We need to talk.... about trade.

When I was a wee young lad growing up in Lincoln, New Brunswick, a local entrepreneur decided to import and sell Skoda cars. These were made in Czechoslovakia and, it turned out, were very Soviet indeed. The cars were cheap but badly built and within a few years, the dealership died out.

Driving around England yesterday, we saw dozens of different cars with the Skoda brand and some looked pretty slick. Skoda now is owned by Volkswagen and as I understand the manufacturing is still done in Czechia.

There was a time, pre-NAFTA, when the concept of ‘national champions’ or firms with the greatest potential to build global markets for its products - was a thing in Canada. Bombardier might be the best example but there were others. The idea was that governments would support these firms (and industries) in specific ways (procurement preference, subsidies, R&D support, etc.) and, in return, they would get big enough and strong enough to sell into world markets.

Post-NAFTA, at least obviously, there has been much less of that. In fact, you might point to companies such as Nortel and RIM (and even to some extent Bombardier) and conclude the vision of national champions is dead. On an industry level, the auto manufacturing sector continues to benefit from massive subsidies.

I don’t know why or how Skoda survived but it did and continues to be an important economic engine based in Czechia but with production facilities in Slovakia, China, India, and Ukraine. Why auto manufacturing in Czechia but not Australia?

I raise Skoda because the concept of a country leveraging competitive advantages to develop export-focused industries is not anti-free trade - in fact - it might be the thing that buttresses free trade the long run. For most countries (and, I argue at the sub-national level), running a massive trade deficit can be a drag on GDP growth, prosperity and on the capacity of a country to raise enough tax revenue to sustainably fund public services.

I don’t think that having a few strategically important industries that are supported equates to being anti-free trade. Wanting to have a base of domestic food production (food security) is not antithetical to the idea of free trade. Wanting to ensure that critical industries such as medicines and defense equipment are either domestically produced or ‘friend-shored’ does not make a person a mercantilist.

Like everything these days people want to boil down the concept of free trade to a binary choice. Either you are rabidly pro-free trade (everything goes) or anti-free trade.

As I wrote a couple of weeks ago, free trade has been hugely beneficial to Canada. There are hundreds of products that are nearly as cheap now as 30 years ago and some (TVs, other electronics, some computer products) that actually cost less now (not inflation adjusted) than in 1990.

Imagine that. On the flipside, there are many industries that were mostly immune to free trade and the cost of these goods and services are significantly higher now than in the past even after adjusting from inflation (beef, tuition, auto insurance, etc.).

Driving around southern England it seems the entire region is dominated by agriculture. It might be cheaper to import meat, vegetables, fruits and other food products but shouldn’t a country worry a bit about food security?

So it seems to me as countries now seem to want to rethink the global trading system, we should get back to a kind of first principles approach. Pursue a free trade model with like-minded countries while understanding that in the long run free trade only works if the various players believe it is mutually beneficial. If one country like the US thinks they are getting hosed even though there is considerable evidence it has benefitted a lot from free trade, they will do exactly what Trump is trying to do today and using red herrings like national security and evil tariffs on certain food products to justify blowing up the system.

I know trade negotiators have been working on these principles for decades but I think we now need to bring it out into the public square. I fear that if we go back to a pre-free trade philosophy it will bring serious negative economic impacts (across the broad) and make the world more susceptible to wars. Remember one of the main reasons to promote free trade and investment flows was to try and ensure that countries were not self-sufficient enough to get away with invading their neighbours (that, of course is fraying with Russia).

So a simple framework could look like this:

1. Industries to protect: Should mostly be produced locally (even if cheaper/better to import). This should be fairly limited. There should be a high bar.

2. Industries open to friendly trade: Open to trade but imports must come from friendly countries. Medicines, defense equipment/tech, transportation equipment, critical minerals and others.

3. Let ‘er rip: Let the best companies win no matter where they are located (e.g. children’s toys, candy, movie production, etc.).

At the same time countries should work hard to be productive and innovative to foster competitive export sectors and should develop natural resources. The trade balance should be a consideration but, again, set in this kind of framework.

Extremes don’t fit well with democracy. Democracy can be a messy business as we look to find middle ground across a wide range of perspectives. Trump-style populism or a neo-Marxist approach are both polarizing and, IMO, will harm our economies and destabilize our politics. And who ends up getting hurt the most? I’ll let you answer that.

As seen in Cardiff, Wales. Will some form of hard right populism win out or will the Marxists come from the left and win the day?