Trade policy used to be about bringing down market access barriers so that goods, services, and ideas could move freely. In that world, the market determined the flows of trade. But, as a Washington Post editorial recently put it, that “era of unfettered free trade is over.” From Washington to Brussels to Ottawa, policymakers are taking a closer look at where things are coming from and where they are heading. Sanctions against Moscow for its aggression towards Ukraine have severed most economic ties between the West and Russia. Export controls spearheaded by the United States are limiting China’s access to cutting-edge semiconductors. Import restrictions prevent Western companies from importing products tainted by conflict, deforestation or forced labor. A growing share of trade is becoming policed by states. The days of unfettered free trade indeed seem to be over.
Sanctions, export controls, and import restrictions are all forms of controlled trade. And they are on the rise.
True, there are important differences between them. Sanctions typically target actors — states, legal entities, or individuals — engaged in specific wrongdoing and seek to trigger a change in behavior. Export controls, in contrast, focus on goods. Some goods, such as arms, high-tech products, or some agricultural exports, raise specific concerns and require additional regulation. Finally, import restrictions are about production processes and draw distinctions between “good” (e.g. no forced labour) and “bad” (e.g. forced labour) trade. The three trade controls also differ in their legal bases, administration, and enforcement. In Canada, for example, export controls usually stem from international obligations and are enforced through administrative procedures (such as export permits), while sanctions can be imposed unilaterally and are enforced through criminal law.
Notwithstanding these important differences, there is merit in considering these different trade controls together. None of them are novel. Export controls were widely used during the Cold War though not always successfully to keep sensitive technologies out of the hands of adversaries and sanctions were popular already in the Interwar period. Their uptake in recent years, however, is unprecedented in recent history. Their collective rise signals a broader shift from free to increasingly controlled trade.
This paradigm shift has important repercussions for trade policy, public administration, businesses, and consumers.
First, in terms of trade policy, states are increasingly using trade for non-economic policy goals. To prevent Western consumers from being complicit in Russian warfare, Uyghur forced labour, or Latin American deforestation, market access is used as a tool to discipline, constrain, and arm-twist foreign states. Trade controls are also instrumental for rerouting supply chains away from strategic rivals (“de-risking” or “decoupling”) and towards like-minded states (“friendshoring”). Security concerns have fueled a “weaponization” of trade. It is not an accident that most U.S. trade controls are directed towards Russia and China. More broadly, though, trade controls are emerging as a vital tool for economic statecraft to achieve strategic, and often non-economic, policy goals from security and resilience to climate change mitigation and respect for labour practices.
Second, in terms of administration, trade controls require an ever more sophisticated bureaucratic apparatus to effectively manage and enforce them. Challenges range from drawing up carefully tailored lists of targeted individuals or products, to issuing clear guidance to companies, all the way to policing compliance. When it comes to controlling trade, the devil is in the detail and implementation challenges abound. Canadians know that better than most. After a rocky start that left Canadian companies with stranded assets and Canadian pensioners blocked from their Russian retirement savings, Canada promised to invest 76 million to build capacity at Global Affairs Canada and to bolster RCMP enforcement. If not done with care and foresight, Canadians risk bearing the costs of trade controls.
Third, for the private sector, compliance with trade controls is moving from the corporate back office into the boardroom. With large penalties looming and the corporate image at stake, compliance departments are expanding, and CEOs lose sleep over trade controls. The pace of sanctions, export controls and import restrictions has caught everyone off guard. Longer term though, bigger companies are likely to shoulder the increased compliance burden and will invest heavily in monitoring their supply chains. Canadian small and medium sized companies, however, may lack the resources or expertise to navigate ever more complex controls and could exit markets. What seems certain is that the cost of doing business is rising. Abroad, consequences are more dire. Entire regions such as China’s Xinjiang region, targeted by the U.S. import prohibitions relating to Uyghur forced labour, risk being cut out of supply chains. Similarly, if supply chain transparency and risk management is paramount, small producers across the developing world that are unable to provide the necessary paperwork will be the first to lose access to Western markets.
Fourth, consumers will feel the impact of trade controls through higher prices and fewer choices at a time when inflation already squeezes wallets. Trade controls are also reviving old debates over consumers’ ability to make their own choices rather than to have them made for them. Debates will likely center on when trade controls should inform consumer choices, e.g. through supply chain transparency obligations, and when the government should determine them, e.g. through import prohibition.
Canadian small and medium sized companies, however, may lack the resources or expertise to navigate ever more complex controls and could exit markets. What seems certain is that the cost of doing business is rising.
What then seems clear is that trade controls come with trade-offs. On the one hand, they allow states to align trade policy with other strategic objectives from managing geo-economic competition to combatting climate change. They also protect companies and consumers from being unwitting accomplices in war crimes, forced labour or deforestation abroad. On the other hand, trade controls have a price tag and can produce severe collateral damage both at home and abroad. They also risk backfiring by fueling circumvention and substitution and ultimately lesson the commercial interdependence that makes controls bite in the first place.
Reaping the promises of trade controls while mitigating their risks will require smart economic statecraft in the years to come, including in Canada.
This post builds on a background note prepared for the panel “Export Controls, Import Restrictions and Sanctions: From Free Trade to Controlled Trade?” held at the University of Ottawa on 8 December 2023.
