Mr. Speaker, I rise to support my colleagues and the government in passing this bill. I believe it will increase trade between the two countries and generally will serve the interests of both the people of Israel and the people of Canada.
However, I wish to deal with two objections which are normally raised whenever there are bilateral agreements between states or when there are agreements for regional free trade.
The first of these objections is that it diverts resources away from the pursuit of overall free trade. This is true enough. No government has infinite availability of experts to engage in trade negotiations. It would in my judgment be the best of all possible worlds if all trade barriers between all countries were removed.
However, generally I believe that the two targets of pursuing both bilateral trade barrier reductions and universal reductions in trade are not mutually exclusive. Therefore, while I would in a perfect world rather have completely free trade, I am satisfied that the negotiations of the Israel-Canada free trade agreement have not slowed down progress on obtaining completely free trade throughout the world through negotiations at the World Trade Organization.
However, there is a very interesting and important other objection that is often raised to bilateral agreements. It arose in the post-war years when the club of Rome led to the integration of the European economies. It involved a very subtle but interesting counter intuitive argument.
If free trade is good then is it possible that free trade between just two countries or within a region might in fact be bad and reduce world output and welfare? This is a strange puzzle, one when it was first developed by Jacob Viner in the 1930s. It almost threatened to paralyze all economic research. Here we have a world full of regulations, tariffs, domestic regulations and taxes, all of which are distorting the free allocation and the efficient allocation of resources as they would be in a completely free economy. Yet people thought for a long time that if we could go slowly in the reduction of such barriers, one at a time, by ultimately moving toward a completely free economy we would therefore be on a progressive movement toward increasing the efficiency of allocation of resources and therefore living standards of people in the world.
However, as Viner pointed out, that is not necessarily so. This was his argument. He framed it in the context of trade between two European countries but I will do it for the case of Israel. Let us assume for a moment that right now the tariffs facing imports into Israel both from Morocco and from Canada are the same and as a result, because Morocco is the cheapest producer of this product, trade is now taking place from Morocco importing into Israel and Canada is left out. Let us now consider that when the tariff barrier on that product comes down only on trade between Canada and
Israel, it is possible that the imports from Morocco are replaced by imports from Canada into Israel.
By definition, if previously when they both faced the same tariff barriers, the production of that product in Morocco was the least cost production location, the one which served the world best because Israel got its product at the lowest price, therefore shifting the production to Canada would mean a loss in productive efficiency for the world. This is called trade diversion. It is a negative aspect of moving in this world the way Canada did with Israel by reducing trade barriers through bilateral agreement.
Of course, there is another side to it. It can also be that the reduction in the tariff barrier means that now the production will be taking place between Israel and Canada, whereas before only Israel was producing the product. There were no imports at all.
To repeat, the alternative is the lowering of the tariff barrier and will result in the creation of trade between Canada and Israel, trade which previously did not exist. By definition again, the product that used to be produced at high cost behind the tariff barriers in Israel will now be produced at a much lower cost in Canada and shipped to Israel. That is what the free market says is done.
We face an empirical question: Are the benefits from trade creation greater or smaller than the benefits from trade diversion? It is not clear on purely logical grounds which of these effects will dominate.
We can see why in the presence of such a puzzle in the post war years economists were very upset. Logically, they could not say anything any more about the benefits of any form of deregulation, like the removal of tariff barriers, unless they had the empirical evidence on how much more trouble was created rather than the benefits that were created.
It turns out in an examination of the experience of the European Economic Community, trade creation by far outweighed trade diversion.
One of my students at Simon Fraser University wrote his doctoral dissertation on asking whether the Government of Pakistan had a net benefit from the greater growth that took place in Europe as a result of unification of the common market, the removal of tariff barriers between Germany and France and Italy, than it had because some of its exports to Germany were replaced by exports that previously were taken from France.
A careful study of trade patterns has shown that typically, trade creation outweighs trade diversion. I am personally convinced that
this will be the case with Israel as it has been in Europe and almost any other country that has been studied.
This effect is especially strong if at the same time the removal of the barriers takes place, trade is created and wealth increases. As countries get richer because of the more efficient allocation of resources, they will trade more. This dynamic effect, as it is called, of trade creation provides benefits that empirically have far outweighed the effects of trade diversion.
Nevertheless, in my own mind there remain some problems. I raised them with the people from the Department of Foreign Affairs when they briefed us on this bill. There have to be very tedious provisions for certification of the origin of goods that are being traded.
For example, since there is free trade between Israel and Canada but not between Pakistan and Canada, it is possible that Israel could lend itself simply to taking products produced in Pakistan that are transshipped through Israel and then, as a result of that, are moved into Canada without having to face trade restrictions that we as a country have imposed on Pakistan. Personally I think we are so rich that we should remove them all.
We have to face the fact that in the wisdom of this House many years ago, some barriers were put up to trade with Pakistan. We must somehow ensure they are maintained and are not circumvented in a surreptitious way through the use of Israel as a base to ship. As a result, there needs to be a bureaucratic mechanism to assure Canada that all the products exported from Israel to Canada are Israeli products.
That sounds fairly easy but the question is: What if a shirt comes from Pakistan but it has no buttons and no buttonholes and an Israeli factory makes the buttonholes, attaches the buttons and packages the shirt? Is it now a Pakistani product, or is it an Israeli product? This is one of the issues. Strict rules have to be put in place, which are thought through, codified and enforced, as to what level of value added in a country makes it okay to call the shirt an Israeli product rather than a Pakistani product.
We can see how complex all of this is. Some products may be coming from Europe. Complicated products may contain not just Pakistani input but German input, and we have free trade with Germany. There are all of those issues. One of the fears of people who oppose bilateral free trade is that the amount of bureaucracy with enforcement mechanisms and dispute resolution mechanisms is very costly indeed.
What we really need is to remove these discriminatory tariffs as they now exist where we give concessions to Israel but not to
Pakistan. If we had given our benefit of free trade on these products to Pakistan as well, this problem never would have arisen.
After looking at the evidence on all of those matters, I have concerns over the growth of bureaucratic enforcement mechanisms throughout the world, as Canada has bilateral agreements not just with Israel but also with the European Community and Latin American countries such as Chile and with NAFTA. It is becoming a bureaucratic nightmare.
There are certain influential professions which have very good lobbyists that benefit from all of this. They are the lawyers. They are the organizations that certify this is the right kind of origin, that this is okay. They will completely oppose free trade and say to go ahead with bilateral free trade.
I will discount arguments of this sort and suggest that we should continue to push along with as many bilateral free trade agreements as we can obtain. When we are through and have a bilateral agreement with every country, maybe then the time will come to say: Why maintain anything at all? Let us move to total free trade. That is my hope and this agreement is a step in that direction.