Category Archives: Trade

With CETA comes needed regulatory reform

NL
(Photo: Wikimedia)

Editor’s note: we welcome Ed Hollett to the Straight Talk blog. Ed has been hired as AIMS Senior Fellow based in St. John’s, and will be a regular contributor to this space.

 

By Ed Hollett, AIMS Senior Fellow

In 2012, the fishing industry in Newfoundland and Labrador sold about $119 million worth of fish and other seafood to the European market. The provincial fishing industry was worth about $1 billion that year. Both of those numbers are dwarfed in comparison with the $25 billion European fisheries market.

Newfoundland and Labrador’s share of that big market was so small because of European tariffs. They added 25 percent to the cost of direct fish imports from Canada and up to 20 percent on shellfish.

The Comprehensive Economic and Trade Agreement (CETA) will eliminate those tariffs. This is the principal value of the European trade agreement to the fishing industry throughout Atlantic Canada.

The agreement gives the Canadian industry fair access to a lucrative market. CETA brings opportunity, including the chance to improve the fishing industry.

The cost of social engineering

For Newfoundland and Labrador, CETA will also mean the elimination of Minimum Processing Requirements, or MPRs. It will also increase pressure to eliminate other restrictions that have kept the fishery from developing into a modern, prosperous enterprise for everyone involved.

MPRs set minimum levels of processing that must be done on every species before product can be shipped to market. They are designed solely to keep work in fish plants in rural Newfoundland and Labrador. They have worked very well, in that respect. In 2015, there were twice as many workers processing fish in Newfoundland and Labrador compared to Nova Scotia. But the catch is a great disparity in earnings between workers in these provinces

The value of fish landings has generally been higher in Nova Scotia (2016: $1.6 billion) than Newfoundland and Labrador (2016: $1.4 billion). With MPRs, more plant workers in Newfoundland and Labrador have to share a similar- or smaller-sized pie of earnings. A 2008 study by the Department of Fisheries and Oceans demonstrated the impact of policies like MPRs. Plant workers in Newfoundland and Labrador earned about half as much as their Nova Scotia counterparts and about one-third less than the regional average for plant workers. Self-employed fish harvesters were actually in a worse position in comparison to their Nova Scotia counterparts or the regional average.

NL1(Source: DFO)

By mandating an oversupply of labour, MPRs artificially suppress wages. This helps to explain the difference between the earnings of processing workers in Nova Scotia and Newfoundland and Labrador.

More importantly for economic growth, MPRs told processors what to produce regardless of what customers were looking for and regardless of the value of the final product in the market. Processing restrictions hindered processors from finding ways to process landings for species such as yellowtail flounder that couldn’t be processed economically in Newfoundland and Labrador. The same restrictions also forced the provincial government to spend money prosecuting companies for trying to meet market demand or issuing exemption after exemption to the unworkable processing rules.

The problem of harmful restrictions is not confined to Newfoundland and Labrador. In 2015, for instance, federal license restrictions prevented New Brunswick crab harvesters from selling their catch to a company in Newfoundland and Labrador, even though the company was offering a better price than New Brunswick plants.

CETA brings Atlantic Canadians access to a new market for their fish and other products and services. It also brings the opportunity to get rid of ideas that simply don’t work any more, if they ever worked at all.

 

Supply management: a costly endeavor

SM.pngSource: Trevor Tombe, Twitter @TrevorTombe

By Alex Whalen, AIMS Operations Manager

The viability of supply management has come into discussion lately due to the new Trump Presidency. Dalhousie University’s Dean of Management, Sylvain Charlebois, a food expert, recently issued a press release examining the potential effects of Trump policy on the Canadian Dairy Industry.

Following Dr. Charlebois’ announcement, AIMS President Marco Navarro-Génie appeared on the Sheldon MacLeod Show. Dr. Navarro discussed the economics of supply management and why they are prejudicial against consumers. The simple explanation is that in Canada some industries, dairy being most prominent, have a restriction on production. The result is more profit for the producers at the cost of a higher price for everyday consumers.

This leads one to wonder: how do producers get away with such a scam? The answer lies in the distribution of costs and benefits. The costs of supply management are large in the aggregate, but relatively small on any individual purchase. A few extra pennies per transaction is not enough to outrage the public, even if the total costs are enormous. On the other side, the benefits of supply management are large and distributed among a small number of vocal, organized, and politically strong producers.

This phenomenon is analogous to the issue of inter-provincial trade, which has made it into the public lexicon only sporadically. The costs of not allowing Quebec beer into New Brunswick, for example, are small on a per-transaction basis, but large in the aggregate. The benefits accrue to a single entity, NB liquor, and in other cases, to Quebec’s SAQ, the LCBO, etc.

Recent trade deals reveal just how bad things have gotten. While we see occasional lip service paid to abolishing supply management, the provisions included in actual deals are paltry. For example, the recently negotiated CETA allowed for just 2% of the Canadian cheese market being opened up to foreign producers. Such reforms are merely symbolic and do not match the intensity of the problem.

For economists, demolishing inter-provincial trade barriers and phasing out supply management are as close to consensus items as you may find. However, the problem is not economic, it is political. The answer to these issues lies in the broader consumer base realizing it is being conned to the benefit of a select few. Such anti-market interference is unjust and consumers should demand better.

Tax-free U.S. retailers. Coming soon to your community?

LLBean

By John Williamson, Vice-President, Research

Since border enforcement and protection is a federal responsibility it is Ottawa’s responsibility to set the tax and duty limit exemption on consumer purchases entering Canada.  The limit is currently $20 but Ottawa is being pressured to boost it to $80 or even $200 for online purchases from the United States and overseas.

Increasing the tax exemption limit means online order destined for Canada won’t be charged HST or even U.S. state tax.  Consumers would rejoice.  Yet, it would treat two similar transactions differently and put domestic Canadian retailers at a competitive disadvantage since HST would continue to be applied on purchases made within Canada –  both locally at a neighbourhood store and online from Canadian-based shippers.  This is bad tax policy.

My recent AIMS column, which appeared in the Telegraph Journal and the Financial Post [click here to read] discussed why it is essential to maintain the neutrality of the HST on all consumer purchases.  It is also important for the provinces to enter this debate since any change would reduce provincial HST revenues.  New Brunswick along with Newfoundland & Labrador increased the HST over the summer.  Prince Edward Island will soon follow.  Nova Scotia did so several years ago.  These provincial governments say they need added tax revenue.

The Retail Council of Canada estimates the tax loophole would reduce provincial HST revenues in New Brunswick by $40-million.  Finance Minister Cathy Rogers was asked about the impact on the provincial treasury.  She opted to remain more or less neutral since it is a decision for Ottawa.

It is wrong for provinces to stay quiet about a federal tax change that would exempt the HST only on online sales made by foreign retailers after provincial governments hiked the tax on local Canadian retailers.  The change would give foreign vendors a sizable 15% tax advantage in Atlantic Canada, particularly when stores like Maine-based L.L. Bean ship to Canada for free.  Minister Rogers, along with other provincial finance ministers, should take a position.