Amazon’s search for a second HQ created a bidding war among cities offering subsidies. Such subsidies cause economic distortions and should be banned, under NAFTA.
When Amazon announced last year that it was seeking proposals from North American cities interested in being the base for the company’s second headquarters, politicians across the continent were whipped into a frenzy. It’s not hard to see why. What sane politician wouldn’t want to help deliver 50,000 new high-paying jobs to their city, state or province?
There’s nothing new about Amazon’s gambit. Industries such as film, aerospace and the automotive industry have been playing jurisdictions off against each other for years to get the sweetest deal possible. But, given its size, Amazon set off the mother of all bidding wars — and that’s bad news for taxpayers, since the main incentive politicians are using to try and seduce the company is large piles of taxpayer money. (In what must count as a victory of sorts, Toronto, the only Canadian city that made it onto Amazon’s shortlist of 20 finalists, mercifully managed to avoid promising any handouts beyond existing government subsidies.)
Politicians love to claim that these types of subsidies “create” new jobs, but the economics show quite clearly that such handouts don’t do anything of the sort: they really just move jobs around from one place to another. In other words, Amazon is going to create these jobs somewhere anyway, but by playing different cities off against each other, it’s hoping — and, if history is any precedent, this result is very likely — to get free subsidies to create them in one particular geographic location.
Politically, this creates a very perverse incentive: even politicians who know subsidies are bad and don’t want to offer them run the risk of being criticized if they won’t match subsidies offered elsewhere. The problem has become so bad that Richard Florida, a prominent University of Toronto urban studies professor, even started a petition calling on Amazon finalist cities to sign a non-aggression pact promising not to engage in a costly bidding war, since often all it takes is one politician willing to put taxpayer cash on the table to set one off.
Such bidding wars are, of course, fantastic for subsidy recipients but costly for everyone else. The ongoing spat between Boeing and Bombardier (which may or may not have been “won” by Bombardier in spite of the fact that it gave away majority control of its C Series planes to Airbus) is another instructive example. Bombardier has received at least $4 billion from Canadian taxpayers since the 1960s, while Boeing has received a jaw-dropping US$64 billion on its side of the border since 2000. This puts both companies in the absurd position of criticizing handouts to their competition while simultaneously arguing that the very same subsidies justify their own reliance on taxpayer support.
But what if there was a way to prevent taxpayer subsidies from being offered at all, removing the pressure on politicians to outbid each other? The possibility is not as far-fetched as one might think. In fact, there’s already a binding international treaty in force that could serve as a framework for such rules, and both Canada and the United States are already parties to it. It’s the North American Free Trade Agreement.
A ban on this type of corporate welfare would be a natural extension of the original purpose of NAFTA: to create a level playing field between Canada, the United States and Mexico based on a common set of rules. Billions in taxpayer dollars would be saved, while the economy, freed from massive distortions that funnel capital into money-losing industries, would create jobs where they make the most economic sense rather than in the place that offers the biggest handouts. Rather than competing on subsidies, different jurisdictions would have to compete to attract and develop businesses on other measures, such as competitive taxes, smart regulation, a skilled labour force, good infrastructure and better quality of life. And, perhaps most importantly, this ban would ensure that in the future, large amounts of taxpayer resources are not perpetually diverted into politically sensitive private industries at the expense of public services.
As difficult NAFTA negotiations drag on this year, Foreign Affairs Minister Chrystia Freeland should take note. Making environmental standards, gender impacts and labour regulations top priorities for Canada at trade negotiations may be music to progressive ears, but these asks have been nonstarters at the bargaining table. In dealing with a Trump administration with a completely different world view, a proposal to end corporate welfare might have more appeal.
NAFTA may or may not be beyond saving — but putting forward a proposal that could help pre-empt costly future trade spats and prevent future subsidy bidding wars might be worth a shot.
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