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FARE-talk is to provide an enduring conversation about contemporary topics relevant to food, agricultural, and resource economics.

Economic Integration Reconsidered - June 26th, 2017

00:00 – 03:16

Brady Deaton: Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Junior of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I will be your host. Today is June 21, 2017 and I have a special guest today, Professor Bruno Larue from Laval University who just gave a keynote address titled “Economic Integration Reconsidered” and that’s going to be the subject of this podcast. Bruno, thank you for joining us.

Bruno Larue: Well, it’s my pleasure.

Brady: Bruno, we’re going to talk about a lot of aspects of your title, we’re going to use this as a basis for asking questions. So I’ll just begin with what do you mean by economic integration?

Bruno: Well, economic integration is basically the sharing of competence, if we look for example at the Canadian provinces, they are integrated into an entity called Canada, so there are certain domains that are strictly under provincial jurisdiction, like education for example. We have domains that are under a joint jurisdiction, federal and provincial, like agriculture and there are some domains like trade policy that are strictly under federal jurisdiction. So with countries it’s a bit the same sort of thing, countries integrate to be a little bit like bigger country or a lot to be like a bigger country. A good example is the European Union so minimally countries in the European Union have zero tariffs between goods traded amongst themselves, they have common external tariffs, so for example the goods that are imported from China whether they’re imported from Germany or from France, they’re taxed the same way. They have a common market, pretty much like Canadian provinces where workers can, for example if the economy is down in the West workers can move to the East. They have the same sort of thing between them, the same thing with capital, free movement of capital and some of these countries even share a common currency, so very much like the Canadian provinces in the end, so there’s a whole menu of integration. So in the case of Canada for example with the United States and Mexico we have what we call a free-trade zone so we’re exempting each others from import taxes and we also coordinate some aspect of our policies. We try to coordinate for example meat inspection so that trade in meat is more fluid but we don't go as far as having a common external tariff or free movement of people.

03:16 – 05:08

Brady: The economic integration, what all of those things in common is that it seems to me is that they're trying to expand trade and the movement of people across increasing distances and not kind of be constrained by borders in the typical way.

Bruno: That’s right. The idea is to facilitate exchanges to increase welfare of the of the members and if you look at the Heckscher-Ohlin model you have a perfects of substitution between moving goods or moving factors, and so in a world like this you can have one or the other and end up being the same, of course in the real world they are there are elements that are such that you know it’s moving goods versus moving people is not exactly a perfect substitute but it's certainly the idea is to reduce the thickness of the borders between countries so that people can have a better life, that’s the idea.

Brady: One of the ways this kind of always gets described in some ways is free trade and I always marvel, I’m a little concerned about the use of that because it seems to me, if we’re going to talk about in the past and in the present that the institutions or the rules that enable that expansion of trade and movement across distances is very costly and challenging and there's a lot of rules that enable that expansion.

05:08 – 06:43

Bruno: That's right. There's actually even countries that essentially have free trade, for example Canada and the United States what we find empirical studies have found is that there’s still a border effect that is quite substantial and it’s not only between Canada and the United States we find that also between European countries. It's a lot easier to move goods inside a country between Canadian provinces for example, Quebec and Ontario do a tremendous amount of trade and that trade is actually a whole lot more fluid than trade say between Quebec and New York State, but the idea is to try to make it smoother so you reduce or eliminate tariffs on most goods, there’s still some exception like we have a quote-unquote free trade agreement with Mexico and the United States but there are some goods that still remain taxed so there's never completely free trade, it’s free trade on most things but with a few exceptions, but we also try to coordinate regulation to reduce what we call non-tariff barriers because there could be quite substantial especially in agriculture of course.

Brady: What I always marvel at is this coordination process is pretty costly

Bruno: That’s right.

Brady: and I want to come in as a way to move into the title of your presentation, “Economic Integration Reconsidered.”

06:43 – 12:04

Bruno: That's right and a good example of this is what's going on for example in Britain you know the British citizens have voted to leave the European Union and now they are involved in a process about leaving. It’s extremely complicated because you have to take care of so many things, so we have to prioritize and what was decided for example in this case is well let's settle the issue about British citizens working in the EU and EU citizens working in Britain so what will be their status, their rights and so forth and that's quite complicated and that eventually the British citizens really, really want that, they want a free-trade agreement they don't want a common market, they don’t want too much labor movement but they want free trade but then with free trade comes, OK what are we going to do with standards? Are we going to just blindly take the EU standards or are we going to have different standards? What if we have new standards and then there so different from the EU standards that we have a problem exporting and then if we just take the EU standards well then we won't have a say in how these standards are set. So why did we get out of the EU? I mean these are sort of the questions, so it’s very complex. If you do for example a trade agreement like Canada and the United States did then because you have different tariffs on goods coming from third countries a strategy that some third country exporter might have is to try to sneak in and say if the US has a lower tariff than us to sneak through the US to export actually to Canada and so to prevent that we have what we call rules of origin so we have to define what constitutes a North American goods and for example for cars the parts can come from all over the place so there's got to be a way to compute the North American content and that could be quite tricky but at the end of the day there’s got to be a number and there's got to be a way to actually compute that so that it can be verified. It can actually be very, very costly to implement these sorts of trade agreements and of course they can be disruptive because when for example imports increase they can displace domestic production and so there could be unemployment and that’s the sort of thing that a lot of citizens focus on. They see some of their some of them lose their jobs or they know somebody that has lost his job and they tend to focus on this as opposed to the bigger picture and so what we've observed is that when we did our first big trade agreement, the Canada-US trade agreement and in the 1980s when we started negotiating that the labor movement in Canada was extremely skeptical about the benefits of this sort of endeavour, and there was actually a very strong opposition this sort of an opposition like we're going to lose our sovereignty, we won't be able to have our domestic programs like our healthcare system for example, and of course none of that was true but I guess it is repeated often enough then people decide that it must be true and so that’s why there was a fair amount of opposition. Ultimately you know we had free trade with the United States and people realize well you know it’s not so bad, actually there are new jobs being created, there are some that we lost, but there are new jobs being created, so it's not as disruptive as initially thought and for a long time does it seemed like when we moved along and negotiated other trade agreements that people sort of understood that it was to our benefit yeah there would be some disruption but even to the labor unions had this sort of opposition when we negotiated with the United States and Mexico NAFTA already back then you know people realized well you know we will have the Mexicans as partner and they’re not that big a trek, you know?

12:04 – 14:17

Brady: It seems to me that there were always concerns but I would kind of be interested in you reflecting, so I mean on the 1980s and the early 1990s it was a real amazing sweet I mean as you mentioned we had the Canadian-US Free Trade Agreement, the World Trade Organization, Canada signs on to the World Trade Organization Agreement on Agriculture, we have NAFTA, we have the European Union all within the span of say 89 to 95, that was there was there were challenges then and you raised some of them, but what’s the difference between then and then maybe take us to now. It seems to me that

Bruno: Well now there seems to be a switch to the old fears and we seem to have them in the United States and in Europe too of course, but we look at them the United States I’d say that the big contributing factor is the emergence of China as a power trader. I mean they went from a rather marginal trading nation to the biggest trading nation and what we found out is that some manufacturing sectors tend to be clustered in geographical areas and so when some of these sectors contract because of import competition the workers and the capital have a problem moving out and being relocated to other sectors of the economy. It takes actually more time than what most people most economists thought and so what happened is that there's been an increasing focus on these the sort of issues so that I would say some politicians have been quite astute and have capitalized on that like Donald Trump of course.

14:17 – 16:00

Brady: I just want to say one thing. Can I get in here and get your thoughts on this?

Bruno: Sure.

Brady: Now one in the United States the actual amount manufacturing goods is higher than it's been in the past but the labor producing those goods is much lower. Do you have a sense of how much to which we attribute

Bruno: Well actually the share of manufacturing in the US economy has shrunk so that the service sector is more important than before because manufacturing has moved essentially a big chunk of it has moved overseas and actually even China now is fearing that it’s is going to lose some of its manufacturing might to countries with cheaper labor, so that’s a natural process. When goods become sort of standardized they can be produced in places where labor is very cheap so countries like Canada and the United States have lost a fair amount of their manufacturing base so the importance of manufacturing in the economy is smaller so even if we were trying to take a protectionist route and say well we got try to stop some of the imports from China that honestly would not do a whole lot to reestablish manufacturing, we wouldn’t be able to bring back manufacturing to what it was 20 years ago so that would be counter-productive.

16:00 – 18:19

Brady: We certainly wouldn’t be able to in terms of employment just because of the technology.

Bruno: That's right. So what we do is that we have to focus on what we're good at and actually take advantage of the fact that some countries have cheap labor. A good example is the iPad. The conception was done in the United States but the parts come from all over the place and some of Apple's rivals are actually providing some of these parts like Samsung for example and like the hard drive come from the Philippines, it’s made in plants owned by Toshiba, a Japanese company, and all of this is assembled in China so the value added in China amounts to four dollars, but when the United States is importing these goods from China every single unit adds something like $280 to the US trade deficit, so some people think well you know isn’t that bad? But then all of these units are sold in the United States for about twice as much. So who gets the bulk of the profit from this? Of course the American companies, the retailers, Apple so that's an example where if you look at the trade deficit with China you might think well you know is that such a bad thing but it's a profit engine and a lot of the people don't see it and it's because there's a lot of misinformation and people focus on job losses and they think that they're losing also their sovereignty because the world is more integrated, the supply chains are more integrated.

18:19 - 21:31

Brady: So do you have a sense of what triggered that new so one of the things that I hear you saying is it is very difficult to trace out these effects and the movement of trade which was it always had these people that were knew they were to be affected by it and there was always a bit of resistance to it in the 90s but there is new capitalization on it maybe by politicians and there's you know a lot of misinformation. Are there other factors contributing to the kickback that we’re experiencing right now?

Bruno: Well, I would think that the biggest one is through simply the politics you know the rise of the populous movement in the United States and in Europe but at the same time you know we see that some of these things are quite volatile because the French election shows that you know in some parts of the world people can look at integration and embrace it in the end. So there are countries that have resisted that but even in France there are certainly elements of populism, the extreme right party of Marine Le Pen has been more successful in the last presidential election than ever before so I think that there's a certainly a window now to try to do things the right way but if it's not done properly then there will be a stronger populous movement in France and things can degenerate even in France they could at that point say well we’re French first and we don't care so much about the European Union, but I think it's mostly like simply the a lot of disinformation and with the media now it’s so it seems so much easier to do than before. People don’t necessarily get their news on TV from respectable reporters anymore, there are economists that have found that it's kind of a reflex for people to look for news that support their value system or to when confronted to facts that contradict their beliefs that they’ll try to come up with cues to dismiss these facts so public opinion is once it starts going one way it's quite difficult to change it and it will eventually change I think and go back to where it was and pretty much in support of integration.

21:31 – 23:38

Brady: Let me ask you a question because we’re kind of moving on to a point that I heard you mention in your address, now it’s clear I think to most listeners and most people that we’ve had a watershed change between the 90s and where we are right now but the sense, economists my senses generally feel the same way, they’re generally supportive of trade and you talked a little bit about that in your presentation, but there are some nuances.

Bruno: That’s right. I mean what the new theories show is that trade can actually be quite beneficial but at the same time disruptive in the sense that what we found looking at the data is that the firms within a sector differ widely in terms of their productivity so you’d think you know if they’re in the same sector they should pretty much have the same technology and pretty much achieve the same level of total factor productivity but that's not the case. What we find is that there is a wide range and what free trade does is that it that tends to give opportunities that are better suited for the most productive firms and so this is great for countries in the sense that you know if most of the goods are produced by more productive firms overall productivity increase and so the purchasing power of the consumer increases, but you know for this to work well

Brady: Because their wages are tied to their productivity

Bruno: That's right. And you know the real wage increase because most of the goods are cheaper because they're done by more productive firms.

23:38 – 26:39

Brady: So the country gets more productive and the people get cheaper goods

Bruno: More purchasing power and so they benefit from that. The downside is that it creates disruption in the sense that the less productive firms are forced to exit. In a very fluid labor market the workers are laid off by less productive firms normally should end up being hired by more productive firms because the more productive firms then not only have to meet the demand of the were facing before but now they have larger demand because they're picking up the demands from the firms that were forced to exit so they normally should hire more workers but again that’s the sort of thing that takes a bit of time to readjust that relocation of resources that can take some time and so that could be a bit disruptive. The other thing is that what we find is that the world is not perfectly competitive. Firms take markups and in a world like that the

Brady: When you say markups just for our listeners you mean like raising

Bruno: Markups on goods

Brady: Making the price higher

Bruno: That’s right. And that's a natural tendency and in a world like that you know that you know creates inefficiency, so basically in addition to countries wanting to use their trade policy to manipulate world prices to their advantage, that is trying to reduce the prices they pay foreign exporters and increase the prices that their exporters get along export markets. There’s also the incentive to use trade policy then to address domestic market failures, those markups on domestic goods, and so the optimal policy, trade policy then must take that into account so the I guess the prescription now for small economies is no longer a zero tariff, but a small positive tariff, so there’s a nuance there but that’s the sort of thing that sometimes people who sometimes try to sell protectionism would use and say well you know this is a justification for a 200 percent tariff and of course a 200 percent tariff are inconsistent with those new theories that say well there should be a small positive tariff but certainly not a 200 percent tariff, but I would say the new theoretical results that the new knowledge and in economics is sort of being abused by some people that have vested interest in protection.

26:39 – 28:53

Brady: So the economic thinking about integration is largely the same but there's gains to it, but then in some cases these issues about imperfect competition or

Bruno: And in terms of trade manipulation you know it’s always the case that big countries that you know have a big share in the world markets have you know the reflexes trying to use their trade policy to manipulate terms of trade. What we've known for quite some time is that it's can be counterproductive when there are too many large countries that are trying to this sort of thing and that's why institutions like the GATT and the WTO have been created, it’s to basically prevent countries from shooting themselves in the foot by counteracting each other and so by having an organization like the WTO countries then commit themselves to certain policies, it’s not free trade but what the WTO does is that it forces countries to come up with a schedule of tariffs and basically what we call bound tariffs or maximum tariffs. So, a Canadian exporter for example that is exporting to Japan like Olymel for example that sell pork meat to Japan it knows in advance what the worst possible tariff will be and that's a big plus because it creates some stability, you know what the market conditions are. Japan can always lower the tariff and of course it would be to the benefit Olymel but at least Olymel knows that this the worst case scenario and I know that they will not after I sign a contract with them try to tax me more. So that’s a huge benefit actually.

28:53 – 30:59

Brady: I mean, that sounds so important that the capacity to trade over increasing distances with people that you don't know requires institutions that allow you to coordinate expectations and when we talk about free trade undergirding quote-unquote free-trade or costly institutions to maintain. Moving forward into this kind of that we are currently in, this whole set of concerns about NAFTA, TPP where do you see Canada's place? You know I realize you it's a crystal ball kind of scenario, but what are you thinking is going to unfold?

Bruno: Well I think if you look at Canada we have quite a bit of land, we have water so we certainly have what I would call a comparative advantage in agriculture and we’re a big exporter of agricultural commodities we are trying to diversify and add value added and process more these commodities, but essentially when I look at Canada we’re a small nation, trade is certainly a bigger part of our economy than trade is for the United States. It’s important for us to have access to world market and especially to have really good access to the US market because it's such a big market, it's very close, so you know in the short run it's important for us to make sure that we have we maintain a special relationship with the United States. Having said that I think it's very important even if the US doesn't want to have trade agreements with more Asian countries, I think it’s important for Canada to go ahead and maybe try to revive the TPP.

30:59 – 33:36

Brady: So the TPP is the Trans-Pacific Partnership

Bruno: The Trans-Pacific Partnership agreement that was rejected by the United States and because they had a rule about having a minimum they basically for the deal to go forth the countries that signed on have to represent I think it was 80 percent of the GDP of the whole group, and by pulling out the United States essentially killed the deal for everybody else even though there's just one country that left and right now Canada and some of the others are saying well maybe we should still go ahead as we invested a lot of time in negotiating this agreement and you know for Canada the big attractiveness of the Trans-Pacific Partnership was partner having a trade agreement with Japan, a huge nation and we think that we can export quite a bit of agricultural goods there so that should go ahead and perhaps a deal with China, perhaps a deal with India so we should because most of our trade agreements have been of course with the United States and then Central American countries, like Chile or South American countries like Chile or Costa Rica, but we sort of we have a trade agreement that’s fairly recent with South Korea but we don't have trade agreements with other Asian countries. So we have to catch up so you know a strategy I think would be to explore that make sure that we our special relationship with the United States that will not be simple because of the President Trump, but if we can protect that then we should explore new avenues and actually makes some of the our US competitors jealous. If we start exporting and meat to Japan under better terms than the Americans I'm sure that there will be American firms that will be rather annoyed at their president and then they'll probably push the US to be a bit more forward thinking.

33:36 – 37:44

Brady: Let me ask you a question, it’s something that I know that comes up a lot in economics classes and it’s related for the Canadians sitting out there listening to you speak about improved relationships with Asia. What when someone responds, and speaks to the issue of comparative advantage, but wait a minute everything in say another country, say Vietnam can be produced cheaper so we'll lose. How do economists think about that or how you teach that kind of concern or address that?

Bruno: Well the idea of comparative advantage is to allocate your resources, and when I say resources it’s labor, capital, water, land, and in sectors where you’re relatively good at. So you can be good in a lot of things, but you'll be relatively better in a few and that's where you should specialize. A good example is on a very personal level. You could be for example the son of a plumber and at the same time you can be highly paid, very successful lawyer. So if you have a shower to replace and it's a job that would take a half to a full day and the local plumber is as good as you or you are as good as he is and he charges $75 an hour and your opportunity cost as a lawyer is $300 an hour. So, what are you going to do? Are you going to call the plumber or do the job yourself? So comparative advantage would dictate that you’re relatively better at lawyering than at plumbing and so that's the sort of thing that essentially drives comparative advantage. So in the case of for example less developed countries yes their productivity is lower, but then so are their wages, and so there’s a strong connection between productivity and wages so here in Canada and I guess in the United States a lot of people tend to focus on wages say well you know the sort of wages we have is such that we’re not competitive, but then if you talk to people in less developed countries they’ll say well we certainly don't have the productivity to match countries in the rich world and so if we trade with them it will be harmful trade, but the idea is that there are some goods that some of those countries are relatively better at doing and they can gain by specializing in those goods and there's some goods that we’re really good at doing here in Canada and the United States and in Europe and ultimately when we trade we both benefit. It’s not a zero-sum game even though a lot of politicians seem to have this sort of view that if you import it’s bad, if you export it's good. When you import you’re importing goods that are cheaper so that you know increase your purchasing power and your utility. When you're exporting you're actually depriving yourself of goods so that technically is a bad thing but the reason why you're exploring this is so that you can import some more so you so when the whole world is that then we have a more efficient allocation of resources we can increase the amount of goods for the whole planet and so that tends to be a good thing.

37:44 – 39:28

Brady: When you see kind of in this crystal ball and the movement of trade to new trade to Asia, are there any particular goods that strike you where we have that comparative advantage relative to those new markets that we might be looking at?

Bruno: Well we can certainly export a lot of grains, certainly a strong comparative advantage in that. We can also export quite a bit of meat, beef, pork, we’re actually doing quite a bit of that. What makes Asia interesting is that these economies are either already quite big or they are growing very fast, like China for example the revenue per person is not all that high but it’s growing fast and when the incumbent people are growing then they switch their consumption patterns and that's what we observe in a lot of those countries. When consumers get richer and they want to consume more meat, they want to consume a wider array of vegetables and fruits, they want to consume more sweet things like maple syrup for example, they want more wine, Chinese consumption of wine has increased tremendously so there’s all kinds of opportunities for a nation that produce a lot of agri-food products like Canada.

39:28 – 42:55

Brady: I want to kind of move to, I realize we’re moving towards the end of our conversation but I want to get your thoughts on a couple of things and make sure we get these in before we stop, and the first is you mentioned that economists generally feel that there is in the long run, it’s not an exact science, but in the long run that the consumers and producers will benefit ultimately on aggregate from free trade, but it's a long-run equilibrium, and in the short run there are these costs. How would you suggest that we think about as we moved to new markets and we know we’re in a short run you know at various points, how do we think about how to handle that adjustment that concerns a lot of people?

Bruno: Well, there are policies we can put in place to try to make adjustment easier, I mean we can have programs that would retrain displaced workers for example, we can certainly try to encourage labor mobility. If you cannot find employment in your city, you know if you have a really good safety net that doesn’t force you to look for jobs beyond your city you're not likely to move where the jobs are. So we can try to be a bit more clever about facilitating adjustment in some cases, that means that workers will have to perhaps leave their province, but then you know that's the reality. You have sometimes to move where the jobs are and then embark on the quote-unquote new long-run equilibrium. That's not necessarily easy, I’m not saying that for families to sell their house and moved to a different province where there are more jobs is an easy thing to do, but ultimately it’s the sort of thing that needs to get done, it’s certainly better than having a lot of unemployed people in one part of the country waiting for new opportunities to arise and that these opportunities take years and years and years and that's very costly for the whole country. We need to be a bit more proactive in encouraging labor and capital mobility and that's the sort of policies that have to accompany trade agreements. Liberalizing is one thing it's a good thing but we can do better because right now it's like a cold turkey sort of thing their cost under people that are a bit like left to themselves to readjust. We have safety net in Canada with employment insurance, we have welfare programs but we can do better because some of these programs like I said can have perverse incentive so we have to give people the right incentive.

42:55 – 45:28

Brady: One other issue that kind of always comes up it seems in these trade negotiations with respect to Canada is debate about various aspects of supply management and I know it’s a contentious issue, but I wouldn’t mind you kind of touching on how you think that plays out in some of these efforts to expand trade.

Bruno: You know, Canada was a founding member of GATT so that was created in the 1940s and so we've gone through several cycles of multilateral trade liberalization.

Brady: Just for listeners out there GATT is the General Agreement on Tariffs

Bruno: and Trade, that’s right. And so members of the GATT initially it was only 23 countries went through various cycles of trade liberalization reducing tariffs, so after several cycles like that we’re at a point where in agriculture about 57 percent of our tariff line are at zero and most of our other tariffs are very low, less than 10 percent. Then we have a few exceptions, like the supply managed commodities that are taxed often at 200, 245 percent, 300 percent.

Brady: Supply management commodities, we’re talking about dairy

Bruno: Dairy, eggs, turkey so you know in terms of dairy, it’s all dairy products not just milk, yogurt, ice cream and also milk ingredients and basically that's the supply managed commodities. That’s pretty much the only low hanging fruit left when Canada is negotiating with the European Unions or the Americans on the new NAFTA for example and so it's normal that these countries are trying to pressure us though. The Europeans were successful in getting a quota enlargement for their cheese exports. What we have for those commodities supply managed commodities is a trade policy instrument called a tariff-rate quota. Tariff-rate quota taxed imports on a small quota of products or level of imports, and then any level of imports in excess of that quota is taxed at a very, very high rate.

45:28 – 48:34

Brady: So I can send like five gallons of milk to you for a little tax but then if it goes at some cut off point it goes over six then it’s like 200 percent or something.

Bruno: That’s right. So if we’re talking about tons of product like if we import less than say 18,000 tons of cheese then it’s taxed at a low rate and then anything above that is taxed of a very high rate like some cheeses in the neighborhood of 250 percent.

Brady: So that’s what Canada currently imposes

Bruno: Currently has and for our partners it’s of course they want a bigger share of the market and so what they say is we would want to have you have the ability to export more cheese at a low tax rate and so that's what the Europeans negotiated with us so that was the first time actually that we agreed to liberalize. During the negotiation of the Trans-Pacific Partnership the Americans were successful in getting additional concessions on dairy products, on chicken and eggs. Of course we’re not talking about big influx and the cheese imports make about five percent of our consumption, so we’re talking about in the end after seven years we would have cheese imports making about 8.5 percent of the market, for dairy products in the TPP we’re looking at increases about three percent of what we consume, so we’re not dramatic concessions but nonetheless in terms of the history of our negotiation that was a major achievement that was done by the European Union and the United States. Now we’re negotiating a new NAFTA and we’ll have to make concessions I think we’re going to have to give a little bit more so that President Trump can save face because he’s been saying that the Trans-Pacific Partnership was a very bad deal for the United States and so we cannot simply say well take what we had agreed in the TPP and go with that, because since he’s been saying that that was a very bad deal for the US we're going to have to add a few things. One strategy that we could use is to cut some of those very, very high tariff, so even if we were to bring down some of those tariffs from say 250 percent to 100 percent it wouldn't change a thing.

48:34 - 51:24

Brady: But why would he go for that then?

Bruno: But in terms of symbol you to say well we got a major concession with the Canadians, we brought down tariffs to 100 percent or maybe even 50 percent and eventually we’ll bring them down, it’s the eventually that would sell the thing the deal and this way I think he could save face and for us in the short run at least we wouldn’t have to give much market access.

Brady: From my perspective it might even not be a bad thing if we gave for Canadians if we gave more concessions because it's true there is a producer problem, but then consumers both sides the consumers would pay less for

Bruno: That’s right. It would certainly be I think a good thing to put a bit more pressure to give incentive for these sectors to become a bit more productive and that's what trade policy could do. If we were to replace the tariff-rate quota with the binding tariffs we could set the tariffs so that we would essentially get the same market access or maybe a little bit more than the Americans currently have. The advantage with this is that if our relative productivity slips relative to the Americans with a tariff our imports would increase, so consumers then would Canadian consumers would benefit from the productivity gains in the United States. If we maintain our tariff-rate quotas the same volume of imports would continue to be imported regardless of our loss and relative productivity and so that would be a bad thing because we wouldn’t be able to capitalize on the fact that the Americans have had a productivity gain. If Canadian farmers become relatively more productive than the US farmers then with the tariff there would be less imports. They would also help us this way if we somehow become relatively more productive we'll import less and again Canadian consumers then would not pay higher prices and Canadian farmers will be able to produce more and benefit from their relative increased productivity, so a tariff would be actually a much better instrument than a tariff-rate quota, but there doesn't seem to be a strong appetite politically to change the policy.

51:24 – 54:03

Brady: So, in other words, your crystal ball is just more minor or more concessions following what you know was offered perhaps a little bit more within TPP.

Bruno: I think unfortunately that's where we’ll most likely go in part because that's what we did with the Europeans we've increased the quota of the tariff-rate quota so we guaranteed them a larger access to our market and so it’s managed trade. If we become relatively better at making cheeses we’ll still have to give them the same access and personally I find that it's unfortunate so again it would be better if we were to replace these instruments by tariffs, but my sense is that the industry, so the Dairy Farmers of Canada, Chicken Farmers of Canada they prefer tariff-rate quotas and giving a slightly larger quota to foreigners than to switch instrument to a tariff. It looks like they’re the ones deciding what our trade policy should be as opposed to the government deciding.

Brady: Why do you say that?

Bruno: They carry a lot of clout, but in terms of it seems to me that the economics are relatively simple in this case that you know it would be better simply to use a tariff and a tariff would give us more flexibility and like I said before protect us against a slip in relative productivity, it would protect the Canadian consumers but the politics of the this negotiation is such that you know the industry lobby is extremely powerful. In the past actually they had been successful in shielding completely these industries from any sort of trade liberalization, so personally I was impressed that the Europeans have managed to get at least some concessions.

54:03 – 56:24

Brady: It seems that this is one of the great challenge, like the political economy challenges to taking advantage of the gains of trade are just in all countries to a certain extent. I think about the concerns raised by the softwood lumber companies in the United States, those are real challenge those are in some ways similarly situated groups that are aggressively pursuing their own self interests and sometimes to the detriment of the consumers.

Bruno: In the United States, most states actually would benefit from a free trade and softwood lumber, and actually the large hardware stores in the United States have sided with Canada on this issue but again you know you have sometimes small but extremely well organized lobbies that are very, very powerful that can carry the day and in the case of the US softwood lumber dispute with Canada that has been the case and in Canada it’s the other way around, it's our supply managed sectors that have been extremely powerful and influencing politicians and in order to be successful in influencing politicians they have to be successful in courting public opinion and otherwise it wouldn’t work and we have examples week after week of information sent to newspapers or magazines about the virtues of the supply management system and so few repeat the same message often enough. There are a lot of people will start believing it and again I’d say a lot of the people, Canadian people, have a lot of empathy toward farmers. If we were talking about the big corporation getting protected and increasing prices the consumers pay, I don't think there would be the same sort of support, but again it's a very well organized lobby with the very proficient at spreading their message.

56:24 – 1:01:34

Brady: So I just want to end going back to your title, “Economic Integration Reconsidered.” We talked a little bit about its history, we talked a little bit about the challenges of certain sectors, we talked about the idea that there are gains in the long run, but there are pains in the short run. If you are leaving your listeners with where you're at, you’ve had a really a long career, I’ll just congratulate you again for becoming a Fellow at these Canadian Agricultural Economics Society meetings where we are right now in Montreal.

Bruno: Thank you.

Brady: Where are you on your sense of, I know this is a tough question, you could take a moment there's no problem but if you could, how would you sum it up?

Bruno: Well I say you know, public thinking, public opinion I think changes over time and in many ways we tend to forget history pretty quickly, so we fall into the same sort of traps than before. I think right now we’re Canada at the bottom of a wave, but I think that eventually will go back up and more logic will prevail. So I think that ultimately we’ll be able to preserve our special relationship with the United States, which is so crucial for the Canadian economy. I’m hoping that we’ll be proactive in negotiating trade agreements with Asian countries Japan, China, India. As far as supply management well these people up in, like I said very good communicators and swing public opinion to their side, they’ve been also extremely good at preventing rebellion within their ranks and that's the big difference for example in relation to what we saw with the Canadian Wheat Board where you had some farmers that were very much for it, but then some farmers that were very much against it and the pro-wheat board were not able to convince the anti-wheat board that there were some benefits from that institution. With supply management the industry has been very good at sharing the rents from the whole system, because you know the idea is we’re getting more money from consumers and then we’re disputing it so that everybody's happy, everybody's taking a margin and that makes for a very inefficient industrial structure because it's like a cascade of little monopolies and so that the market then shrinks quite a bit as a result, but that's what has made the system so efficient because everybody's taking a cut and they’ve been efficient at splitting these things so that there wouldn’t be too much dissatisfaction within the ranks, you know from time to time you'll hear some processors being annoyed at something but then you know they find ways to appease them or and it's not only the processors itself, so the input suppliers, the lending institutions. One of the first times I criticized the system in the op-ed, the first letter in response to my letter was from the president of Desjardins Credit Union, so the president himself. It was not like the ag person, it was the president basically saying supply management is a great system, it makes the revenues of the incomes for farmers stable and high enough so that he can live well and of course the lending institutions benefit from that because nobody goes bankrupt.

Brady: Well thank you very much for sharing your thoughts with us today. It was a real pleasure to have you on FARE Talk.

Bruno: Well, it was fun. Thank you.

Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcasts.


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