Federal support programs are being offered to help certain sectors adjust to Canada’s recent trade deals, including the Trans-Pacific Partnership. They may be politically effective, but they aren’t equitable or economically efficient.
The recent Trans-Pacific Partnership (TPP) agreement marks a second major trade deal for Canada, following on the heels of the Comprehensive Economic and Trade Agreement (CETA) with the European Union. The federal government has offered assistance to a number of sectors that seem likely to be hurt by these agreements. Below, we provide some comments on this assistance based on our forthcoming study “Does Canada Need Trade Adjustment Assistance?” to be published by the Institute for Research on Public Policy (IRPP).
Although it is widely recognized that greater international trade brings net benefits over the long term, there are always concerns about potential negative effects on specific groups of firms and their employees. In response to those concerns, some countries, including the United States, offer formal trade adjustment assistance (TAA) programs. Programs for workers typically provide benefits similar to those available in contemporary labour market programs, including income support and training. TAA programs for firms offer grants and loans to facilitate modernization as well as help paying for outside consulting services. While they are not “formal” TAA programs, we consider the federal assistance offered in connection to the CETA and TPP to be ad hoc TAA measures.
The rationale for trade adjustment assistance and discourse in Canada and the US
Three theoretical justifications of TAA are particularly important: 1) compensation for losses imposed on the few so that the majority can benefit from trade; 2) a way to enhance economic efficiency by helping labour and capital move from declining industries or firms to expanding ones; 3) a way to enhance the political feasibility of trade liberalization by enlisting the support of key domestic stakeholders such as unions, industry associations or provincial governments.
The first Canadian TAA program was created in 1965 in response to the Auto Pact with the US. Various programs then operated in fits and starts until late 1980s, when the last federal program was phased out. Two practical concerns about TAA have been raised consistently in Canadian policy circles: 1) the difficulty in determining which workers and firms have been injured by the government action; and 2) the risk that other industries faced with the need to adjust because of government policy changes might reasonably argue for similar assistance programs. While the challenge of adjustment to international trade was recognized, preference was clearly given to broad-based programs such as unemployment insurance.
In the US, there have been a number of calls to extend the TAA program to all workers. From a trade policy perspective, for example, Richardson (2010) argues that global integration is happening along many lines — trade, technology, business organization and supply chains. There is thus a need to reshape traditional trade adjustment assistance into structural adjustment assistance that “would recognize the many ways that globally enabled dynamism exposes workers to the same instability and displacement as does trade…” (p. 345).
Trade adjustment assistance offered in connection with CETA and TPP
As part of the TPP, and in return for concessions made by other countries, Canada granted its TPP partners greater market access to supply-managed products and will gradually reduce tariffs on automobiles and associated parts from TPP countries. Canada also committed to lower the proportion of the value of automobiles and parts that must come from its TPP partners in order for those goods to enter Canada duty-free. Recognizing the harm that these concessions might cause for workers and firms in those sectors, the government has offered to create two new sector-specific TAA programs.
First, a $2.4 billion Income Guarantee Program for producers in the supply-managed sectors —the dairy, chicken, turkey, egg and hatching egg industries — will ensure that their incomes do not fall for at least ten years after the TPP comes into force. Because producers own “quota” whose value could decline as a result of the agreement, the $1.5 billion Quota Value Guarantee Program will insure them against declines in quota value over the next decade. Finally, the government has promised a $450 million Processor Modernization Fund for processors in the supply-managed sector, aiming to support new investment by firms as well as expenditures related to technical and management capacity. Overall, the support promised to the supply-managed sector is worth $4.3 billion. Even though it will be spread across 10-15 years, this amount is still very large compared with the annual budgets of TAA programs in the US (US$600 million for all trade-affected workers) and EU (about US$200 million).
Second, for the auto sector, the Conservative Party has promised, if re-elected, to provide adjustment assistance by expanding and renewing the Automobile Innovation Fund that provides loans to firms in the auto sector. These loans can be transformed into grants if the investments create jobs. The Conservatives promise to renew the fund, set to expire in 2017-2018, and to increase its funding by $1 billion over the 10 years.
Previously, in connection to the CETA, the federal government committed to provide assistance to provincial governments, threatened by strengthened intellectual property rights for pharmaceuticals that may result in higher drug costs, and to the fisheries sector in Newfoundland and Labrador, threatened by the elimination of provincial rules requiring that fish caught in that province be processed there. The government also offered assistance to cheese makers threatened by CETA’s increased import quotas for European cheese but this assistance will be delivered through the TPP programs.
Three observations on recent trade adjustment assistance announcements in TPP
First, the supply management program is a new development in the history of Canadian TAA. Unlike any prior program, the supply management Income Guarantee Program has taken a “pre-liberalization” view of assistance, guaranteeing that those affected will have incomes equal to those experienced prior to the agreement.
Second, the ad hoc nature of the programs implies quite different and potentially inequitable treatment of firms and workers, depending on the sector in which they operate. Compare for example, the funds promised to dairy and poultry processors in TPP to those offered (but as yet not delivered) to Newfoundland and Labrador fish processors in the CETA negotiations. As far as we now know, there are no conditions attached to the $450 million Processor Modernization Fund being established for dairy and poultry processors. The story of the Newfoundland Fish Fund, however, is quite different. In that case, the federal government promised in 2013 to contribute up to $280 million to a fund for the fishing industry. Later, however, the government abandoned that promise and instead claimed that contributions to the fund would be based on “demonstrable harm” arising from the CETA agreement.
The programs might be seen as inequitable in another way. According to the 2011 Farm Financial Survey conducted by Statistics Canada, the average net worth of a Canadian dairy farmer was $2.7 million with the average annual net cash farm income of over $120,000. These dairy farmers will have their income guaranteed for a decade after TPP comes into force. Many workers outside the supply-managed sectors might be negatively affected by the TPP and CETA agreements, but they will receive no income guarantee. Instead, they will have only our unemployment insurance system to fall back on, a system that has been weakened in past decades and never had the capacity to deal with structural adjustment.
Third, there should be concerns about the economic effectiveness of the assistance programs. In the auto sector, the history of TAA programs in Canada (as well as in the US and Korea) suggests that government-provided loans are not an effective way to help firms adjust. For example, the US abandoned this form of assistance in 1980s, apparently because evaluations showed their ineffectiveness.
Apart from being a generous compensation package, the assistance to the supply-managed sectors is similarly unlikely to be effective in maintaining the viability of those sectors. The programs effectively stifle incentives for the sector to change. And even though the Modernization Fund could help processors become more efficient, the continued regulation of supply and prices in the sector may result in ineffective use of the funds. In similar US and Korean programs, firms used the funds for purposes other than “modernization”.
Our negative view of the economic effectiveness of the programs echoes the negative view of the 1980s Macdonald Commission concerning the Canadian TAA programs of the 1970s — that they had been designed “in large measure, to postpone, rather than to facilitate, adjustment” (emphasis added). It is only from a political perspective that the assistance in connection to CETA and TPP appears to be effective.
Overall, the TAA programs announced for the supply-managed and auto sectors fall short in terms of both economic efficiency and equity. The income and quota value guarantees for producers in the supply-management sector assistance package are not only unprecedented but also seem destined to impede economic adjustment. The Automobile Innovation Fund replicates previous failed programs and, even if it did not, is too small to have any major impact. Moreover, these programs should be seen as unfair to workers and firms in other sectors affected by TPP as well as to workers and firms affected by economic developments other than trade agreements. Such ad hoc assistance is better understood as a political strategy to mitigate opposition to trade liberalization by specific groups, rather than as a serious effort to facilitate economic adjustment and minimize social consequences.