2016: A New Age of Protectionism?

April 15, 2016

The coming year is shaping up to be a puzzle for Canadian exporters and export manufacturers, if only because there is a higher than normal level of volatility regarding changes to international trading practices. On one hand several major trade liberalization agreements—the pending Trans-Pacific Partnership (“TPP”) chief among them—are in their last stages of negotiation and will move into the political realm for final approval; on the other hand, globally, there is evidence of rising protectionist sentiment.

We have been inundated for several decades now with business stories reporting on the liberating rise of globalization and its positive effects, but recently there have been strong pressures in the opposite, protectionist direction. There is now a strengthening argument that in 2016 we are moving beyond the lingering froth of a long era of trade expansion and into a more guarded age of regulated trade.

Contrasting this wave is the fact that for Europe and North America the last seven years have seen the slowest recovery from a major recession in modern economic history. There are a myriad of explanations for this, but the lead indicator in most analyses is the anemic recovery of international trade. For the preceding forty years—during our long wave of trade liberalization— expanding export trade has been the world economy’s engine of growth, but it is now statistically clear that this reality is gone. The continued devastation of the manufacturing sector in Canada is evidence of this.

Conversely, economic history repeatedly shows that restricting trade reduces competition and triggers inflation. It is not a coincidence that inflation rates over the last two decades have been historically and consistently low: cheap goods, whether from China, Mexico or elsewhere, drive consumer spending, which has been the fuel in our economic stability for decades. It is a simple fact that when high level American politicians or policy makers talk about restricting China’s access to US markets, they are also talking about Americans paying more for basic goods like clothing and furniture.

There are of course larger dangers than inflation to consider in all of this. The decline of Western economic fortunes is juxtaposed by the rapid and solid rise of China, and to a slightly lesser extent, India and Brazil. Finding the right fit for these rising powers into a wobbling and volatile international trade system is the root of our current situation and the source of protectionist arguments. The Trans-Pacific Partnership is directly aimed at creating trade relations that allow the participants to by-pass China so that the goods we so ravenously consume will come from Vietnam or Malaysia, leaving China to source new partners. Questions of worker rights or environmentally friendly production techniques invariably fall to the wayside.

These are aggressive measures taken in high stakes, state-to-state collisions between the globe’s largest economies. Fortunately, one of the unspoken benefits of globalization entering 2016 is the increased interconnectedness of major trading nations; because of this the pain of destroying existing trade relationships outweighs the gain of escalating into nation-to-nation conflict. It is to our benefit to find a way of further integrating our economies with those of China, Brazil, India and the rest, than it is to shut the door and take the fight to the next level. The EU is an example of this. However rocky its ongoing health may be it is still more advantageous to bring rising nations such as Poland into the group than to force confrontation and lose the deals already in place or pending.

The bottom line is that, globally, the situation is volatile. Trade challenges are intermingled with geopolitical challenges (Russia’s seizure of Eastern Ukraine, and the resulting heavy trade sanctions against it are the best example) to a higher degree than at any time in recent memory. Canadian manufacturers and exporters are wise to avoid volatility in this regard, regardless of the opportunities. New markets and new partners require close scrutiny, and a heightened awareness of potential trade challenges is essential. BDO’s tax and advisory services supply these timely and necessary responses.

To learn more, contact your local BDO office or:

Michael Gillespie
National Manufacturing & Distribution Leader
519 576 5204 Ext. 5002

About BDO

One of the nation’s leading accounting firms, BDO Canada provides assurance, accounting, tax, and advisory services. As a member of the BDO international network, which spans more than 150 countries and 1,400 offices, BDO provides seamless and consistent cross-border services to clients with international needs.

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BDO has extensive experience providing services to a broad range of clients in the traditional and emerging areas of manufacturing and distribution. With unique insights into your industry and access to firsthand knowledge of trends and insights, we understand your business. Our international network of industry professionals has a wide range of financial and advisory expertise to provide global problem-solving capabilities and support your changing needs.

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