THE LONG ROAD TO FREE TRADE

Earl H. Fry

After an interval of 120 years, Canada and the United States finally concluded the Free Trade Agreement, negotiated in October 1987 and implemented at the beginning of 1989. “In the aggregate,” writes Earl Fry, a leading authority on bilateral commercial relations, “20 years of free trade have actually been very good for both Canada and the United States.” “Total Canadian exports to the United States have increased almost 350 percent in nominal terms from US$88 billion in 1989…to US$303 billion in 2006. For most Canadians, their national economy has never been better during their lifetimes has been over the past several years.”

Après un entracte de 120 ans, le Canada et les États-Unis ont finalement conclu l’Accord de libre-échange, négocié en octobre 1987 et mis en œuvre début 1989. « Globalement, observe Earl Fry, réputé spécialiste des relations commerciales bilatérales, ces 20 années de libre-échange ont été très profitables à nos deux pays. » Nos exportations vers les États-Unis « ont augmenté de près de 350 p. 100 en valeur nominale, bondissant de 88 milliards de dollars US en 1989 à 303 milliards de dollars US en 2006. Pour la plupart des Canadiens, l’économie du pays ne s’est jamais mieux portée qu’au cours des dernières années. »

anada and the United States once experienced a tion. The campaign was filled with warnings from political dozen years of free-trade linkages way back in the leaders opposed to the pact that Canada’s days as a sovereign C 1850s and 1860s. At the time of the negotiation of nation would be numbered if the accord were ever imple- the Elgin-Marcy Reciprocity Treaty of 1854, Canada was mented. This time, however, enough Canadian voters were known as British North America and British officials were willing to take a chance on free trade and returned ultimately in charge of reaching an accord with their federal Mulroney’s Progressive Conservatives to power in the House government counterparts in Washington, DC. Unfortunately, of Commons, albeit with a reduced majority. After a hiatus of Washington abrogated the agreement soon after the end of more than 120 years, the neighbouring countries were once the US Civil War, and in spite of many requests from Ottawa again linked via a comprehensive free-trade accord. to renew the pact, nothing was accomplished for the remain- der of that century. In 1911, however, Washington did agree his new era of free trade between Canada and the United to a free-trade arrangement, but Canadian voters proceeded T States has been in effect for two decades, first under the to toss out the Liberal government of Sir Wilfrid Laurier, FTA, which was negotiated in October 1987 and began to be which had initiated the trade discussions. Following the implemented in January 1989, and later under the North Second World War, the Mackenzie King government negoti- American Free Trade Agreement (NAFTA), which superseded ated yet another trade pact with the United States, but the the FTA and was implemented in the period between 1994 Prime Minister had second thoughts and decided to scrap the and 2008. Canadians remained cautious at first about the ram- proposed accord in 1948. Both in 1911 and again in 1948, ifications of free trade, especially during the economic slow- many Canadian political leaders and regular citizens consid- down of the early 1990s. Today, however, a solid majority ered that a free-trade accord would inextricably entrench favours the free-trade arrangement with the United States and Canada into the US orbit and chip away at Canada’s econom- almost three-quarters are optimistic about future relations ic and political sovereignty. Many of the same concerns were between the two countries, according to a 2007 survey by the still being voiced when the Brian Mulroney government and Association for Canadian Studies. Americans, on the other Ronald Reagan administration reached another deal in 1988. hand, have been consistently supportive of the concept of free The Canadian Senate refused to ratify the Canada-US Free trade, but in recent years have been very lukewarm about Trade Agreement (FTA), forcing the 1988 “free-trade” elec- NAFTA, with roughly half in favour and half opposed. To be

76 OPTIONS POLITIQUES OCTOBRE 2007 The long road to free trade fair, much of the opposition has been United States have increased almost 350 trade, its current-account, and the fed- focused on economic ties with Mexico percent in nominal terms from US$88 eral government’s budget. Its trade and the fear of increased illegal immi- billion in 1989, the first year that free deficits with Canada and Mexico have gration and the loss of jobs to compa- trade began to be phased in, to US$303 been sizeable, but this has been offset in nies situated south of the US border. billion in 2006. For most Canadians, part by the fact that most merchandise In the aggregate, 20 years of free their national economy has never been trade in North America is intra-firm, trade have actually been very good for better during their lifetimes than it has and many of these firms are US-owned. both Canada and the United States. been over the past several years. Two decades of Canada-US free trade have been beneficial to In the aggregate, 20 years of free trade have actually been very consumers in both countries good for both Canada and the United States. Canada’s gross who now have a better domestic product (GDP) at the end of 2007 was in the range selection of products at more competitive prices. of C$1.5 trillion, ranking it as the eighth-largest economy in the Companies have also been world. This is a remarkable achievement because each of the able to abandon their seven nations ahead of Canada and the five nations branch-plant tactics in immediately behind Canada has a much larger population base favour of regional or global mandating for their facilities than Canada’s, with Canada having only the 35th-largest scattered across the two population among the world’s community of nations. countries. Trade between the two neighbouring coun- Canada’s gross domestic product (GDP) The GDP of the United States at the tries has gone beyond “international” at the end of 2007 was in the range of end of 2007 surpassed US$13.5 trillion, to the level of “integrative,” and North C$1.5 trillion, ranking it as the eighth- roughly three times larger than second- American companies, adopting “just- largest economy in the world. This is a ranked Japan. Its major stock market in-time” and other strategies which remarkable achievement because each of has also reached record highs and its flourish in a regional free-trade environ- the seven nations ahead of Canada and unemployment rate has been in the ment, are better prepared to cope with the five nations immediately behind range of a historically low 4.5 percent. competition from industries in Europe, Canada has a much larger population Almost 50 million jobs have been creat- Asia and elsewhere in the world. base than Canada’s, with Canada having ed in the United States since 1980, an In Operations of US Multinational only the 35th-largest population among average of nearly two million addition- Companies, authors Raymond J. the world’s community of nations. al employment opportunities every Mataloni, Jr., and Daniel R. Yorgason Canada’s economic growth rate year. Unlike Canada, the US has suf- note that majority-owned US affiliates over the past several years has been near fered major deficits in merchandise operating in Canada now provide over the top of the major Western countries, it has enjoyed net job creation for 15 consecutive years, and its unemploy- FIGURE 1. US EXPORTS TO CANADA, 1988-2006 (US$ BILLIONS) ment rate has fallen to a 33-year low. 250 Canada’s major stock market is near record highs and Ottawa has experi- s

enced budget surpluses for each and ar 200 every year since 1997. Canada’s net debt for all levels of government, when meas- ured as a percentage of GDP, has also 150 improved dramatically from being the s US doll second-worst in the G7 to the best. n Canada’s current-account balance is in 100 the black, its net international debt has Billio fallen from C$311 billion in 1996 to C$99 billion in 2006, its merchandise 50 trade surplus with the United States has been approaching C$100 billion per year, and the loonie has appreciated dra- 0 matically vis-à-vis the US dollar. Total 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Canadian merchandise exports to the Source: US Department of Commerce, Bureau of Economic Analysis.

POLICY OPTIONS 77 OCTOBER 2007 Earl H. Fry

one million jobs for Canadian workers records have been far from spotless in manufacturing an average car in Canada and account for almost 10 percent of carrying out this task. Manufacturing at least US$1,000 cheaper than doing so value added in Canada on an annual jobs in both countries have been on a in the United States. The US persists in basis. Critics of free trade argued that US downward spiral, but this is attributable spending almost 16 percent of its GDP direct investment would completely to more intense global competition, on health care while no other country in dominate the Canadian landscape, but in short-sighted government policies and a the developed world spends more than actuality US investment has decreased continuing transition to service-orient- 12 percent, and these other nations cover both as a percentage of total foreign ed economies. all of their people, whereas the US has 45 direct investment and overall economic The auto sector in Michigan has million without any health insurance at activity in Canada. In the meantime, say never suffered a worse period since the all. This health-care travesty is not only a human-rights issue, but is Two decades of Canada-US free trade have been beneficial to also eroding America’s eco- consumers in both countries who now have a better selection of nomic competitiveness. Critics in Canada of free trade products at more competitive prices. Companies have also been with the United States able to abandon their branch-plant tactics in favour of regional warned that their health-care or global mandating for their facilities scattered across the two system would become a sacri- countries. Trade between the two neighbouring countries has ficial lamb. Ironically, after 20 years of free trade, the gone beyond “international” to the level of “integrative,” and Canadian health-care system North American companies, adopting “just-in-time” and other has not suffered at all and it is strategies which flourish in a regional free-trade environment, now likely that the United are better prepared to cope with competition from industries in States will move toward a Canadian-style program over Europe, Asia and elsewhere in the world. the next decade.

authors Thomas W. Anderson and Great Depression and more cars and light ust as consumers have been big win- William J. Zeile, in US Affiliates of Foreign trucks are now manufactured in Ontario J ners from North America free trade, Companies, Canadian investors have than in Michigan, the historic home of they have also been losers in sectors that poured US$150 billion into the American the Big Three auto companies. Part of have been sheltered from market com- economy in direct investments measured this shift was due for a long time to the petition. It is very difficult for a foreign on a historical-cost basis, and provided in low-valued loonie, but another impor- observer to understand why Canada has 2004 almost 400,000 jobs for Americans. tant factor was the different health-care not moved toward domestic free trade. The ratio of US direct investment in plans in the two countries which made The Agreement on Internal Trade Canada versus Canadian direct invest- ment in the United States is only about FIGURE 2. US DIRECT INVESTMENT IN CANADA, 1988-2006 (HISTORICAL-COST 1.6 to 1, and jobs created in both coun- BASIS, US$ BILLIONS)

tries by these investors is about 2.7 to 1, 250 surprisingly low when taking into account that the US economy and popu- s

lation base are both about nine times ar 200 larger than Canada’s. Some companies which were not competitive before free trade went into 150

effect have been driven out of business, s US doll but this would have eventually occurred n even in the absence of the FTA and 100 NAFTA, because globalization in general Billio and the World Trade Organization (WTO) in particular would have subject- 50 ed these companies to much greater international competition. Both nation- al governments need to provide trade- 0 adjustment assistance to employees of 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 these adversely affected firms, and their Source: US Department of Commerce, Bureau of Economic Analysis.

78 OPTIONS POLITIQUES OCTOBRE 2007 The long road to tree trade reached by the provinces and imple- other districts would wise up and bring an Canada and the United States have mented in 1995 to bring about such an end to such largesse, but the pork barrel benefited from two decades of mostly open market has been woefully inade- and log rolling, combined with the con- free trade relations. Now that NAFTA has quate. Alberta and British Columbia stant need to raise money from well- been fully implemented, it is time to have now agreed to free trade between heeled interests for congressional and push for additional economic and busi- these two provinces, and Premier presidential campaigns, keep this ness harmonization and liberalization. It Charest in Quebec has suggested that deplorable system in motion. For their is certainly within reason to establish a customs union with com- Canada and the United States have benefited from two mon external tariffs. Labour decades of mostly free trade relations. Now that NAFTA has mobility across the 49th paral- lel should also be enhanced, been fully implemented, it is time to push for additional and this can be done because economic and business harmonization and liberalization. It is all three NAFTA governments certainly within reason to establish a customs union with have agreed that Canada and common external tariffs. Labour mobility across the 49th the US can proceed at a pace which may differ from what parallel should also be enhanced, and this can be done the US and Mexico, or because all three NAFTA governments have agreed that Canada and Mexico, agree to Canada and the US can proceed at a pace which may differ do bilaterally. from what the US and Mexico, or Canada and Mexico, agree to do bilaterally. oth the United States B and Canada will be fac- Quebec and Ontario do likewise. part, Ottawa and the provincial govern- ing a labour crunch within the next few Canadians would benefit substantially ments should reform some of their own years and additional flexibility for the from a nationwide agreement, much as agricultural and dairy industry practices cross-border movement of workers the United States did when its constitu- in order to benefit Canadian consumers. would benefit both economies. tion of 1787 abandoned the regional At the same time, both levels of govern- Washington should also adopt many of protectionism enshrined in the Articles ment in Canada should work to loosen Canada’s standards in recruiting skilled of Confederation and created instead a parochial regulations in the financial sec- immigrant labour. Microsoft’s recent national economic union. tor, relax foreign-investment restrictions decision to expand facilities in The preponderance of special-inter- in finance, telecommunications, trans- Vancouver and hire Canadian software est politics in the United States at the port and some cultural industries, and specialists was done in part to take expense of the general interest has also agree to a common set of trans-Canada advantage of Canada’s immigration damaged consumers in both countries regulations governing securities. laws, laws which are far superior to and hampered US competitiveness at home and abroad. The softwood-lumber FIGURE 3: CANADIAN DIRECT INVESTMENT IN THE UNITED STATES, 1988-2006 episode which has dragged on for decades (HISTORICAL-COST BASIS, US$ BILLIONS) is exemplary of this sad state of affairs, 160 and although the 2006 softwood accord is a step in the right direction, it represents 140 s

temporary managed trade and is far from ar being free trade. Agricultural protection- 120 ism and subsidies represent another major manifestation of this special-inter- 100

est disease. Farmers in the United States s US doll represent fewer than 2 percent of the n 80 nation’s population, but tens of billions of 60 dollars are allocated annually to bolster Billio large agribusinesses or to protect these 40 businesses from international competi- tion, such as in the sugar industry. Half of 20 the agricultural subsidies are allocated in approximately 20 congressional districts, 0 out of a total of 435 districts. One would 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 think that members of Congress in the Source: US Department of Commerce, Bureau of Economic Analysis.

POLICY OPTIONS 79 OCTOBER 2007 Earl H. Fry

current US practices, especially in terms dollar, the euro and an eventual Asian he energy sector will also provide of Washington’s self-destructive H-1B unit agreed to by China and Japan. In T excellent financial opportunities visa limitations. In addition, as Gary adopting the dollar, Canada would be but result in a lot of soul-searching and Hufbauer and Jeffrey Schott note in abandoning the monetary leadership of internal disputes among Canadians. NAFTA Revisited, NAFTA’s dispute-settle- the Bank of Canada in exchange for per- Only Saudi Arabia has more proven oil ment panels should be made perma- haps one seat on the Board of Governors reserves than Canada, and the United nent, staffs within the three NAFTA of the US Federal Reserve System. States is desperate for imported oil. The secretariats combined, and the new con- Canadians would also be increasingly US is currently responsible for almost a solidated secretariat given a much larger affected by the fiscal policies of the US quarter of the world’s oil consumption operating budget so that it can improve Congress, and these policies have left but accounts for only 9 percent of global its efficiency and visibility. The dispute- much to be desired for a number of oil production and 2 percent of the plan- et’s oil reserves. Americans If global warming accelerates and Americans continue to flock will certainly be willing to to sunbelt locations where potable water is already scarce, the pay US$100 or even more pressure by Washington on Ottawa to permit major water per barrel of Canadian oil in the future and this will repre- exports will intensify. However, no provision in NAFTA will sent a steady stream of rev- ever force Canadians to ship vast quantities of water to the enues for Ottawa and the United States, even though the profit margin for such oil-producing provinces. shipments could be staggering. Canadians, however, will eventually face the fateful settlement panels keep both nations on years. Nonetheless, many major decision of either taking the easy money their toes and make it more difficult for Canadian businesses are already using or deciding at some point to keep a special-interest politics to water down the US dollar in their accounting ledgers major proportion of this precious non- clearly enunciated NAFTA commit- and a common currency would end the renewable resource in the ground for ments. Greater harmonization in com- uncertainty associated with fluctuating their own children and grandchildren. petition policy should also mitigate loonie-dollar valuations which have Canada must also contemplate why it is some of the negative consequences of swung dramatically from the 62-cent a net oil exporter, but still imports 40 anti-dumping and countervailing prac- range six years ago to near parity in percent of its oil for use mostly in tices in the United States, and Ottawa recent months. Economically, this is an Central Canada. Should more money be must work closely and persistently with optimal time to make the move to the allocated to developing the oil and natu- sympathetic domestic groups in the US common currency, but Canadians are ral gas infrastructure within Canada so in order to stave off efforts on Capitol understandably skeptical about the that almost all Canadians could rely on Hill to revive a broad array of protec- overall ramifications of doing so. the shipment of domestic instead of tionist policies. The two national capi- tals should also do much more toward liberalizing trade in services, the sector FIGURE 4: CANADIAN EXPORTS TO THE UNITED STATES, 1988-2006 (US$ BILLIONS)

which dominates economic growth and 350 job creation in both countries. Although chances of it occurring s 300

are remote, this is actually a propitious ar moment for Canada to adopt the US 250 dollar as its national currency while the loonie is near parity with the dollar. 200

Robert Pastor’s notion of a North s US doll American currency called the amero has n some merit, but it will never fly in 150

Washington. Any North American cur- Billio rency will have to be the US dollar 100 because of its global presence and the vast economic and population size of 50 the United States versus Canada. In addition, Benn Steil may be prescient in 0 suggesting that one day there will only 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 be three major global currencies: the Source: US Department of Commerce, Bureau of Economic Analysis.

80 OPTIONS POLITIQUES OCTOBRE 2007 The long road to free trade foreign oil products to meet their needs? the United States, especially if this inci- United States will no longer be consid- In all probability, a compromise will be dent involved terrorists who had previ- ered as a superpower by the year 2040, reached in which significant oil will con- ously taken up residency in Canada such attributable to three major factors: the tinue to flow southward across the bor- as the case of Ahmed Ressam, represents further entrenchment of globalization der, but not in the quantity that the worst-nightmare scenario imagina- which will increase international inter- Washington would like to see. This will ble for the future of a seamless North dependence and mitigate the capability lead to some cross-border tensions, but American economic relationship. All lev- of any single nation to solve problems even under NAFTA, Canada is not nor els of government in the two federal sys- unilaterally; the rise of new competitors will ever be obliged to send most of its tems must work together to insure that such as China and India and regional oil to the United States. this never happens. More optimistically, groupings in Europe and Asia which increased levels of cooperation in estab- reduce the overall economic and politi- n a similar vein, water may well lishing a security perimeter should cal influence of the US superpower; and I become the next major resource improve the level of confidence to the domestic difficulties within the United issue dividing Canada and the States itself which are weakening United States. Canada has Canada must remain vigilant and the foundation upon which its been blessed with a huge develop a much more competitive superpower ranking was con- quantity of the world’s fresh- and diversified economy. It has a structed. These internal prob- water reserves, and some peo- lems include a massive federal ple in northern countries are huge current-account surplus with government debt which has already willing to pay far more the United States, but a large deficit increased nine-fold since 1980; for bottled water than an with the rest of the world. Much of unprecedented trade and cur- equivalent amount of gaso- its recent economic prosperity has rent-account deficits which have line. If global warming accel- relegated the United States to the erates and Americans continue been based on higher commodity status of the world’s largest to flock to sunbelt locations prices, and this cycle will not last external debtor nation; a grow- where potable water is already forever. The high-valued loonie will ing reliance on foreign govern- scarce, the pressure by also hamper growth in ments and overseas private Washington on Ottawa to per- investors to finance this massive mit major water exports will manufacturing exports which are debt, with foreigners currently intensify. However, no provi- mostly fabricated in Central Canada. purchasing half of Washington’s sion in NAFTA will ever force Labour productivity must improve IOUs; out-of-control increases in Canadians to ship vast quanti- significantly, and Ottawa should be entitlement obligations linked ties of water to the United to Social Security, Medicare and States, even though the profit actively engaged in signing free Medicaid; and massive concen- margin for such shipments trade agreements and other market- trations of wealth and income could be staggering. opening accords with selected reminiscent of the Gilded Age In addition, the border nations around the world. and which will eventually lead should not be allowed to become to a populist backlash and signif- any “thicker” as a result of post-9/11 point that Canada and the United States icant political and social disquietude. trauma and insecurity within will one day introduce a program for the Washington’s Beltway. Border rules dic- cross-border movement of people pat- evertheless, the formidable chal- tated by the US Department of terned after the Schengen Accord in N lenges which the United States Homeland Security (DHS) could dimin- Europe, rather than more restricted bor- will confront over the next few ish some of the big gains achieved by der access in line with the fortress decades should not diminish Canada’s free trade over the past 20 years, such as America mentality perpetuated by DHS commitment to North American free the ability of corporations to employ and a few lawmakers in Washington. trade. Indeed, Canada has seen major “just-in-time” manufacturing and deliv- economic benefits from two decades ery strategies. The Western Hemisphere ecurity concerns are not the only of free trade with the world’s largest Travel Initiative (WHTI) has been a per- S worrisome issue which will confront economy, and the United States will fect case study of how not to conduct the two neighbours in the future. The still grow economically, even though border relations. Ottawa and bilateral economic relationship will face its share of global production, trade Washington need even greater coopera- a number of peaks and valleys over the and investment will diminish over the tion in the security arena and in harmo- next few decades, in large part due to next quarter of a century. Canada’s nizing some immigration and visa myriad problems afflicting the United identity and sovereignty are intact policies. Another 9/11-type episode in States. It is quite possible that the and, if anything, Canada has become

POLICY OPTIONS 81 OCTOBER 2007 Earl H. Fry

progressively more distinctive from which absorbs four-fifths of Canadian economic agenda with more ambi- the United States over the past 20 merchandise exports and accounts for tious goals is now required as North years. In effect, it has achieved major over a third of Canada’s total GDP. America gears up for even greater economic gains with little in the way However, this shift in emphasis should competition from across the Atlantic of offsetting political or social costs, not be mistaken for a Trudeauesque and the Pacific and even within the even during the two-term presidency third-option strategy. Instead, Canada Western hemisphere. As clearly mani- of George W. Bush, characterized by can continue to increase its exports to the fested by a century and a half of on- overt unilateralism and controversial US, while at the same time expanding again, off-again bilateral trade foreign policy pursuits. exports to the rest of the world at a high- negotiations, Ottawa and the provin- Canada must remain vigilant and er rate. Continued progress in liberalizing cial governments must take the lead develop a much more competitive and trade, investment and labour relations in introducing this new agenda. How diversified economy. It has a huge cur- with the United States should be viewed unfortunate it was that it took so long rent-account surplus with the United by Canadians as but one big step in for Canada and the United States States, but a large deficit with the rest of improving their nation’s economic com- finally to implement a free trade the world. Much of its recent economic petitiveness with the rest of the world. agreement, and how unfortunate it is prosperity has been based on higher today that no new “NAFTA-plus” commodity prices, and this cycle will AFTA will be fully implemented agenda has as yet been championed not last forever. The high-valued loonie N at the beginning of 2008. Its by Ottawa or any of the provincial will also hamper growth in manufactur- goals have been limited and focused, capitals. What is taking so long? ing exports which are mostly fabricated with the intent “to eliminate, progres- in central Canada. Labour productivity sively, tariff and non-tariff barriers, to Earl Fry is professor of political science must improve significantly, and Ottawa trade in goods and services, to estab- and Endowed Professor of Canadian should be actively engaged in signing lish clear rules for investment, and to Studies at Brigham Young University. He free trade agreements and other market- strengthen intellectual property has served as president of the Association opening accords with selected nations rights, and, in the process, to create for Canadian Studies in the United States around the world. effective dispute settlement mecha- and as special assistant in the office of Gradually, Canada should reduce its nisms.” Most of these objectives have the US trade representative in almost total reliance on the US market been achieved, and a new Canada-US Washington.

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82 OPTIONS POLITIQUES OCTOBRE 2007