The Failure of Trade Agreements & Investment Liberalization over the last 25 years

Ascent of Giants, the 60+ page 2015 study by Jordan Brennan, contrasts what we are told about the benefits of trade agreements and investment liberalization with the much more negative reality reflected in meaningful statistics.  He highlights the lackluster growth, under-investment and weak employment results of the post NAFTA period.  All of that adversely affects ordinary Canadians, particular young workers locked into precarious employment. Meanwhile, intense corporate merger activity since NAFTA has led to the growth of huge firms, increased corporate investment abroad and enormous CEO salaries.  Brennan demonstrates the correlation between the above and increasing inequality in Canada. Here is a summary of his main points.

The rationale sold to us for trade agreements

TAIL (Trade and Investment Liberalization) through trade agreements like CUFTA (Canada-US) and NAFTA (Canada-US-Mexico)  were sold to us on two grounds: necessity and prosperity

• Canadians were told that technological change meant that production and markets were globalizing, and should Canada not secure predictable access to the U.S. market it would be relegated to the periphery of the global political economy

• The Economic Council of Canada forecast a 1.8% boost in employment. The federal Department of Finance predicted a boost to long-term economic performance, including a long-term increase to inflation-adjusted GDP of 3%.

• The explicit assumption was that gains from TAIL would be shared with workers in the form of higher wages

Statistics that show a reality different to the neoliberal rationale for TAIL

GDP:  In the quarter-century to 1988, GDP grew at a per capita rate of 2.8%.  Since then the rate has halved.

Employment:  In the quarter-century to 1988, the rate of growth of private sector employment was 2.4%.  Since then it has halved.  Although it appears that unemployment levels fell during the 2000s (after having risen in the 1990s), when we take into account the rise of precarious work, (contract, part time, etc.), unemployment has remained higher than in earlier postwar decades.

Inequality: Income inequality rose sharply over the last 20 years and correlates highly (.91) with the rise in corporate power.  At one end are the very high executive salaries, at the other end, the low wages associated with precarious employment.  Good paying jobs are disappearing for most new workers.  (In the last decade 520,000 manufacturing jobs alone have been lost.)

Trade:  In 1988, Canadian exports amounted to 26% of GDP.  By 2012 Canadian exports were only 30% of GDP, down from 44% in 2000.  (A probable reason for the growth of exports in the 1990s was the low value of the Canadian dollar.) The two largest exports by far to the United States are oil and automobiles.  In the case of oil it is demand that drives exports, not lower tariffs through NAFTA.  The Canada-US Auto Pact explains why automobile exports to the U.S. are high.

How do we explain the disjuncture between the omnipresent cheer-leading for “free trade” by the Canadian intellectual class and the negative investment, employment and growth performance in the TAIL era? If trade flows are falling, investment has lessened, employment growth has worsened and GDP growth has slowed, why the unrestrained euphoria for more “free trade” agreements like CETA?

1.      Control of the NAFTA message by dominant, very large                      corporations

Commentary on the 25th anniversary of the Canada-U.S. Free Trade Agreement (CUFTA) and the 20th anniversary of the North American Free Trade Agreement (NAFTA) has tended to proceed in three steps.

• The commentator begins by trumpeting the virtues of the agreements, loudly proclaiming that its advocates were wise to counsel such a shift in policy.

• Commentary proceeds to deride those who raised questions about the deal or who opposed it, declaring (by fiat) that “the debate is over,” usually without providing sufficient evidence to substantiate the assertion.  

• The commentator often concludes by trotting out a few exhausting clichés about the glorious future Canadians can expect courtesy of the “free trade” agreements currently under negotiation.

2.         The failure of  our intellectual  class to challenge the corporate              message

• The Canadian intellectual class has failed to engage in a debate about the merits and demerits of the TAIL regime.

• Contemporary economic thinking seriously constrains the range of permissible questions and the content of acceptable answers.  In particular, economists don’t want to look at the reality of power, preferring to talk about the ideal of free markets and level playing fields..  Political Scientists, on the other hand, ignore markets.

Why have TAIL and Trade Agreements not led to increased GDP and employment?

1.     Corporations have failed to invest in fixed assets in this country.

• In the quarter-century to 1988, the rate of growth of business investment in fixed assets, a key driver of GDP and employment growth, averaged 4.8%.  That has been halved since 1988.

2.        Large corporations have chosen, instead, the Mergers and Acquisitions             route.

• In the three-quarters of a century from 1914–1988, for every dollar spent on building new industrial capacity an average of 23 cents was spent on M&A. In the quarter-century since 1988, for every dollar spent on expanding industrial capacity an average of 93 cents was spent on M&A — a four-fold increase.

• The four fold Increase in mergers and acquisitions under TAIL is a phenomenon of big business.  Small and medium size corporations don’t engage in M&As.

• There is a logical progression to this acquisition process.  Large firms first merge in their industries, which means less corporations supplying a broader sector.  Next is the formation of multi-unit, vertically-integrated, nationally-embedded firms. In the final stage large corporations seek acquisition targets in other countries.

3.       Large corporations are increasingly hoarding their money.

• Instead of investing in fixed assets, corporations now hoard in preparation for mergers and acquisitions.  

• Between the early 1960s and the early 1990s the stockpile of corporate cash averaged 4% of assets but this nearly tripled (to 11%) between 1990 and 2012. 

4.         Large Canadian corporations are choosing to invest abroad rather than              in Canada.

• In the quarter-century to 1988 the stock of Canadian direct investment abroad (CDIA) averaged 8% of GDP. In the quarter century since 1988 the stock of CDIA peaked at 40% of GDP in 2009.  

• Put another way, in 1960 the profit of Canadian corporations was almost entirely domestic in origin, with foreign profits representing just 5% of total profit. A long-term rise in foreign operations followed, with foreign profit reaching a high of 47% of total profit in 2010.
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The Winners and the Losers under TAIL

The Growth of Dominant Firms, increasingly internationalist in scope

  

• There is now an enormous concentration of corporate profits and wealth among the large firms.

• In 1950 the largest 60 firms in our country accounted for 29% of total corporate profit, which was little changed in 1993 (30%) on the eve of the NAFTA. By 2011 it was 58%.

• In the early 1960s the largest 60 firms held 27% of total corporate assets, rising to only 30% in the early 1990s. But by 2010 the largest 60 firms controlled 46% of all corporate assets.

• There are 1.5 million registered corporations in Canada. The 60 largest firms account for roughly 60% of all corporate profit in Canada

Increasing Inequality

• Over the past century there has been an extraordinarily high (.91) correlation between concentration of corporate power and  income inequality.

• For example: Increased market power among large firms is closely associated with the national redistribution of income between capital and labour — owners at the expense of workers. There also appears to be a positive relationship between surging executive salaries and income inequality, on the one hand, and corporate concentration on the other.

• The increase in foreign investment by the dominant corporations has meant that fewer corporate resources are employed for hiring Canadian workers.  

• The emphasis on corporate flexibility has led to an increase in precarious employment, the weakening of unions and minimal wage gains.

• Another reason for increasing inequality is that the restriction of competition leads to an increase in price, thus undermining the tendency towards equality.

Alternative Strategies

Jordan Brennan believes that an alternative set of state policies could change this set of outcomes. A trade and investment regime that actually promoted domestic investment and Canadian exports (like the Auto Pact) and that fostered inclusive, wage-led growth (which typically arises when the trade union movement is nurtured and strong) would alter the distribution of income, wealth and power.

Our Conclusions at Citizens against CETA

Dominant corporations will continue to show little interest in investing in the manufacturing sector in Canada as long as they can use mergers and buy-outs to dominate the market and reduce competition. This is being accomplished with the full blessing of the current federal government, who have deliberately made it easier for global corporations to takeover Canadian businesses by raising the threshold from $344 million to $1.5 billion⁹ before any foreign transaction is reviewed.

Our dominant Canadian corporations have become internationalists. They prefer to invest where they can get the greatest return and that’s not Canada. That’s bad news for Canadian productivity and is accelerating our over reliance on the export of base commodities rather than value added products. It’s, bad news for our young people who still believe that getting a good education will get them a good job. Finally, it’s bad news for government revenues given the rampant use of tax havens by dominant corporations.

Our dominant Canadian corporations control the major political parties and the political agenda. That’s evident in the enthusiastic, uncritical acceptance of trade agreements like CETA by the federal Conservatives, Liberals and NDP.

Our dominant Canadian corporations control the mainstream media. That allows them to control the message we receive, through repetitive clichés about future benefits that just never seem to arrive. This is particularly true in television and radio. Gone are the balanced debates about public policy we saw and heard in the past. One liners and quotes increasingly dominate. Were it not for the phone in talk shows and the Letters to the Editor that some newspapers still encourage, the public would suspect nothing about the dramatic negative impact that neoliberal globalization is going to have on our children and grandchildren.

Our dominant corporations increasingly control what gets talked about in our education systems – and what doesn’t get talked about. Courses that provide opportunities to discuss the huge economic, political and societal changes at the heart of globalization have disappeared from the high school curriculum in some provinces.

Our publicly funded universities have acquiesced, through their silence, to the uncritical promotion of TAIL by corporate think tanks. Does this disinclination on the part of the intellectual class to analyze the impact of the last 25 years of neoliberalism reflect the increasing corporate influence in our universities?

The Harper government’s is straitjacketing public policy criticism by NGOs through Revenue Canada’s new rules on what charitable organizations are allowed to talk about.

Who is left to speak out for the public good and democracy?