President Obama Is COOLing It

Commentary, Natural Resources, Sylvain Charlebois

With its “Buy-American” requirement for spending on domestically manufactured products, the United States recently threatened to encourage a return to one of the worst eras of economic history, but there are signs that more responsible policies will prevail. As the global economy goes south at an astonishing rate, gargantuan stimulus bills and other protectionist measures are becoming a priority for many countries. We’ve seen this before. In 1929, some American politicians pushed forward the Smoot-Hawley bill which raised tariffs on imports, and the result was all too predictable. Other countries retaliated with their own tariff hikes and the world suffered a collapse in international trade. But with a new tenant in the White House, and despite Obama’s support for the American stimulus bill, we have reason to hope this time that the United States will think beyond its borders.

Conventional wisdom suggests that Republican presidents have been far less protectionist than Democratic presidents, but history suggests otherwise. Many now believe that Republican president Ronald Regan was the personification of modern conservatism and free trade. However, Reagan often broke with free-trade principles during his time in office. In the 1980s, he called for voluntary restraint agreements to limit imports of automobiles and steel, and he signed an agreement in 1985 that made Japanese imports more expensive by raising the value of the yen. Some of George W. Bush’s policies were inhibiting to trade as well, in particular the mad cow crisis, the subsidy-driven Farm Bill and the soft wood lumber conundrum.

Canadians have already seen a difference because of the recent regime change. Days before President Obama’s inauguration, the American government eased regulations on Country of Origin Labelling (COOL). This new regulation, which went into effect last October, received little press because of the recent Canadian and US elections. COOL’s major provision is to require labels that identify the country of origin on certain foods, such as pork, beef, produce and nuts, when sold in retail establishments. Under the original COOL, American-based food manufacturing plants would have to establish a separate production line to process foreign-based commodities. As a result, many companies were shying away from buying Canadian cattle and hogs. That business model was just not sustainable. But with the Americans’ recent move on COOL, the American market is open again to Canadian producers, and Canada’s department of Agriculture and Agri-Food announced it was suspending its complaint to the World Trade Organization.

In times of economic frugality, Americans are becoming more price-sensitive, especially in terms of food products. Fortunately, the new American administration recognizes that food, like housing, is a necessity. These commodities usually have inelastic demands and thus few or no substitutes. Last year, Canadians and American consumers saw food price hikes in double digit territory. In some states and provinces, the cost of food for any given household increased by as much as 12% in the last year alone. McDonald’s Restaurants are certainly noticing a difference in food consumption behaviour. McDonald’s Corp. posted higher sales in recent months. Sales in fast-food restaurants generally have been boosted in recent months by cash-strapped consumers shifting down to lower-priced fare during the recession. Thus, American consumers are feeling some pressure and they need all the help they can get.

When considering economic predictions that suggest the Canadian dollar will hang at around $0.80 US for the next little while, cheap Canadian commodities are becoming more attractive to Americans. Corporate players like Tyson Foods and Cargill are poised to gain from this change because they will have access to more affordable commodities. These beneficiary companies may create more jobs or, at least, be more likely to keep the workers they already have.

Food trade policy is essential to providing variety and affordability to consumers, no matter where they live. The food industry is largely recession-proof, but still vulnerable to external influences. The decision that altered COOL’s agenda is significant, particularly to Canadian agriculture and American consumers. The Canadian government should remain cautiously optimistic and continue to build strong relationships with the new American administration. With a president in the White House who seems ready to think more internationally, the virtues of free trade may be fortified. That would be welcome news to the Canadian economy during these worrying conditions.