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Trade liberalization offers long-term economic benefits, but trade agreements can entail difficult adjustments for some firms and workers. To aid this transition process, some governments offer trade adjustment assistance TAA programs — for instance, by providing affected workers temporary income replacement and subsidies for retraining or relocation. Advocates argue that such assistance helps compensate those harmed for their losses, redirect economic activity toward more productive uses and enhance the political viability of trade liberalization.
As Canada seeks to implement two major trade deals — the Canada-EU Comprehensive Economic and Trade Agreement and the Trans-Pacific Partnership — the issue of whether and how to design compensation and adjustment packages has moved front and centre. Because trade agreements increasingly require a broad Canadian political consensus on negotiating positions across a range of issues that cover both federal and provincial jurisdictions, new policy approaches might be required, perhaps including trade adjustment assistance.
Based on a thorough review of the evidence and interviews with several provincial trade negotiators, Dmitry Lysenko and Saul Schwartz conclude, however, that Canada does not need a new, stand-alone TAA program, because. However, although the current policy approach has secured political buy-in, the authors identify a critical shortcoming: This means that one-off assistance for one stakeholder leads others to demand similar treatment.
The ultimate goal should be to help workers adjust to important longer-run structural changes in the labour market — whether caused by specific trade agreements, technological change, strong economic growth in emerging economies or other factors. In , only four free trade agreements FTAs were in force in Canada. Although it is widely recognized that greater international trade brings net benefits over the long term, there are always concerns about the potential effects on specific groups of firms and their employees.
Those effects can be the result of stronger import competition caused by specific provisions in a trade agreement such as lower tariffs or other factors such as rapid economic growth in emerging economies. For example, CETA has caused concern because of the potential for the expanded import quota for European cheese to hurt Canadian cheesemakers Grant and because enhanced intellectual property rights in the pharmaceutical sector might hurt generic pharmaceutical companies in Canada Lexchin and Gagnon The TPP also involves some contentious trade concessions in supply-managed agricultural sectors as well as automobiles Keenan ; McGregor Theoretical trade models suggest that, for countries to benefit from trade liberalization, labour and capital must move between and within sectors of the economy.
Some industries and firms will expand and others contract. The transition process for the economy entails adjustment costs and takes time. Workers, for example, might lose their jobs and be unable to find new ones quickly. Firms might lose market share to competitors that use more advanced and efficient production processes.
Some communities might even face catastrophic economic decline if an industry that is the backbone of the local economy loses its market. And although some effects of trade liberalization are temporary, others can be permanent, with some firms and workers experiencing lower incomes not only during the transition period but on a long-term basis. Trade adjustment assistance TAA is government-provided aid to those negatively affected by import competition — be they workers, firms, sectors, regions or communities Francois, Jansen and Peters ; World Trade Organization Historically, TAA programs were narrowly defined and addressed increased import competition caused by specific trade agreements negotiated by governments.
Over time, however, some programs have been expanded to help firms or workers deal with increased import competition without attempting to sort out its causes. Different countries have had various forms of TAA at different times, but the main focus has been on support for workers in the form of temporary income replacement and subsidies for retraining or relocation. Aid for firms has been less extensive, typically taking the form of government loan guarantees, government loans or technical assistance, all intended to help firms compete against new rivals.
Various programs then operated in fits and starts until the late s, when the last federal program was phased out. In this study, we ask whether Canada needs to reintroduce trade adjustment assistance in response to the intensification of trade policy. An immediate question is: Why would special programs be needed to help those negatively affected by import competition when such programs are not available to those negatively affected by other economic shocks, such as fluctuations in commodity prices, technological innovation or climate change?
Three justifications for TAA programs are particularly important. First, assistance is justified as compensation for losses imposed on the few so that the majority can benefit from trade. In traditional programs, TAA-as-compensation provides monetary transfers to those deemed to have been made worse off because of the increased trade resulting from government action. In practice, harm caused by variations in factors such as commodity prices or technological change might be even greater than that caused by trade, but the responsibility for their effects is often more diffuse.
Temporary income support can be seen as compensation for jobs lost because of trade agreements, but it can also been seen as a way to give laid-off workers more time to find new jobs. Second, assistance is justified on efficiency grounds if it facilitates the faster movement of labour and capital from declining industries or firms to expanding ones.
For workers, TAA-as-adjustment might include income support and job search assistance or retraining that aims to reintegrate trade-affected people back into the labour market. Third, assistance is seen as a way to enhance the political viability of trade liberalization, which might depend on the support of key actors such as unions, employer associations and provincial governments. In Canada, all trade agreements — and especially the newer ones — depend to some extent on provincial governments to implement important provisions; TAA might be the price to pay for their cooperation.
Currently, three important Canadian trade partners have TAA programs: For trade-affected workers, the year old US program includes income support, wage insurance, allowances for training and relocation, job search assistance and a health-coverage tax credit United States, n. The United States also has a TAA program for firms that helps to cover the costs of technical assistance provided by consultants or other experts Trade Adjustment Assistance Centers, n.
The mix of benefits provided to workers is case specific, with member states deciding which measures are most effective in each case. Although Canada currently has no TAA program, a number of new developments in Canadian trade policy-making motivate us to re-examine this policy choice. For one, the provinces have become more important political players in trade policy. CETA, for instance, dealt with many issues under provincial jurisdiction, and the provinces were involved in the negotiation process to a far greater extent than in previous trade agreements.
We argue that CETA has demonstrated that the federal government views compensatory transfers to the provinces as a way to reach federal-provincial consensus. Indeed, Ontario has already said it would seek compensation for any negative effects of CETA, particularly on drug costs, cheesemakers, winemakers and distilleries. This new development adds to provincial bargaining power in seeking compensation.
Another reason to re-examine the need for TAA programs is that Canada is experiencing greater international pressure from its FTA partners to liberalize its supply-managed products Grant et al. Canadian producers of these products — eggs, poultry and dairy — are highly protected from international competition by means of tariff rate quotas, 5 and benefit from government regulation of domestic supply. CETA expanded the quota on imports of cheese from the EU, and thus created an important precedent for reducing the protection of supply-managed products.
Canada then took another step toward opening the supply-managed sector in the TPP by allowing duty-free access to 3. In general, because supply-managed products are highly protected, trade liberalization in this area might imply substantial adjustment costs relative to the size of the sectors. Trade adjustment assistance could provide temporary relief, helping some firms or farmers survive import competition and become internationally competitive.
At a minimum, it could provide some compensation to those who cannot adjust. To preview our conclusions, we do not think that Canada needs a special TAA program for workers and firms affected by recent trade agreements. None of the potential roles of TAA — whether compensatory, efficiency enhancing or political — seems to us to be important in the current Canadian context.
Such agreements are no longer as controversial among firms and workers as they once were; current debates are certainly less heated than those about the Canada-US Free Trade Agreement in the late s. Debates now centre instead on specific sectors, and the federal government has tried to address these issues with ad hoc promises of TAA-like compensation. Thus far, this seems to have been an acceptable solution to the provinces and affected industries, including producers in supply-managed sectors.
Nonetheless, as the Canadian economy has become more firmly integrated into the global economy, we think there is a need for an improved approach to aid workers permanently damaged by structural changes, whether those changes are caused by trade agreements, technological change or strong economic growth in emerging economies.
Unemployment insurance benefits can help workers adjust in the short run, particularly in a relatively brief recessionary period, but we think that Canadian workers permanently damaged by structural changes in the world economy are not well served by the current set of labour market programs.
The Canadian government has never unreservedly embraced the idea of trade adjustment assistance. The first such program, known as transitional assistance benefits, was introduced in the context of the Auto Pact. Few workers were eligible for the benefits of the program, which operated essentially as a low-cost top-up to unemployment insurance UI.
In the early s, the program evolved into the Labour Adjustment Benefits program, which focused on vulnerable older workers. The early programs had components that provided loans to firms and income support to workers, whereas the s program focused only on workers.
Throughout the archived records of cabinet memos and discussion papers, there is a marked ambivalence about these programs that grew from the recognition that — as stated explicitly in the Memorandum to Cabinet concerning transitional assistance benefits — other industries facing the need to adjust because of government policy changes might reasonably argue for similar assistance programs.
Moreover, the persistent practical difficulty of determining which workers and firms had been injured by government action was clearly acknowledged. It was argued that a generous unemployment insurance program was a better way to facilitate adjustment, even as the specific programs were being created.
The TAA programs established in conjunction with the Auto Pact set Canada on a path that heavily influenced future such programs. However, the economic context created by the Auto Pact was far different than that in which later programs were created.
The terms of the Auto Pact, which helped to establish an integrated North American automobile industry, were quite favourable to Canada, and led to a large increase in employment and substantial investment by the major US automobile companies and their Canadian subsidiaries. The Auto Pact allowed duty-free trade between US and Canadian producers in automobiles and their component parts, subject to important restrictions.
For example, because some products covered by the agreement could include imported inputs, duty-free imports were allowed only in goods at least 50 percent of whose content was produced by a partner of this bilateral treaty, in order to -prevent third-country imports from simply being routed through Canada to the United States or vice versa.
The pact also allowed the Big Three producers — General Motors, Ford and Chrysler — to rationalize production between their US production facilities and their Canadian subsidiaries. In addition, the Big Three agreed, in supplemental letters of undertaking, to increase their investment in Canada and the Canadian content of the cars they produced. Inevitably, however, the Auto Pact caused dislocation for some workers and firms. For example, Canadian firms that produced parts for Canadian subsidiaries of the Big Three now faced competition from US parts producers.
Some survived, but others did not. The US General Accounting Office indicated that between and firms in the Canadian auto sector were either purchased by other manufacturers or shut down from the time the Auto Pact took effect in to United States Moreover, some firms faced dislocation that accompanied an improvement in their economic position.
The federal government was not keen to establish a program for displaced workers, despite the position of the Canadian arm of the United Auto Workers UAW. The UAW had made the creation of such a program a condition of its support for the agreement, but failed to convince the federal government to act on the issue. The Canadian program, called the transitional assistance benefits TAB program, operated from to Robertson and Grey , Like the programs that came later, the TAB program was neither particularly costly for the federal government nor particularly generous to displaced workers.
Its most important limitation was the provision that workers who were eligible for the supplementary unemployment benefits SUB programs that the unions had already established with the Big Three automakers would not be eligible for TAB unless their employer agreed to pay into a government fund an amount equal to what they would have paid from their own SUB funds.
The employer could opt out of that requirement, but its displaced workers would then be ineligible for TAB. None of the Big Three automakers agreed to pay into the government fund, however, so their workers were not eligible for TAB, leaving only those workers displaced from firms not covered by the SUB programs eligible for the program.
TAB was normally available for only one year after layoff and after UI was exhausted. However, the path that was chosen in the early years of the Auto Pact became the starting point for subsequent TAA programs for workers. Apart from the effects of the trade negotiations, several industries — clothing, textiles and footwear foremost among them — were under pressure from low-cost foreign producers whose more modern factories and lower labour costs enabled them to undercut domestic prices even with import tariffs in place Mahon ; Pestieau The need for measures to safeguard domestic production is a concern for all countries engaged in trade liberalization.
Because a large proportion of Canadian production was destined for export, the opening of foreign markets to those exports was clearly a high priority for the federal government, but making provisions for the severe dislocation that some industries might experience was also deemed important.
The program was largely compensatory in nature; provisions for training or relocation were virtually nonexistent Pestieau Workers who had been permanently laid off could apply to the Textile and Clothing Board, an agency set up to deal with issues in that sector. If the Board determined that the layoff was trade related, workers who were under 55 years of age were eligible for supplementary unemployment benefits.
These benefits were designed to disappear when an anticipated increase in the generosity of UI came into effect.