Forget About Winning the Trade War; Focus on the Bigger Win

I'm all for 'elbows up'. Like most Canadians I applaud the retaliatory tariffs and threats of other measures our government has made in response to the unjustified, Treaty-breaking tariffs that the US is imposing on Canadian goods.  

But let's be clear.  Retaliatory tariffs and other measures won't win the trade war. If the US president doesn't care about the severe costs that his own measures are having on the American economy and its place in the world, it is difficult to see how the added costs of our retaliatory measures will move him. In many ways our retaliation is more important for what it means for us. The immediate push-back lifts our spirits and signals our resolve not to let the US assault on Canada go unanswered. 

If the first principles of economic theory and the actual historical record teach us anything, it is that no one wins a trade war. The best one can hope for is to minimize the damage. Our retaliation may help if they serve to galvanize internal US opposition to the president's apparent fixation on destroying long-standing, mutually-beneficial trading relationships. But they won't bring about a 'win'. They won't improve on the trading arrangements we had with the US, and they certainly won't restore confidence in a relationship that can so easily be shattered without justification or reason.

It is important to keep all that in mind when, as the president is reportedly determined to do, the US escalates the trade war with further unjustified tariffs and we have to consider how best to respond. 

To my mind, once one accepts that trade wars can't be won and the old order never fully and confidently restored, the best response is to pull back. The US is like a bully, completely out of control, throwing punches in all directions including on his own face. Of course we have to get the elbows up and hit back in response. But we aren't going to 'win' the fight. The only real way to win is to pull away, Maybe the bully will realize he took our friendship for granted. And maybe he will behave better down the road. But the big win is when that doesn't matter or at least doesn't matter nearly as much as it does today. And it is on that big win that Canada should be focussed.

In trade, what is more important than the retaliatory tariffs we impose are the new trading relationships we develop, both within the country and abroad. And underlying that will not simply be the interprovincial and international agreements and understandings we reach, but the hard investments we make in the transportation, port, electrical grid and other infrastructure that is needed for that trade to cost-effectively take place.

We need to consider where and how Canada can further develop its comparative advantage in industry, science, education, health care  and other fields to move away from our over-reliance on the resource and supply chain role we have had in what was an integrated North American economy. 

With respect to defence, what is most important are the new partnerships and military equipment procurement strategies we must pursue to lessen our dependence and vulnerability to the US. We will get far more respect and attention from the US when we stop supporting their military industry than when we impose a tariff on US-produced discretionary consumer goods.

As for global health, the environment, human development and resolution of international disputes and dysfunction, we must expand our efforts to work with like-minded countries so that abandonment of these critical issues by the US does not mean abandonment by the rest of the world.

This upcoming election in Canada is so important in so many ways. The contenders will no doubt spend a lot of time telling us how they will stand up to the US to 'win' the trade war the Americans have foisted on us.  Better they should tell us how they will pull away from the US and this war no one can win -- how they will stand up for a Canada very independent from the US.

It is Not Just a War on Canada

 It is not surprising and not altogether wrong for us to focus solely on what Trump's America is doing to Canada. With his unjustified and treaty-breaking, open-ended threats to impose 25% or higher tariffs on Canadian goods, Trump has in effect declared economic war. He apparently would gladly take us over, but is quite prepared to destroy our economy if he can't. 

Some of the more extreme among us would say we are the Ukraine of North America. Just as Putin sees only an obedient, Russified Ukraine or a physically destroyed country, Trump would seem to see only an obedient, Americanized Canada or an economically crushed territory.

However, as tempting as it is to go down that quite reasonable, albeit self-pitying road, I believe that would be a major mistake. Of course we must prepare for the economic warfare Trump has brought on us, both with our short term lobbying to delay and ideally eliminate the threat of tariffs (the threat itself seriously damaging to the economy) and with our longer term efforts to reduce our dependence on the US market. But we must also prepare for what could be the greater calamity -- the end of the United States as a stable, reasonable country and  leader in western and world affairs.

Trump isn't just declaring war on Canada and Mexico. He is declaring war on reason and fact-based policy; on human rights; on the environment; on justice and impartial application of the law; on critical international institutions, agreements and respect for territorial integrity. Fundamentally more important for Canada and the world than the war Trump has declared on us; Trump has declared war on the United States itself and the many positive contributions the US has made in leading the western world. The United States has never been perfect -- far from it. But it has been an important model and leader in many respects, arguably moreso than any other country over the last one hundred years.

The question for Canada is not just how do we protect ourselves but what do we do to develop new alliances and new leaders to champion the values, institutions and international understandings that are essential for the world to cooperate on the fundamental problems we collectively face -- climate change and protection of the environment; control of weapons of mass destruction; eradication of extreme poverty; identification and protection from virulent disease; respect for territorial integrity and peaceful resolution of disputes. It may be that Trump and his supporters recoil at 'globalist' concerns and actions, but the fact is we are one world; we have shared challenges and opportunities and they are growing in importance every day.

Canada is a small country but we are not alone. There are many countries in this world that share our basic values and concerns. We need to reach out to them -- not so much to help us with our 'war' with the US, but rather to address and respond to the war Trump has unleashed on the values his own country once stood for,

 

How to Respond to Trump's Tariff Threats

At face value there is little sense in President-elect Trump's threat to impose a 25% tariff on all imports from Canada until he is satisfied we have stopped illegal immigration and drug shipments across the border. It may be a negotiating ploy to extract concessions on other issues and it may suit Trump's inimitable need to blame other countries for the serious immigration and drug addiction issues facing the US. But the threat of tariffs won't solve those problems. Major improvements in border control and reductions in illegal immigration and drug supply require serious cooperative efforts by partnering nations committed to the same goals-- not bombast and threats driving people and countries apart.

Even from a parochial American perspective the tariff threat makes little sense because it is a threat to American investors, businesses and people as well as Canadian. It is, as University of Calgary economist Trevor Tombe recently pointed out in some detail, a classic lose-lose proposition. 

A tariff on oil and gas, electricity and other energy products -- by far the biggest component of Canadian exports to the US -- will hurt Canadian industry by putting downward pressure on the wellhead or netback prices producers receive. But it will also hurt US businesses and consumers (not to mention US investors in Canadian oil and gas companies) as the US is forced to replace the reduction in Canadian supply that the tariffs cause, particularly over the longer term as Canadian output falls or is diverted to other markets.

A tariff on motor vehicle parts and production -- the next most important component of Canadian exports to the US -- will hurt the Canadian auto industry, but will hurt the American industry as well because of the highly integrated manufacturing operations. Well-established, efficient supply chains will be disrupted and costs of motor vehicle production in North America will rise for everyone. The only possible winners will be European and Asian producers who will face higher cost North American production in global markets.

Trump's threat of 25% across-the-board tariffs is in short a transparently irrational proposal from the US as well as Canadian perspective. But lack of facts or reason does not necessarily deter Trump, who is attracted as much -- probably much more -- by the political buzz than the real consequences of what he proposes. 

And so the question is: how should Canada respond?

In the short term there is little more we can do than make the case to any and all who will listen -- the imposition of tariffs will hurt Americans and won't help the border control issues Trump says he wants to solve. There are far better ways to work together on those important matters. The same lobbying strategy Canada used to confront Trump's first term foray into lose-lose tariff policy will have to be used here.

But this short term response is the least of what we can and should do. The lesson here is not just that Trump is quite prepared to hurt Canadians even at a cost to his own country.  And the problem is not just Trump. Protectionism is a growing force in the US and Canada cannot count on staying inside its ever-increasing protectionist walls. Nor should we want to. The price will be too high.

The US is by far our largest trading partner and no doubt because of the strong north-south ties, will continue to be. But we need to take seriously the need to lessen our dependence on the American market and assumptions of good faith American policy. We need to be able to respond to tariff threats like the one Trump just made with more than weak entreaties to be exempt.

We need to support the investment in oil and gas pipeline and port facilities that will reduce the cost and increase the capacity to export to offshore markets. Just the option to access those markets will lessen the cost of what the US may do. 

We need to invest in the electricity transmission infrastructure that will support an expansion of interprovincial planning and trade. 

More generally we need to identify and work to eliminate interprovincial barriers to trade. We cannot count on the US to be a reliable trade partner, but we should be able to count on each other.

Of course, even with these and other measures, we will always be dependent on our access to the US market. And so Canada has to develop its own leverage when dealing with the elephant next door. We need to control access to strategic minerals in limited global supply and restrict US government participation in their development. We need to develop a stronger but also much more independent defence policy, particularly in the north where we may have more in common with Nordic countries' objectives and strategies than the US. 

In crisis, they say, there is opportunity. The opportunity for Canada now is to start to address what needs to be done not next week but over the next years and decades. Trump's threats are worrying in the short term, but they will do a great service to Canada if they get us taking seriously what needs to be done over the long term. Let's hope our politicians and political debate start to address that.

'It's All About the Money Stupid'

Like the vast majority of my colleagues I support the use of carbon taxes to encourage households and industry to reduce their consumption of fossil fuels. We economists believe in the behavioural impacts of price signals, so of course we support making it more expensive to consume fossil fuels and emit manifestly harmful CO2  and other greenhouse gases into the atmosphere. 

I understand the scepticism that many people have (and cynical politicians exploit) about the need for and effectiveness of carbon taxes. People will materially reduce their consumption of fossil fuels when reliable alternatives are developed, affordable and widely available. It will be technological progress, not marginally stronger price incentives, that will make the real difference.

Still, whatever one's view regarding the importance of its incentive effects, there is a very compelling and urgent case for carbon taxes that I think many people understand and could accept. In the words of former President Clinton, albeit in a different way for a different reason: 'it's all about the money stupid'.

We know that as hard as we try, we will not achieve zero carbon emissions for many years, not in Canada and certainly not globally. And even then it may take years after that to extract carbon from the atmosphere in order to reduce concentration levels to a level that will meaningful reduce greenhouse gas effects. What that means is we can expect the increasing frequency and severity of storms, fires, floods and other climate change-related events to continue. And that in turn means we will need more financial resources -- more tax dollars -- to invest in the very wide range of measures that are urgently needed to reduce risks, minimize damages, compensate victims and rebuild and recover in timely and resilient ways. 

I've heard a number of understandably very distraught people demand that those responsible for human-caused climate change should be called upon to pay compensation for the material damages that climate change-related disasters have. They are thinking of course of the major oil companies and other suppliers of fossil fuels. But who are in fact responsible. It is convenient to target big oil and other fossil fuel companies as the fundamentally guilty parties. And there may be many good reasons to go after those companies for tax, environmental impact or other reasons.  But in reality it isn't the supply of oil, gas and other fossil fuel products that is the problem. It is the demand for oil and gas that drives their production and supply, and it is the use and combustion of fossil fuels that results in greenhouse gas emissions. 

If we want those responsible for greenhouse gas emissions to pay for the increasingly severe climate change-related damages those emissions are causing, it is household and industrial consumers of fossil fuels that we have to target. And that is precisely what carbon taxes do. 

But we need more than the tax. We need to dedicate the revenues that carbon taxes generate to desperately needed compensation funds -- more generally to finance measures that will help to prevent, mitigate, compensate and recover from the climate change-related disasters we are facing and will continue to face for many years..

These are unsettling times. But there is so much we can and should be doing to help communities minimize costs, respond more effectively, support impacted people, business and communities,  and recover in a fulsome and timely way. Commissions of inquiry, resource management agencies, municipal officials, fire protection personnel and others have all set out what needs to be done so the next climate events are not as bad as the last. But they all require major resources and investments, well beyond what normal budgets provide for.  

Government budget constraints should not be the reason we fail to act.  We don't have to revisit needs every time disaster avoidance and preparedness fall short -- we don't have to rediscover winter every winter. We need to commit the funds and make the investments we know are required and increasingly urgent to avoid, minimize and deal with catastrophic climate change-related events. And we need to do that without draining resources from all of the other priorities our society must address. Dedicating carbon tax revenues to the mitigation and compensation of climate change-related events may not be enough in itself, but it can greatly help. It can get us going much more rapidly and effectively with what has to be done. 

We Need a New Level of Commitment and Approach to the Housing Crisis

We know from countless studies that there are severe costs of inadequate, unaffordable housing. Inadequate, unaffordable housing in urban centres limits access for low and medium wage workers.  People cannot work where they cannot afford to live. It significantly adversely affects the local community and economy. And, homelessness, in the extreme, imposes huge social and economic costs on all sectors of society:

-poverty, illness and premature loss of life for those directly affected;

-reduced property values for business and residents in or near outdoor encampment areas;

-disproportionate demand for emergency and other health services;

-extraordinary policing and criminal justice system costs;

-safety concerns for all residents, homeless and sheltered alike.

There have been increased efforts to address the homelessness and more general housing crisis in Vancouver and other British Columbia communities, but these efforts are manifestly insufficient. The problem has been getting worse, not better. There still is not the commitment to what is warranted and required -- a much greater, long term and strategic investment program than is currently taking place.

A fundamentally new level of commitment and approach is required.

First and foremost, investments to improve access to clean, safe and affordable housing cannot be dependent on the success or failure of ad hoc trilateral government negotiations and agreements. Secure, adequate funds must be dedicated to investment in housing and related supports and services to enable large-scale, long term plans to be developed and implemented.

Instead of the city looking to the province, and the province looking to the federal government for more funds for the different specific projects they would like to undertake each year or political cycle, we need the provincial government to create an Urban Housing Authority with a guarantee of funds sufficient to develop and implement long term investment plans that will make demonstrable improvements in:

-reducing and ultimately eliminating widespread homelessness and associated outdoor encampments;

-providing affordable rental or other housing opportunities for low and medium income workers and families in urban centres, reasonably near their places of work or study, housing that the private sector simply is not developing.

The mandate of this Urban Housing Authority would go well beyond the existing BC Housing Corporation with its limited scope and budget, and its complicated relationship with government. The Authority would be a major new developer of housing in BC urban centres, with private sector management and expertise, but very clearly articulated housing policy objectives and goals.

Core funding for the Authority would come from a housing development agreement with the provincial government. Much like BC Ferries which receives annual payments from government in exchange for  contractually-specified service guarantees, the Housing Authority would receive annual payments in exchange for housing development commitments -- commitments that would transparently put the province on a path to reducing homelessness and affordability concerns. The province could negotiate with the federal government and cities to share the cost of these payments, but the timeliness and success of those negotiations would not affect the province's commitment and contractual obligations to the Authority.

Over time, the Authority would develop other sources of revenues. It would be empowered to undertake land assembly and redevelopment schemes in core urban areas with profits used to finance development of more affordable housing units and related services. The Authority would also have borrowing powers through the Municipal Finance Authority or with provincial government guarantees to gain access to low cost capital funds. In this way the Urban Housing Authority would mirror the rationale and mandate of BC Hydro and BC Ferries -- established and empowered to make the investments and provide the facilities and services the private sector would not or could not do. And in doing so it would fundamentally change for the better the urban landscape of BC.

Lessons from Monty Hall

I wasn't the first to get the Monty Hall problem unequivocally and humiliatingly wrong. But I was as incredulous and arrogant as anyone else.

Monty Hall, you may recall, hosted a game show where contestants had to guess the location of prizes  behind a number of closed doors. In the classic Monty Hall problem there were three doors, two with nothing behind them and one with a grand prize. After the contestant chose one of the doors Monty Hall advised which of the other two did not have the prize. There were now only two doors where the prize could be located -- the one that the contestant had chosen and the one of the other two that Monty Hall did not rule out. Monty Hall then gave the contestant the opportunity to change her choice.

The question is: was there any difference in the probability that the prize was behind either one of these two remaining doors.

I, like many others, insisted there was no difference. The facts were clear. After the information Monty Hall had provided, ruling out one door,  there were only two doors where the prize could be located. The chance that the prize was behind either one of them was the same -- one in two.

That still makes perfect sense to me, except it is wrong. It ignores the fact that from the outset when the contestant picked one of the three doors there was a two in three chance she was wrong. To say the same thing there was a two in three chance that the prize was located behind one of the two doors she did not choose. And that didn't change when Monty Hall ruled out one of the two non-chosen doors. The only change was that there was now only one non-chosen door with the two in three chance of having the prize behind it.

So if the contestant stayed with her original choice she would have a one in three chance of winning. But if she changed her choice to the other door she would have a two in three or double the chance of winning.

I know this is a bit confusing and counter-intuitive. My son, or as my wife would say, the brighter and nicer economist in the family, had to construct simple simulations of the game to convince me I was wrong. Pure logic wasn't enough. But after a while it sunk in. And it was a great learning experience -- not so much the mathematical probability part but rather the more fundamental and humbling recognition of how wrong we can be despite the certainty with which we hold to the correctness of our position.

It is, I think, one of the most important lessons that helped shape my economic consulting career.  No matter how carefully we do our analysis and how thoughtfully we develop our conclusions and recommendations we must never forget we may be wrong. We miss or ignore important facts. We fail to recognize  the nature and significance of our assumptions. We sometimes just make mistakes.

I've always been skeptical of those who profess they have the one and only correct answer to difficult public policy issues. That is why I have taught and applied a multiple account approach to the evaluation of policy and project alternatives. Different values and interests can bring different perspectives and often the best we can do is to assess the consequences of different actions -- how things would be different going forward -- in order to define as clearly and meaningfully as possible the nature of the trade-offs different alternatives present. Add to that a real appreciation that we may be wrong in our assessments despite all of our best efforts and it calls for some caution and humility in the work we do.

One of the most unfortunate trends I've witnessed over my consulting career is the exact opposite of caution and humility. Especially in contentious policy and project debates, and the hearings and media frenzy that often go along with them, there is far too much of what I like to call "analysis with attitude". People have a position and shape their assumptions, analysis and conclusions accordingly. There is no room for nuance, recognition and assessment of trade-offs, or simple acknowledgement of all the reasons including typically pervasive uncertainty let alone mistakes, as to why they may be wrong.

After over 45 years I am closing my consulting business. If I can offer anything from my experience it is a plea to those who continue in the very important world of public policy analysis, debate and advice -- stay away from analysis with attitude and the vitriol and intolerance it too often foments. Try to inform and elevate the debate with careful, objective analysis and a fulsome recognition of uncertainty, different perspectives and interests, and the simple fact that despite our experience, knowledge and best intentions there are lots of Monty Hall problems and paradoxes out there. We make mistakes.

Rethinking the Carbon Tax in the Wake of Recent Severe Climate Events

If there was ever a time to reconsider the logic and purpose of the carbon tax, it is in the wake of the severe weather events that have caused so much damage in British Columbia this past week and last summer. 

The proponents of a 'revenue neutral' carbon tax, where the revenues are dedicated to the reduction of income or other taxes, see the carbon tax solely as a means of providing incentives to reduce fossil fuel use and associated GHG emissions. Encouraging households and business to reduce emissions is clearly critically important. And imposing a carbon tax, as virtually all economists will tell you, is an economically efficient way to do that. 

But carbon taxes would have to be an order of magnitude greater than current levels to meet the emission reduction targets that are needed to limit climate change to so-called manageable levels. And a revenue neutral carbon tax won't address the immediate challenge governments face as a result of the climate change we are already experiencing and which is likely to get more severe. 

There are huge expenditures that must be made to deal with the widespread damages caused by severe climate events like the flooding in recent days. And there are huge investments in public infrastructure and services that are required to enhance the preparedness and resilience of utility, transportation, municipal and other government services in order to mitigate the damages of future events.

Right now those expenditures will either come at the expense of other needed and almost universally underfunded health, education and other public services or be funded by increased income, sales or other taxes. That of course raises the obvious question: why shouldn't the costs of mitigating and addressing damages be paid for by the activity most directly responsible -- fuel use and the GHG emissions it causes.

The most obvious logic for and purpose of the carbon tax is to generate the revenues government needs  to pay for the costs climate change is already and will increasingly cause. We shouldn't be asking hospitals and schools to forego needed funds or workers and business to pay higher income taxes to pay for that. We should be expecting those most directly responsible to pay.

We need a carbon tax that is at least as high as required to cover the costs GHG emissions are causing. You don't need economic theory and price elasticity estimates to justify the tax. You just need the common sense requirement that costs must be paid for and those responsible should pay. You might even find a lot more understanding and support for the markedly growing level of tax that is required.