Yesterday morning a few social media friends posted a link to a recent publication by Al Mussell and Douglas Hedley which warned, “don’t be fooled – the US is a big dairy protectionist”. Among my contacts, every supporter of supply management gave it a Facebook thumbs up.
The response is not surprising. Hedley pointed out that “relative to the size of its market Canada allows in about twice as much cheese within quota, and charges a much lower tariff within its import quotas.” According to Mussell, “The narrative in which the US casts itself in the role of victim to protectionist interests of Canadian dairy is highly simplistic. The US has leveraged protection and support of its dairy industry to become a major export player and transmit the associated market distortions globally, while the effects of dairy protection in Canada are contained internally through production quotas. It is plainly disingenuous for the US to suggest that it is a victim of Canadian dairy policy”.
The authors make an important contribution by exposing how authorities in both countries obstruct interpersonal trade in dairy products. However, the emotive Tintin subtext – the small clever guy (Canada) who outsmarts bullies (the United States) – is no substitute for clear economic thinking. That there are protectionist dairy policies in the United States is not a justification for protectionism in Canada. Their personification of the nation-state supplants what is the proper focus: on activities and decisions of real people (who, ironically, can be the only audience for their policy brief). Consequently the attention is on the immediate effects on one group, and forgetting the long-run effects on consumers and on all other producers regardless of their location. How can an analysis of protectionist border measures not focus on the first causalities: consumers purchasing goods from abroad who are immediately injured by being forced to pay tariffs?
The case for unimpeded interpersonal trade regardless of government interventionism in other geo-political jurisdictions has been stated thousands of times. Almost 250 years ago, Adam Smith rested the case on a single irrefutable proposition: “In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.” “The proposition is so very manifest,” Smith continued, “that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common-sense of mankind.”
Smith underscored that free trade is one facet of the specialization of labor:
“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.”
Arguments for supply management in the dairy industry in Canada never stand up to scrutiny, even seemingly good ones like this: import tariffs are necessary and cannot be repealed without hurting somebody. Let’s say a tariff of $5/kg on importers of cheese in Canada is necessary for domestic raw milk producers to stay in business. The tariff on cheese importers is repealed in Canada. What happens?
Some farmers and cheese makers go out of business, workers are laid off and input suppliers whom they patronized are hurt. This is the immediate result that is seen. But there are also results which, while much more difficult to trace, are no less immediate and no less real. For now cheeses that formerly cost $15/kg can be bought for $10/kg. Consumers in Canada can now buy the same quantity of cheese for less, or better cheese for the same amount of money. If they buy the same quantity of cheese, say one kilogram, they not only get the cheese, but they have $5 left over, which they would not have had under the previous conditions, to buy something else. With the $10 that they pay for the imported cheese they help expand raw milk and cheese production in the United States, as supporters of supply management no doubt lament. With the $5 left over, Canadian consumers can purchase additional goods and services produced by Canadians which expands innumerable other industries in Canada.
But the results do not end there. By buying American cheese, Canadian consumers furnish American purveyors with Canadian dollars to buy Canadian goods. This is the only way in which Americans can eventually make use of these Canadian dollars. Because Americans can sell more to Canadians, they are now able to buy more from Canadians. They must, in fact, eventually buy more from Canadians if their Canadian dollar balances are not to remain perpetually unused. So, as a result consuming more goods produced in America, Canadians must export more goods to American consumers. And though fewer people are now employed in the Canadian dairy industry, more people are employed—and much more efficiently employed—in other lines of production in Canada. Canadian employment on net balance has not gone down, but Canadian and American production on net balance has gone up. Labor in each country is more fully employed in doing just those things that individuals do best, instead of being triangulated into doing things inefficiently or badly. Consumers in both countries are better off. They are able to buy what they want where they can get it cheapest. Canadian consumers are better provided with cheeses, and American consumers are better provided with goods and services produced in Canada.
The best course of action for all Canadians is to abandon the policy of supply management and all other impediments to inter-personal trade. And this is the best course of action for all Canadians irrespective of trade policies enforced in any other geopolitical jurisdiction.