Blogs & Comment

How not to prepare for the New World Order

A tax grab is a tax grab.

One of the most interesting slow-burn business stories of the past two weeks has been the big brouhaha over tariffs. When Finance Minister Jim Flaherty presented Canada’s new budget in late March, he made a big deal of the fact that the government was providing $76 million a year in tariff relief on baby clothes and sporting equipment. It sounded wonderful, until the press realized that Flaherty was also raising tariffs on a whole host of other imports by some $333 million a year, more than offsetting our break on onesies and hockey sticks.

Since then, Flaherty has been on the defensive, and last week he personally penned an explanation in The Globe and Mail of why he’s kicking countries like China, Brazil and India out of the General Preferential Tariff program. Flaherty argues that, when the program was established back in the 1970s, countries such as China, Brazil and India were poor and needed our charity. Now they’re on the road to becoming wealthier than we are, so why wouldn’t we charge higher tariffs on their goods?

Flaherty is right about the first part; they are becoming wealthier than us, and fast. Here in the West, we’re used to being on top, and if you measure our influence in terms of percentage of global output, the members of the G7 have ruled the world since the 1850s. But that’s all over now. According to the United Nations Development Programme, within the next 10 years, China, Brazil and India will pull ahead. By 2050 the UN predicts the output of those three countries alone will be double the output of Canada, France, Germany, Italy, the U.K. and the U.S. combined.

The result will be the birth of a massive new middle class in a whole different part of the world. According to the UN’s Human Development Report 2013, by the year 2050, more than 80% of the world’s middle class will live in the developing countries of the south, and they will account for 70% of total consumption expenditure.

Obviously, Canada’s trading patterns are in for a major shakeup. We’ll be dealing much less with the U.S. and much more with China, Brazil and India. So why are we responding to this new reality by raising import tariffs on their goods? Flaherty’s explanation is basically that it will give us leverage. He says Brazil, for instance, already charges a whopping 35% tariff on some Canadian manufactured products, so why shouldn’t we charge higher tariffs on theirs?

I understand his point, but it seems a strange way to cozy up to our new best friends. After all, raising tariffs could have the opposite effect Flaherty is looking for: it could kick off a trade war. We raise the tariffs on their goods, so they raise the tariffs on our goods, and so on.

It would make a lot more sense to focus on setting up new free trade agreements with these burgeoning superpowers instead. It’s true that Canada has joined the Trans-Pacific Partnership negotiations, and we’re in talks with the EU, but neither agreement includes China, Brazil or India, so when it comes to free trade with our fastest-growing trading partners, we’ve still got a long way to go.

In the meantime, let’s acknowledge the higher tariffs on imports from emerging economic superpowers for what they are: a hidden tax grab that will raise prices and eat into the profits of retailers across the country. This is no step toward free trade—it’s a big step back from embracing a new world order that will shape our country’s fortunes for decades to come.

Duncan Hood is the Editor of Canadian Business.