Rethink our trade adjustment programs

Dmitry Lysenko and Saul Schwartz | December 10, 2015

The new Liberal government will consult with Canadians regarding our involvement in the Trans-Pacific Partnership (TPP) — the 12-country trade deal that was recently announced. International Trade Minister Chrystia Freeland indicated this review will include the $4.3 billion package that the previous government promised to supply-managed sectors (the dairy, chicken, turkey, egg and hatching egg industries) as compensation for TPP.

These consultations are a welcome development as Canada looks to potentially implement major trade deals — not only TPP, but also an earlier agreement with the European Union (CETA). Taking the opportunity to rethink whether to offer government compensation, and if so, how best to do it, is a worthwhile exercise.

While trade liberalization offers long-term economic benefits, trade deals can entail difficult adjustments for some firms and workers. To aid the transition, some countries — including the United States — offer dedicated trade adjustment assistance (TAA) programs to affected workers or firms. These programs typically provide workers with temporary income support and retraining subsidies.

In our new study for the Institute for Research on Public Policy, we trace the history of TAA in Canada and examine recent compensation packages offered in TPP and CETA, which we view as an ad hoc form of trade adjustment assistance.

Focusing on Canada’s TPP-related program for supply-managed sectors, there are three main components that seek to address potential negative impacts of greater imports. First, a $2.4 billion Income Guarantee Program will ensure producer incomes do not fall for at least 10 years after TPP comes into force. Second, a $1.5 billion Quota Value Guarantee Program protects producers against any declines in their quota values over the next decade. Finally, the former government promised a $450 million Processor Modernization Fund to support new investment by firms as well as spending on technical and management capacity in the sector.

We offer three observations on these programs. First, the Income Guarantee Program is an entirely new development in the history of Canada’s TAA. Unlike any prior program, producers in supply-managed sectors would be guaranteed that their incomes will not decline as a result of a trade deal. Previous programs offered income support, but nothing close to a guarantee against lower income.

Second, the ad hoc nature of these programs implies quite different and potentially inequitable treatment of firms and workers in various sectors. For instance, compare the funds promised to dairy and poultry processors in TPP to those offered to Newfoundland and Labrador’s fish processors in CETA negotiations. As far as we know, there are no conditions attached to the fund for supply-managed sectors but “demonstrable harm” would be required to obtain up to $280 million in support in the fisheries industry.

These programs are inequitable in another way. According to Statistics Canada’s 2011 Farm Financial Survey, the average net worth of a Canadian dairy farmer was $2.7 million, with an average annual net cash farm income of over $120,000. Workers outside of supply-managed sectors who are negatively affected by the TPP and CETA agreements won’t receive an income guarantee. Instead, they will have only our unemployment insurance system to fall back on, a system that has been weakened in past decades.

Third, assistance for supply-managed sectors is unlikely to improve their viability and may instead stifle incentives for the sector to change. Even though the Modernization Fund could help processors become more efficient, the continued regulation of supply and prices in the sector will likely result in ineffective use of the funds. In similar American and Korean programs, firms used the funds for purposes other than “modernization.”

Our negative view of these programs echoes that of the 1980s Macdonald Commission concerning the Canadian TAA programs of the 1970s — which was that they were designed “in large measure, to postpone, rather than to facilitate, adjustment.”

Overall, the TAA programs announced for supply-managed sectors fall short in terms of both economic efficiency and equity. The income and quota value guarantees are unprecedented, expensive, and seem destined to impede rather than facilitate economic adjustment. Moreover, they are unfair to workers and firms in other sectors affected by TPP, as well as those affected by economic developments other than trade agreements. Such ad hoc assistance is better understood as a political strategy used by the previous government to mitigate opposition to trade liberalization by a specific group, rather than as a serious effort to aid economic adjustment and minimize social consequences.

A better way forward for the new Liberal government is to adopt a more modern and comprehensive set of labour adjustment programs. The ultimate goal should be to help workers adjust to important longer-term structural changes in the labour market — whether caused by specific trade agreements, technological change or other factors.

Dmitry Lysenko is a senior policy analyst with the government of Nova Scotia. Saul Schwartz is a Professor in the School of Public Policy and Administration at Carleton University.

Does Canada Need Trade Adjustment Assistance?

Does Canada Need Trade Adjustment Assistance?