dairy farm and my dad was given quota when supply management began. Many of my friends and family are still on the family farm, working very hard at milking cows. I hope these people will still speak to me after I say this: The bottom line is that agricultural supply management, taxi medallions, the bridge to the U.S. at Windsor, the Beer Store and the LCBO are all making higher profits because they are monopolies.

Of course, those benefiting would like the system to continue because those financial benefits are huge. However, a dismantling of these various and sundry monopolies would increase the welfare of many consumers. The gains would outweigh the losses. In terms of supply management, it would be worth it to pay farmers for their quota so that Canadians – who mostly do not live on farms – can consume dairy products at lower prices.

Christopher Ragan: I couldn't agree more with both Jack and Evie on supply management. It is really disappointing to see that no federal party appears prepared to dismantle this system. Is there something particularly special about dairy farmers, as opposed to vegetable farmers or cattle ranchers?

There is something else about the supply management system that is not often enough discussed: If you were one of the really lucky dairy farmers (like Evie's father, apparently) who received an allotment of dairy quota for free – years ago – then the benefit is very clear. You received a free asset and now receive an artificially high price for your products every year.

But the story is quite different if you are a "new" dairy farmer, in which case you have to purchase the quota necessary for your annual production. The current market value of this quota is in the ballpark of $25,000 a cow. So if you have 90 cows (roughly the average herd size in Canada today), you need to spend roughly $2-million just to have the permission to produce. And then you have to purchase your land, buildings, equipment, and everything else. So the supply management system significantly increases capital costs for new dairy farmers, who then "need" the higher prices just to generate a normal rate of return.

The long and the short of it is that even new farmers don't benefit from the system – at least not in terms of their overall return on investment. So the system is really benefiting just those "old" farmers (or their heirs), who long ago received the quota for free. What is the sense of this system?

EA: Dairy supply management has a few quirks that make compensation to dairy farmers tricky. It is true that those who were given or inherited quota shouldn't be compensated if the quota system is dismantled, but many of those farmers have already sold out. My dad became a minister in the early '70s so our financial fortunes took a decided downturn.

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In recent years, the price of quota has been capped to the sellers but the actual market price of quota should be higher. Farmers who want to sell have worked around this problem by connecting the difference in value to the price of the farm as a going concern. I would hope supply management would be completely dismantled rather than die the death of a thousand imports. As pointed out by Jack, Australia has a good model to do this.

JM: Canada had no choice but to negotiate the TPP during the election as we could have been left out of the largest trade agreement to date. Besides, the next Parliament will have the role of ratifying the agreement or not. No question, TPP is a good thing for the Canadian economy that will give access to a large market. And if Mexico and the U.S. are part of it – and we are not – that will put our Canadian businesses at a disadvantage in a world in which businesses operate in supply chains.

Sure, some sectors that have been protected by restrictive trade – such as forest product manufacturers through log export restraints, auto companies and dairy farms – will be affected, but many companies that can compete at the international level will have some fetters taken off. If we want a more dynamic business community, the last thing we need is a walled-in economy. An election is a tough time to have an impassioned debate about the merits of the agreement but Canadians have always been supporters of trade and most will find the TPP consistent with our development as a nation.

CR: How can I disagree with anything Jack has just said about how the TPP will be good for Canadians or Canadian business? I can't. Free trade is one of those things that is very counterintuitive for some people. It just seems so logical to want to protect our workers and our firms. But it harms our consumers (and firms using imported inputs) and it harms us again when our trading partners respond with their own protectionist measures. I think the biggest problem in the public mind with the TPP negotiations is that they have been conducted behind closed doors, so the various bargaining elements have not been debated publicly. The government is essentially telling Canadians to "trust us" and that they have our backs. But many Canadians are not so sure. However, I'm not sure any trade agreements have ever been negotiated in the full light of day – is this even possible?

EA: It even touches on global income inequality and security. If we really care about poor countries, which happen to have a competitive advantage in agriculture, we should open our doors to their products. They could be better off but as seen with the Doha Round [of trade negotiations at the WTO], rich countries don't want to give poor countries access to our markets. It may also be true that trade sanctions against Russia could be part of Vladimir Putin's strategy in Syria. Free trade is a bit like world peace. Really good in theory and hard to implement in practice.

The Globe and Mail: Joe Oliver said this week that the July GDP numbers show that Canada is back on track. Others pointed out that other key sectors suffered drops.

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JM: The GDP growth for July at 0.34 per cent monthly is certainly good news following a good month in June at 0.44 per cent. The increase, which was positive for mining, oil and gas, finance, manufacturing and services was broad enough to rest fears that Canada was heading for a recession – which I believe was never the case – with growing employment and government revenues this year. The resource growth won't be permanent, coming off a period of turnarounds. However, the improvement in other sectors will likely mean that Canada's annual growth will be better than expected, reaching close to 2 per cent this year.

Weakness in wholesale trade and non-residential construction largely reflects the past slowdown in the energy industry. The decline in arts and entertainment is a short-term result from the boost given from the FIFA Women's World Cup. We shouldn't get hung up on some particular sectors with negative growth. None of this means the Canadian economy is back on track for the longer term. The weak Canadian dollar has made imports more expensive, hurting consumer-oriented businesses and machinery investment. Exports are improving, which are obviously helped by a stronger U.S. economy. However, we still face a structural change that no party has been able to address with a smart economic strategy. For the Conservatives, the recent GDP gains is certainly good news.

CR: Obviously the GDP news for the month is good, with all the detail that Jack lays out. What concerns me is the willingness by Mr. Oliver to be so swayed by monthly data – especially when it tends to be ignored when it is negative. As a general rule, monthly GDP data is quite volatile and unreliable. Even quarterly data bounces around and is subject to considerable revisions. So there is a need (and it has long been there) to try to "look through" the very short-term blips and instead focus on the more solid trends. This is true about the business cycle and also about longer-term growth. Jack is right about our longer-term structural challenges, and no party is really acknowledging or addressing these issues – except, I suppose, for the Liberals' emphasis on the importance of more infrastructure.

Dr. Jack M. Mintz is president's fellow of the school of public policy at the University of Calgary. He serves on the boards of Imperial Oil Ltd. and Morneau Shepell, and is chairman and vice-president of the Social Sciences and Humanities Research Council of Canada.

Eveline Adomait is an economics professor at the University of Guelph, a former TEDx speaker, and author of Cocktail Party Economics: The Big Ideas and Scintillating Small Talk about Markets and Dinner Party Economics: The Big Ideas and Intense Conversations about the Economy.

Christopher Ragan is an associate professor of economics at McGill University, research fellow at the C.D. Howe Institute, and author of Economics, the most widely used introductory economics textbook in Canada.

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