hen it works, two-way international trade can be a powerful engine of growth, job creation, productivity and consumer welfare. Indeed, during the expansionary postwar decades of the 1950s through the 1970s, rapidly growing global trade reinforced economic expansion, industrial development and rising incomes in Canada and other industrial countries.

More recently, however, both the scale and the mutuality of the gains from trade have petered out. Trade has slowed dramatically, and trade imbalances have become large and chronic, undermining production and employment in the deficit countries (such as Canada).¹ With countries fighting for larger slices of a stagnant pie, trade has become a beggar-thy-neighbour contest, no longer the mutually beneficial engine of earlier decades. Vast numbers of people have experienced falling incomes and opportunity,² while a well-off minority have captured most of the new income and wealth.

Globalization was not the only cause of this economic and social polarization, but it was an important contributing factor. Defenders of free trade policy, claiming globalization was not the problem and that people were actually better off than they felt they were, have responded to this disaffection by trying to “educate” the public about the supposed true benefits of trade.³ Predictably, this public relations campaign failed miserably. Long-festering resentment has since burst forth in unhelpful expressions — such as Brexit and the election of Donald Trump.

Most industrial countries, including Canada, have experienced forms of popular (and often populist) rejection of globalization and its institutional and political hierarchies. For years the World Trade Organization (WTO) was deadlocked by fundamental conflicts over the direction and scope of future policy. Now it has been paralyzed by the United States’ refusal to populate its top judicial body.⁴ Other bilateral and multilateral trade policy initiatives have similarly stalled; existing trade deals are grappling with internal conflict and fragmentation (such as in North America and the European Union), and few economically significant new agreements are being pursued.

The first thing to note about the current paralysis of trade policy is that the economic problems that are sparking so much political trouble were not supposed to happen.⁵ In conventional free trade theory, automatic market adjustments are expected to guide all economies toward positions of mutual specialization and improved efficiency. In this happy world, free trade is always a win-win opportunity. The idea that entire regions or countries could be sidelined or impoverished by globalization, creating a powerful incubator for populist backlash, was never admitted.

Indeed, the quasi-empirical mathematical models (called “computable general equilibrium models”) trotted out to promote each new trade deal incorporated far-fetched assumptions about automatic and mutual benefits right into their mathematical code. The models assumed full employment, incomes that automatically rose with productivity, smooth and costless inter-industry adjustments, and a society composed of so-called “representative households” — whereby anything that was good for the nation was automatically good for everyone in it.⁶ This approach simply wished away all the problems of unemployment, job loss, inequality and stagnation that are now bedevilling trade policy. It simply ignored the many ways (acknowledged in high theory, but not in real-world policy debates) in which trade liberalization can hurt: by undermining net aggregate demand, facilitating capital outflows, stimulating perverse specialization (in industries with falling productivity or deteriorating terms of trade), and exacerbating inequality.

The reality is that global competition (like any other kind of competition) produces both gains and losses, winners and losers — and those differential effects are unevenly distributed across sectors, regions, occupations and entire countries. Not only does conventional free-market theory fail to contemplate the possibility of losses from trade liberalization but, worse yet, free trade deals, in their more aggressive modern incarnations, have handcuffed the capacity of national governments to prevent or ameliorate those losses. In that light, the tendency of free trade policy since the 1990s to exceed its original mandate and go beyond tariff reduction into much broader areas of policy has contributed to its own demise.

The overreaching of trade policy became evident with the Canada-US free trade agreement in 1988, which was extended to the North American Free Trade Agreement (NAFTA) in 1994. These were among the first trade deals to include broad provisions addressing topics that had little to do with “trade,” as conventionally defined. These included new requirements for patents and intellectual property;⁷ new limits on government regulation of foreign investment; powerful new adjudication processes, including parallel investor-state judicial processes that jeopardized the traditional rule of law;⁸ and bizarre provisions such as the Canada-US energy-sharing agreement (thankfully, jettisoned in the new Canada-United States-Mexico Agreement⁹).

With the formation of the WTO in 1995, this mission creep was globalized. The WTO undertook far-reaching efforts to deregulate service industries (even those whose output never crossed national boundaries), codify laissez-faire investment rules, strengthen intellectual property, and further extend the application of quasi-judicial dispute settlement and arbitration (including to debates over investor rights and national investment policies¹⁰). Other bilateral and multilateral trade deals (including a worldwide network of investment treaties that ensnares countries in a permanent business-friendly web of rules¹¹) followed suit. Modern free trade agreements have little to do with actual trade: tariff reduction and other traditional trade promotion measures are typically described by just one or two chapters of each massive deal. Instead, these deals are more aptly described as international business agreements,¹² aimed at enhancing the scope, security and profitability of private business in general — whether it’s engaged in international trade or not.

One unintended but profound consequence of this overreaching was the deep split (largely along north-south lines) that soon enveloped the WTO. Many developing economies rejected the deregulatory and business-friendly bias of this more expansive mission;¹³ this conflict resulted in the collapse of the Doha Round, the failure to expand the General Agreement on Trade in Services and the collapse of the Multilateral Agreement on Investment (and subsequent initiatives). But this broader and more aggressive vision of free trade policy has also failed at the national level.

Consider how domestic economic policy has been curtailed in Canada by the strictures of the new generation of more intrusive and prescriptive trade agreements. For example, the Canada-US Auto Pact arguably generated more economic benefits for Canada than any other trade deal.¹⁴ Yet, an important early decision of the new WTO was to rule that agreement completely out of bounds,¹⁵ because its requirements for proportional production violated the WTO’s new, far-reaching national treatment provisions. Since then, Canada has fallen from the world’s fourth-largest auto producer (in 1999, when the WTO initially overturned the Auto Pact) to twelfth today — and our industry is still shrinking. The economic and social repercussions from the loss of auto production and related manufacturing have been enormous, and are ongoing.¹⁶ The knee-jerk free trade claim that those jobs would quickly be replaced by other, more productive occupations better reflecting our “national comparative advantage” has been proven hollow. The WTO decision was not the only factor in the auto industry’s fall from grace; other free trade deals (notably NAFTA) also played an important negative role. The industrial destruction wrought by trade liberalization has been profound and painful.

There are other examples of how the intrusive and biased ambition of trade policy after the 1990s undermined Canadian economic opportunity. Canada’s disproportionately large and successful aerospace industry was built on the strength of active industrial policies (including public ownership, public procurement, mandated production sharing, and more)¹⁷ that have also been curtailed under this new generation of trade agreements. Active policy efforts to foster new and high-tech industries (such as renewable energy equipment and pharmaceuticals¹⁸) have also been hindered or upset by the edicts of free trade bodies. The overreaching of trade rules has affected other policy decisions in Canada, too: from environmental regulations to prescription drug policies to Canadian content laws.¹⁹ Supposedly inspired by liberalism, modern free trade deals seem to spend more time telling countries what they can’t do than what they can.

Some suggest that widespread concerns over the social and environmental dimensions of globalization could be addressed by expanding the scope of trade deals even further to include measures addressing labour standards, human rights or ecology.²⁰ Examples include the “side deals” in many trade agreements committing participating countries to limited, mostly symbolic labour and environmental measures — usually simply promises to enforce their own labour and environmental laws.²¹ The economic incentives that push certain countries to weaken those national standards to attract more private investment are unaltered. And the ability of other jurisdictions to protect themselves against that competitive race to the bottom is still strictly constrained.

A more realistic approach would be for trade agreements to abandon this effort to micromanage so many disparate dimensions of economic and social policy. Trade agreements should be limited to facilitating trade in a narrower sense, rather than trying to enforce a one-size-fits-all template for a business-dominated, deregulated economy.

Under this more limited scope for trade policy, national and subnational governments would retain the authority to undertake active policies to enhance the industrial, economic and social well-being of their respective societies, for example:

• sectoral development policies²² aimed at enhancing a jurisdiction’s footprint in desirable sectors;
• technology, innovation and skills programs to expand the technological capacities of a country and its firms;
• financial and capital market policies to stimulate productive investment, and to empower government to regulate or deter unhelpful capital flows, including foreign investment and international financial flows²³ in the public interest;
• environmental policies to foster decarbonization and sustainable practices by all companies selling into a domestic market, including border adjustments²⁴ to ensure that imported products are subject to the same standards; and
• active macroeconomic policies to push the economy closer to its productive potential and to facilitate trade-related (and other) adjustments between industries and occupations. It is much easier to adjust to job losses in one industry when decent work is amply available in other sectors, as was the case in the postwar era. A commitment to full employment would, in fact, move the economy closer to the supply-constrained equilibrium that is assumed in those computer trade models but that rarely exists in practice.

Trade agreements, in this vision, should be limited to reducing tariffs, facilitating trade promotion and trade infrastructure, harmonizing product standards while respecting genuine safety and environmental goals, and taking other initiatives to foster genuine trade — rather than promoting an all-encompassing vision of a private, deregulated, business-led economy. By sticking to its knitting, trade policy would abandon the more intrusive, deregulatory agenda it has pursued since the 1990s. It would reaffirm both the legitimacy and the capacity of national governments to actively promote a more balanced, inclusive and equitable economy. That refocusing could start the long process of rebuilding public confidence in the value of international trade — as well as affirm the public’s legitimate expectation that government will protect their interests, rather than invoke trade agreements as an excuse for inaction. For a generation after World War II, the successive rounds of the General Agreement on Tariffs and Trade (GATT) pursued a limited but successful agenda of pragmatic, mutual liberalization very similar to this vision. It focused its attention on the mutual reduction of tariffs and other obvious trade barriers, in the context of sustained full employment macroeconomic policy that kept people employed, and their incomes rising, as trade-related adjustments took place. No populist backlash occurred; indeed, most citizens would not have even heard of the GATT. Trade liberalization wasn’t a goal in its own right; the GATT didn’t attempt to impose a holistic and ideological vision on participating nations. Instead, trade policy played a limited role, offering back-up support to the larger mission of postwar redevelopment and welfare state capitalism.

Given the economic failures and the current political stalemate of modern free trade, it’s time for trade policy to get back to these basics. If the WTO is to regain the legitimacy and the buy-in that are essential to its future, it has to abandon its broader ambition to enforce a worldwide pro-business agenda. It is time to reimagine a more focused and feasible mandate for trade policy. In a world in which national governments are compelled to actively confront increasingly unstable social divisions, mass migration and environmental catastrophe, the starting assumption of current trade policy — that the economy works best when government is forced to the sidelines — is no longer tenable. Well-managed, mutual, balanced trade can be part of the solution. But first it has to relearn its place — as just one component of a broader commitment to inclusive, sustainable economic and social development.