Routledge Book on Free Trade
Routledge has just published a book comparing Australian, Canadian, and Mexican experiences of free trade with the United States. There are three chapters on each country examining long-run socioeconomic development prior to free trade, the specific free trade deals, and future policy alternatives.
I wrote the Canadian chapter on the Canada-US Free Trade Agreement and NAFTA. A “pre-print” version follows. Much has changed during the three years or so since I initially drafted this chapter. However, a critical appraisal of NAFTA is even more timely now that there may be a genuine opportunity to renegotiate it.
The book is entitled International Trade and Neoliberal Globalism: Towards Re-peripheralisation in Australia, Canada and Mexico? The sticker price is equally academic, so check your nearest university library! (Amazon appears to be selling it for three-quarters of the publisherâ€™s price.)
Canadaâ€™s Free-Trade Agreements with the US and Mexico:
The Exaggeration of North American Trade
During the 1980s, free trade with the US emerged from the fringes of Canadian political debate to become a reality for Canada. Brian Mulroney opposed free trade in his successful campaign for the Conservative Party’s leadership in 1983. As Prime Minister, he signed the Canada-US Free Trade Agreement (CUSFTA) in 1988. In Chapter Five, Stephen McBride analyzed the broad socioeconomic and ideological forces that pushed Canada toward continental integration. This Chapter examines the more immediate Canadian origins of CUSFTA and the North American Free Trade Agreement (NAFTA), and assesses the contents, effects and implications of these agreements.
The Origins of CUSTFA and NAFTA
Canadian support for free trade depended partly on whether it was framed as industrial policy, foreign policy, or a North American constitution. Industrial policy typically entails government intervention in the economy to develop certain sectors. For decades, some economists promoted free trade as an antithetical, ‘free market’ form of industrial policy. They argued that removing barriers to trade with the US would allow Canadian industry to expand by supplying those goods that it could produce most efficiently to the entire North American market. Free trade would increase Canadian productivity by exploiting continental economies of scale, promoting specialization in areas of comparative advantage, and prompting greater efficiencies to meet unrestrained American competition (Inwood 2005; Laidler and Robson 2005).
Although most academic economists assumed capital immobility and full employment in forecasting the effects of free trade, other analysts feared that Canada would lose investment and jobs due to free trade. Though some Canadian industries could thrive, others might collapse. Economists countered that, since free trade would enhance efficiency, the winners would gain benefits more than sufficient to compensate the losers for their losses (Inwood 2005). However, for free trade to benefit everyone – or at least harm no one – the government would have to finance compensatory transfers to the losers by taxing the winners. Because free trade amplifies competitive pressure to lower taxes, such transfers were and are unlikely to be made (Samuelson 2004). The C. D. Howe Institute and the Business Council on National Issues (BCNI), which pushed free trade onto Canada’s political agenda in the early 1980s (Doern and Tomlin 1991: 19-20, 26-27), clearly support tax cuts as opposed to redistribution.
Pierre Trudeau’s Liberal government inadvertently aided free-trade promoters. In 1982, it appointed the Royal Commission on the Economic Union and Development Prospects for Canada, chaired by Donald Macdonald. Liberal strategists hoped that a global perspective would underscore the need for a stronger national government to unify the Canadian economy by removing alleged inter-provincial trade barriers. While the Commission’s economists found barriers between provinces to be insignificant, they favoured removing barriers between Canada and the US. In 1985, Macdonald legitimized continental integration by formally recommending Canada-US free trade and expanded income-security programs to assist those harmed by it (Inwood 2005; Laidler and Robson 2005; Lee and Weir 2007).
Within the federal government, the Department of Industry, Trade and Commerce (ITC) had worried that free trade would damage Canadian industry by depriving it of tariff protection. In 1982, Trudeau reorganized federal departments to integrate industrial and regional development initiatives. While ITC’s industry section joined the Department of Regional Industrial Expansion, ITC’s trade section was attached to the Department of External Affairs. As a result, the Government of Canada began evaluating free trade more as foreign policy than as industrial policy (Inwood 2005: 38-39; Doern and Tomlin 1991: 18). In 1980, Ronald Reagan had been inaugurated as US President proposing ‘a North American Accord’ (Cameron 1993: x). In 1984, Mulroney became Prime Minister promising improved Canada-US relations (Doern and Tomlin 1991: 5). Some External Affairs officials viewed free trade as the ideal policy to achieve this objective.
As foreign policy, free trade was a means ‘to Secure and Enhance Access to Export Markets’ (Doern and Tomlin 1991: 320). The American Congress was using trade-remedy laws to limit the sale of non-American products in the US. The Trudeau government’s attempts at shifting Canadian trade away from the US, and at sectoral free trade with the US, had failed. Some Canadians hoped that signing a comprehensive free-trade treaty with Reagan’s administration would circumvent Congress, guaranteeing that Canadian producers could export to the US.
Because a disproportionately large share of Canada’s least productive industry was located in Quebec, this province had been a major beneficiary and supporter of Canadian tariffs. However, the goal of guaranteed access to the American market appealed to all regions of Canada, including Quebec. This foreign-policy goal also motivated the Canadian Manufacturer’s Association (CMA) to reverse its historic opposition to free trade. A united business lobby, led by the BCNI and CMA, prompted Mulroney’s government to negotiate CUSFTA in 1986 and 1987 (Doern and Tomlin 1991: 32, 46-50, 140).
Meanwhile, opponents mobilized around Reagan’s notion of free trade as ‘an economic constitution for North America’. Constitutions serve to enshrine rights and limit the power of government. CUSFTA would grant special rights to American corporations operating in Canada and deprive Canadian governments of important policy tools. Under free trade, greater competition against the US for mobile capital would intensify pressure to reduce Canada’s social standards (McBride and Shields 1997: 161-162).
To proponents of free trade, this outcome would be a desirable ‘alternative to the centralizing, interventionist policies of the Trudeau Liberals’ (Doern and Tomlin 1991: 34-35). Quebec nationalists supported free trade to undermine the Canadian state’s authority and relevance (Doern and Tomlin 1991: 140; McBride and Shields 1997: 166-167). Some Western provincialists also wished to restrict the Government of Canada: ‘Alberta’s ascendant class perceives its development struggle as being essentially an intra-confederation affair, and that its main quarrel is with what Premier [Peter] Lougheed calls “the Toronto-Montreal establishment” and “its” federal government’ (Pratt 1984: 195). Lougheed had helped convert Mulroney to free trade and, with Macdonald, co-chaired the public campaign for CUSFTA (Doern and Tomlin 1991: 51-52, 112).
Liberals had appointed the Macdonald Commission to help justify a stronger central government to facilitate east-west trade and investment within Canada. The 1988 election campaign focused on Macdonald’s key recommendation as a proposal to curtail the Canadian state by promoting north-south trade and investment with the US. Mulroney’s Conservative Party supported free trade, while the Liberal Party and New Democratic Party opposed it. Both sides accorded CUSFTA constitutional significance and articulated contrasting visions of the country. Business financed an unprecedentedly large – and possibly decisive – advertising campaign in favour of free trade (Doern and Tomlin 1991: 218-219, 241-242).
Polling indicated that most of those who cast their ballots based on the free-trade issue opposed CUSFTA (Doern and Tomlin 1991: 238-240). Although many more Canadians voted for parties against free trade than for parties in favour, the Conservatives formed a majority government by winning majorities of federal seats in only two of the ten provinces: Quebec and Alberta. These two provinces together elected more Conservatives than the remaining eight provinces combined (Canada 1988: 21). In other words, Mulroney won on the strength of the two provinces least favourable to the Canadian state. According to one of Canada’s leading political journalists, ‘a coincidence of the interests of large corporations and Quebec nationalist sentiment had created an effective coalition that acted powerfully on behalf of the winning party’ (Fraser 1989: 445).
Free trade began the 1980s as a hard-nosed option for industrial policy. Its recasting as foreign policy mobilized widespread support for negotiating CUSFTA. However, the agreement’s constitutional functions were far more contentious. Despite limited support for free trade, the Conservatives held power. They used this mandate to sign CUSFTA, which came into effect in 1989, and to sign NAFTA in 1992. The new US President, Bill Clinton, added unenforceable side agreements on the environment and labour in September 1993. Canada’s Liberals won the October 1993 election promising to renegotiate NAFTA, but signed it almost without modification in December 1993 so that it came into effect in January 1994 (McBride and Shields 1997: 180).
The Contents of CUSFTA and NAFTA
Canada’s official foreign-policy goal in negotiating free trade was guaranteed access to the American market. The US sought guaranteed access to Canadian natural resources and investment opportunities. CUSFTA and NAFTA serve these American objectives more effectively than they serve Canada’s goal.
With respect to market access, CUSFTA phased-out tariffs that were already low and falling. Before free trade, American tariffs on Canadian products amounted to less than one percent of the total value of Canadian exports to the US. Through CUSFTA, the Mulroney government gave up annual tariff revenues of just over two billion dollars to eliminate annual American tariffs worth just below one billion dollars (BordÃ© and Cross 1989: 3.7). NAFTA extended this tariff phase-out to Mexico, but made it more difficult for Canadian and Mexican textiles to avoid American tariffs (White 1993: 249).
Although the agreements eliminated almost all tariffs, the trade barrier most used by Canada, they did little to curtail trade-remedy laws, the trade barrier most used by the US. To protect American industry, Congress can impose countervailing duties on products allegedly subsidized by foreign governments and antidumping duties on products allegedly under-priced by foreign companies. In negotiating free trade, “the United States did not accept any substantive limitation whatever on the application of trade remedy laws” (Trebilcock and Howse 2005: 150). In fact, the American legislation implementing CUSFTA made it easier for US companies to initiate countervail against Canadian products than against other foreign products (Sinclair 1993: 225).
CUSFTA and NAFTA established panels to settle disputes, and adjudicate trade-remedy cases in place of national courts. This system may apply American trade laws more fairly, but allows Congress to make and amend such laws as it wishes. Congress can, and sometimes does, negate verdicts against the US in trade-remedy cases simply by rewriting its laws (Sinclair 1993: 228; Watson 2000: 42-43). Also, since ‘Washington bears no legal or political cost for non-compliance’, it can simply disregard unfavourable rulings (Drache 2004: 75-79). By contrast, Canadians have scrupulously obeyed panel rulings against Canada. Even the Canadian officials who negotiated and promoted CUSFTA and NAFTA have lost faith in the dispute-settlement process. For example, Gordon Ritchie observes that ‘Canadian exporters, far from being guaranteed protection against the unfair application of U. S. trade laws, are actually in a worse legal position than exporters from non-NAFTA countries’ (Ritchie 2005: A21).
Before free trade, Canada already had defence-production-sharing arrangements with the US. Through CUSFTA and NAFTA, Canada, the US and Mexico opened more government contracts to bids from each other’s companies (Trebilcock and Howse 2005: 40). Also, American wine gained easier access to Canada’s provincially regulated liquor markets (Doern and Tomlin 1991: 78-80).
Overall, the US improved its access to the Canadian market more than Canada improved its access to the American market. Tom Kent, Policy Secretary to Prime Minister Lester Pearson and founding editor of Policy Options magazine, remembers that ‘No one evisaged the desperate negotiation of a deal comprehensive for Canadian imports but leaving the US able to impose restrictions protective, for example, of its lumber lobby’ (Kent 2005: 12).
Canada made so few gains largely because it had surrendered its bargaining chips before the negotiations began. Whereas Trudeau’s government had taxed fossil-fuel exports and screened foreign investment, the US sought unbridled access to Canadian energy supplies and investment opportunities. In 1984, the Conservatives replaced the Foreign Investment Review Agency (FIRA) with Investment Canada, a new entity mandated to encourage foreign investment. In 1985, they dismantled Trudeau’s National Energy Program (NEP) and deregulated Canada’s fossil-fuel industry. Having already given the US most of what it wanted, Canada possessed less bargaining leverage than it might have in the 1986-1987 negotiations (Doern and Tomlin 1991: 31, 283-285).
CUSFTA and NAFTA prevent Canada from imposing quantitative limits, export taxes, or minimum prices on energy and resource exports to the US. Canada may reduce its output of a commodity, but not the proportion of total supply available for export. These rules were designed to preclude elements of NEP and give Americans the same access as Canadians to Canada’s natural resources. However, the rules do not apply evenly. In joining NAFTA, Mexico was exempted from the proportionality clause. Both agreements allowed US restrictions on Alaskan oil exports to Canada (Bradley and Watkins 2003: 28-29).
Although CUSFTA and NAFTA are widely seen to have completely restricted Canadian energy policy, governments retain some important policy tools. Free trade does not impair regulatory authority over the construction of transmission infrastructure, which determines the maximum extent of energy exports (McDougall 1991). Furthermore, Canada could still use export-price and/or foreign-investment regulations to ensure that future oil exports to China, or other non-NAFTA countries, serve Canadian interests (Weir 2005a).
Regardless of where Canada’s resources are sold, Canadians can collect appropriate returns on them by taxing resource extraction. However, Canada’s ‘oil and gas royalty rates are among the lowest on the planet’ (Reguly 2006). For example, Alberta charges lower royalties than Alaska (Pembina 2004). The C. D. Howe Institute calculates that, excluding royalties, oil and gas companies face an effective tax rate of only 6 percent in Canada, compared to 17 percent in the US (Chen and Mintz 2005: 2). The Canadian public receives so little return on its resources not because of free trade, but because of misguided Canadian decisions to accelerate resource development through low royalties and taxes (Weir 2002).
Nevertheless, Canada made greater concessions on energy than did its NAFTA partners. In exchange, Canadians supposedly gained ‘guarantees of access’ to the US energy market (Lipsey, Schwanen, and Wonnacott 1994: 56). But, after CUSFTA came into effect, American Public Utilities Commissions broke major contracts to buy electricity from Quebec and natural gas from Alberta. Even NAFTA’s revamped energy chapter would have provided little help to Canada in such cases (Cameron 1993: xx; Plourde 1993: 9). Since NAFTA, American regulators have required that Canadian utilities exporting electricity to the US partially deregulate their transmission systems (Bradley and Watkins 2003: 18). The extent to which Canadian energy currently enjoys good access to the American market is due not to free-trade agreements, but to growing American demand for energy.
Free trade does not force Canada to export bulk quantities of water to the US. However, if any provincial government permitted such exports, Americans could use NAFTA to require other provinces to do likewise. The prospect of treating water as a commodity like other natural resources is of great concern to some Canadians.
The second major US objective was to advance the interests of American investors. CUSFTA prevents Canada from: reviewing American take-overs of Canadian assets worth less than $150 million, screening indirect acquisitions of any value, and affecting trade through performance requirements on investments. It also exempts American investors from foreign-ownership limits on Canadian banks (Doern and Tomlin 1991: 88-93). In addition to tightening these rules, NAFTA gives unprecedented protection to investments made from one NAFTA country into another. Its Chapter 11 provides investors with a set of rights and the power to sue governments for alleged violations (Mann 2001: chapters 1-3).
Canada surrendered policy instruments that it had used to attract Asian and European automotive investment in order to maintain its Auto Pact with the US under CUSFTA and NAFTA (Doern and Tomlin 1991: 83-84; Lipsey, Shwanen, and Wonnacott 1994: 59-60). However, the World Trade Organization later struck-down the Pact (Clarkson 2002: 241-242).
CUSFTA was the first trade agreement ever to encompass services. NAFTA covered them more extensively, but the US retained an exemption for marine transportation, while Canada exempted health, education and welfare as public services (Cameron and Tomlin 2000: 42-43, 46-47). Serious concern remains that, if private American medical companies gain access to a province’s healthcare system, they could employ NAFTA to attain the same access in other provinces. Defenders of Canada’s public healthcare perceive NAFTA as a threat.
In CUSFTA negotiations, the US prevailed in disputes with Canada over cable-television transmission and magazine advertising. NAFTA also fulfilled the US objective of entrenching intellectual-property rights in a trade agreement. Although Canadian cultural industries received a porous exemption from the agreements, the US retains the right to retaliate if Canada uses this exemption (Doern and Tomlin 1991: 97; Cameron and Tomlin 2000: 46-47).
Canada did not appreciably improve its access to the American market. The US achieved its energy and investment goals, and dominated the rest of the agenda. By any measure, Canada was out-negotiated (Doern and Tomlin 1991: 276-285).
Proponents of free trade contend that Canada could not have done any better. As a small and trade-dependent country, Canada supposedly needed CUSFTA more than the US did. Even if this analysis is correct, Canada enjoyed a strong bargaining position in NAFTA negotiations because it could have walked away and still had free trade with the US through CUSFTA (Cameron and Tomlin 2000: 233-235). Arguments that Canada needed free trade with Mexico were unconvincing (White 1993: 243-252). In fact, the US needed CUSFTA and NAFTA to force investment, services, banking, and intellectual property onto the global trade agenda (Clarkson 2002: 31-32). After all, it was Reagan who had suggested North American free trade (Cameron 1993: x).
Was Mulroney’s government simply unsuccessful in bargaining for its stated foreign-policy goal of market access or did it pursue other goals instead? Gilbert Winham, a Macdonald Commission research coordinator who supported free trade, characterizes CUSFTA as ‘at base a domestic policy in which Canada sought especially to deregulate its economy.’ In negotiating free trade, American conservatives likewise sought to deregulate key sectors of Canada’s economy. Finding it ‘convenient to use trade policy to promote change throughout the domestic economy’ (Laidler and Robson 2005: 104-105), Canadian Conservatives gladly made concessions to their American counterparts without gaining meaningful concessions from the US in return.
The Effects of CUSTFA and NAFTA
Since CUSFTA and NAFTA were, at best, ‘minimally acceptable’ in terms of Canadian public opinion and negotiating objectives, the case for these agreements hinges on the notion that they ultimately proved to be beneficial (Doern and Tomlin 1991: 289-290). In evaluating their effects on Canadian living conditions, one must consider the costs of reduced political sovereignty, the costs and benefits of reduced Canadian trade barriers, and the benefits to Canada of reduced American and Mexican trade barriers.
As proponents of free trade note, ‘Every international treaty . . . constrains domestic political sovereignty’ (Trebilcock and Howse, 2005: 18-19). CUSFTA and NAFTA have taken on constitutional significance in limiting what Canadian governments may do (Clarkson 2002: 59-60; Doern and Tomlin 1991: 99; Arthurs 1999). In retrospect, Mulroney happily agrees that free trade has ‘constitutionalized smaller government in Canada and a deregulating, privatizing philosophy’ (Watson 2000: 40).
Rather than aggressively testing the limits of CUSFTA and NAFTA, Canadian governments have tended to use these agreements to justify inaction. Therefore, it is unclear whether ‘policy activity’ has declined because policy-makers feel constrained by free trade or because they believe ‘that less government is better government’ (Clarkson 2002: 4). Proponents of this belief may view free-trade restrictions as ‘a desirable loss of sovereignty’, rather than as a problem (Doern and Tomlin 1991: 258).
A fair-minded observer would see withholding policy options from the democratic process as a cost of CUSFTA and NAFTA. Even if one thinks that free-market ideology is currently the best prescription for Canada, it is unlikely to remain the best option forever. Constitutionalizing this ideology, or any particular ideology, has the cost of ‘compromising [Canada’s] capacity to respond to new analytical insights, a new economic environment, a new political consensus’ (Arthurs 1999: 18-19).
In a crucial sense, though, free trade is unlike a constitution: ‘NAFTA has not created a pro-active entity with the executive and legislative power to regulate the newly liberalized continental market it established’ (Clarkson 2002: 40). Instead, it seeks to place continental economic activity beyond the purview of governments.
However, NAFTA has created a judiciary consisting of dispute-settlement panels. When firms have sued governments under Chapter 11, some panels have interpreted ‘investment’ to include ‘assets such as market share.’ In treating sales as investment, these panels read rights from the agreement’s trade chapters into its investment chapter (Mann 2001: 16-17, 23). This approach multiplies the number of bases on which firms can sue governments.
NAFTA clearly requires governments to compensate foreign investors for property taken from them, something that Canadian governments had always done before free trade. Panel rulings differ as to whether NAFTA entitles foreign investors to compensation for costs imposed on them by other public policies. Critics fear that Chapter 11 gives ‘NAFTA firms the power to challenge almost every regulatory action taken by federal, provincial, or municipal governments that might “expropriate” their future earnings’ (Clarkson 2002: 59). To the extent that polluters can exact compensation for environmental regulations, NAFTA reverses ‘the polluter pays principle’ by requiring the public to pay polluters to stop polluting (Mann 2001: 33).
Due to the absence of clear limits on NAFTA’s investor rights, ‘threats to use Chapter 11 are now a routine lobbying instrument’ (Mann 2001: 16). American corporations have collected millions of dollars by successfully suing the Government of Canada for banning a gasoline additive already banned in the US and for temporarily preventing toxic-waste exports to the US. As of 2007, ‘there are ongoing challenges related to water exports, log export controls, public postal services, Canada’s agricultural supply management system, Canadian cultural policy, and other matters which were supposedly excluded from the NAFTA’ (Sinclair 2007: 14).
Lawmakers and regulators naturally seek to avoid risking further NAFTA litigation. This chilling effect, even more than specific Chapter 11 decisions, limits the Canadian state’s capacity to act in the public interest. Because ‘Chapter 11 has created property rights only for foreign corporations’ (Clarkson 2002: 60), it may provide an artificial incentive for American (and Mexican) ownership of industry in Canada, and for Canadian ownership of industry in the US and Mexico. This dynamic could help explain the huge, concurrent increase of investment flows into and out of Canada since NAFTA came into effect in 1994 (Canada 2003: 33, 66). From mid-1985 through 1993, foreign investors spent $123 billion taking over existing production facilities in Canada and $11 billion establishing new facilities. From 1994 through early 2007, they spent $582 billion on takeovers and only $8 billion on new facilities (Canada 2007).
The huge rise in takeovers seems to confirm that NAFTA’s Chapter 11 favours American ownership. At the very least, CUSFTA and NAFTA curtailed regulations that might have limited these takeovers. Throughout the free-trade era – and especially following 1994 – the proportion of Canada’s corporate assets under foreign control increased (Gellaty, Sabourin, and Baldwin 2006: 3.12).
The simultaneous decline of foreign investment in new production facilities may also be related to free trade. By lowering Canadian trade barriers, CUSFTA and NAFTA made firms seeking sales in Canada more likely to import their products and correspondingly less likely to produce them in Canada. The displacement of some domestic production by lower-cost imports should have reduced prices for Canadian consumers, but could have eliminated Canadian jobs. Recent research concludes that CUSFTA ‘was associated with substantial employment losses’ in Canadian industries previously sheltered by significant tariffs and that it ‘possibly lowered import prices’ (Trefler 2004: 887). The rapid growth of imports from Mexico (Canada 2003: 48-49) presumably eliminates some Canadian jobs but lowers Canadian prices. In a full-employment economy, these changes would clearly be beneficial. Given significant unemployment and underemployment in Canada, job losses are detrimental.
Of course, the severe recession following CUSFTA was less a result of tariff reductions than of high interest rates (Gaston and Trefler 1997: 37). But this agreement may have created a direct compulsion to raise rates and certainly provided an indirect one (Jackson 1999: 106-107). The huge economic costs of high interest rates cannot be neatly separated from those of free trade.
By ensuring that companies can sell to Canada from the US and Mexico, lower Canadian trade barriers ‘increase the bargaining power of mobile capital compared to workers and governments.’ Intense competition between NAFTA countries for private investment creates pressure to reduce wages, regulations, and redistributive taxes. To finance the largest tax cuts in Canadian history, governments have reduced public spending to the same low level in Canada, relative to Gross Domestic Product (GDP), as in the US (Jackson 2003: 2, 10, 14). Chapter Five documented the Canadian state’s contraction under free trade.
In exchange for lower Canadian trade barriers, CUSFTA and NAFTA lowered American and Mexican trade barriers. Nevertheless, Canada’s exports to Mexico lag far behind its imports from Mexico. However, Canada’s exports to the US exploded from $117 billion in 1988 to $396 billion in 2000 (Canada 2003: 10, 48-49), propelling gross Canadian exports from 27 to 46 percent of GDP.
These figures seem so impressive largely because they are inflated. Conventional statistics exaggerate the economic importance of trade flows by comparing gross exports, including a substantial amount of imported content, to value-added GDP, consisting only of Canadian content. When a plant uses an imported input to manufacture a product for export, the full value of the product is counted in export figures. However, the value of the product minus that of the imported input is counted in GDP.
North American integration creates massive discrepancies between Canadian export and GDP statistics. Suppose that iron from Canada is used to make steel in the US. The steel is used to manufacture a part in Canada, which is used to produce a component in the US. The component is installed in a vehicle in Canada, which is sold in the US. Canadian export figures would include the value of the vehicle, plus the part, plus the iron. Canadian GDP would include the vehicle, minus the component, plus the part, minus the steel, plus the iron. The vehicle would add much more to export figures than to GDP because it contains imported content (i.e. the steel and component).
Between 1988 and 2000, the import content of Canadian exports more than doubled from 7 to 16 percent of GDP, but value-added exports rose less dramatically from 19 to 29 percent of GDP (see Table 1 below). Import content includes the re-export of finished imports, but mainly reflects the flow of components back and forth across the border during the production process. This flow also implies substantial export content in imports, but data is not available on this phenomenon. Similarly, inventory withdrawals and export taxes count toward gross-export figures, but add nothing to GDP.
As Statistics Canada notes, rising import content ‘increased the measured rate of export growth without a corresponding full increase in the economic effects of those exports’ (Cameron and Cross 1999: 3.1). An Industry Canada study determines that exports have created fewer jobs than one might expect because they contain ‘much higher import content in intermediate inputs than in the past.’ In fact, increased imports have displaced more jobs than increased exports have generated (Dungan and Murphy 1999: ii and iv). Although other economic factors have raised overall Canadian employment, free trade clearly did not satisfy Mulroney’s promise of ‘jobs, jobs, and more jobs’ (Weir 2007).
In one sense, these revelations are hardly earth-shattering. The serious economic purpose of free trade as industrial policy was never to increase exports or create jobs, but to improve productivity. Despite significant controversies about how productivity is measured, scholars from across the political spectrum observe that free trade failed to narrow the Canada-US productivity gap. Although the contraction of low-productivity industry generated a ‘measured increase’ in average Canadian productivity (Jackson 2003: 4), ‘the productivity gains have been much smaller than forecast’ (Helliwell 2002: 2).
Industry Canada research demonstrates that greater exports slightly increased overall Canadian labour productivity because export sectors ‘have always been above the average for total business output in labour productivity,’ even though the ‘labour productivity of exports has shown almost no tendency to increase’ under free trade (Dungan and Murphy 1999: iii; emphasis in original). According to Statistics Canada, export industries enjoy higher labour productivity because they are more capital-intensive: ‘after factoring in their capital use, their total multifactor productivity may not be as high’ (Cameron and Cross 1999: 3.4). In other words, labour productivity is somewhat higher today because Canada has somewhat more capital, but not necessarily because it engages in more international trade.
During the free-trade era, business investment in Canada has been very low relative to GDP by historical and international standards (Jackson 2003: 3-4). Since CUSFTA and NAFTA appear not to have raised the rate at which Canada accumulates productive capital, it is difficult to argue that they contributed much toward increased labour productivity. Traditional economic analysis contends that reducing trade barriers increases productivity by allowing vertically integrated firms to locate and concentrate production where most efficient. Canada-US trade barriers had been so low that these gains were exploited well before CUSFTA (Helliwell 2002: 2). However, even low tariffs prevented the repeated movement of goods back and forth across borders. By making it economical for components to cross borders throughout the manufacturing process, free trade allowed corporations to divide the various stages of production between countries. This system of ‘vertical specialization’ can also increase wage inequality and unemployment (Hummels, Ishii, and Yi 2001).
By integrating automobile production across the Canada-US border, the Auto Pact substantially increased the import content of automotive exports (Cameron and Cross 1999: 3.1). Despite schemes to rebate tariffs paid on inputs imported to produce exports (Norrie 1976: 218), import content remained low in other sectors. CUSFTA greatly increased the overall import content of Canada’s exports by facilitating vertical specialization in industries outside the automotive sector (Cross 2002: 3.1-3.4).
Although normal economic growth has made many Canadians better off now than before free trade, the effect of CUSFTA and NAFTA on Canadian living conditions is difficult to discern. The agreements did not unleash the large gains of traditional specialization and trade, but facilitated the smaller, incremental efficiencies of vertical specialization. Increased exports account for much less of Canada’s GDP than is commonly assumed. CUSFTA and NAFTA have amplified competitive pressure to reduce wages, regulations, and redistributive taxes. It seems that free trade has slightly increased Canada’s total income, but distributed this total even more unequally. As a result, many Canadians have lower incomes than they otherwise would. Even Canadians whose incomes increased due to free trade may still have lower living conditions due to lower environmental, labour, health, and safety standards. Overall, CUSFTA and NAFTA have hindered, rather than accelerated, the improvement of Canadian living conditions.
The Implications for Re-periheralisation
The concept of re-peripheralisation, developed in Chapter One, suggests that forces outside of Canada are exerting progressively more control over Canadian affairs. CUSFTA and NAFTA have furthered this trend by imposing external constraints on Canadian policy and by facilitating foreign control of Canada’s industry. In addition, many observers believe that free trade has made Canada vastly more dependent on external markets, requiring that current and future Canadian policy conform to outside forces. Three aspects of Canadian trade appear to support the re-peripheralisation hypothesis: the magnitude of exports relative to GDP, the particular significance of exports to the US, and the especially rapid growth of manufacturing exports from Ontario to the US.
Gross exports as a share of GDP, sales to the US as a share of gross exports, and manufactured goods as a share of gross exports have declined in recent years. However, all three proportions were and are exaggerated by imported content. While the import content of Canadian exports reflects North American economic integration, it partly insulates Canada from external forces. Canada’s position in the global economy does not compel it to accept continentalist proposals such as a North American monetary union. Notwithstanding the legal limits set by free-trade agreements, Canada has far more latitude to pursue independent policies than is usually accepted.
Academic works and government documents frequently suggest that, because exports account for about 40 percent of Canada’s GDP, the Canadian state has little capacity to manage the economy or redistribute wealth within it. Instead, Canada’s ‘international competitiveness’ is often promoted to the detriment of other goals (Hurtig 2002: 390-395; Weir 2005b). As explained above, however, value-added exports are closer to 25 percent of the economy. According to Statistics Canada, ‘Canada is less dependent on exports for its value-added GDP than is commonly believed’ (Ghanem and Cross 2003: 3.1). International trade and competitiveness should be considered in formulating Canadian policy, but need not be accorded decisive weight. Contrary to rhetoric about Canada as ‘a trading nation,’ value-added exports do not account for a dramatically greater share of Canadian GDP than of British, French, German, or Italian GDP (Weir 2005b).
Canada’s economic dependence on the US is another apparent source of re-peripheralisation. Organizations like the Canadian Council of Chief Executives (formerly the BCNI) and the C. D. Howe Institute use this evidence to argue that Canada should support American military, security, and energy policies in order to ensure access to the US market (Dobson 2002). The Security and Prosperity Partnership of North America – a 2005 arrangement between the governments of Canada, the US, and Mexico – constitutes a step in this direction.
The claim that ‘at least one-third of our GDP depends on’ the American market (Gotlieb 2004) is based on the notions that exports account for more than 40 percent of Canada’s GDP and that up to 90 percent of Canadian merchandise exports flow to the US. However, Canada’s service exports – which the first percentage includes and the second one excludes – are more dispersed between countries. Imported content, which is disproportionately concentrated in Canada’s exports to the US, exaggerates both percentages. Including service exports and factoring-out imported content reveals that no more than 75 percent of value-added exports, which account for 25 percent of GDP, go to the US. Therefore, no more than 19 percent of Canadian GDP relies on American demand (Weir 2005b). As Statistics Canada notes, ‘our dependence on the US for exports is not as great as is widely assumed’ (Cross 2002: 3.9).
This revelation helps explain Canada’s relatively strong economic growth during the recent US economic slump. Between 2000 and 2003, Canada’s gross exports to the US fell from $396 billion to $366 billion, while Canada’s GDP rose from $1,077 billion to $1,219 billion. The concurrence of an eight-percent fall in exports to the US with a thirteen-percent rise in GDP defies the conventional wisdom that American demand drives the Canadian economy (Weir 2005b).
Due to the prominence of import content in Canada’s exports, the burden of reduced American demand was borne as much by limiting Canadian demand for imported inputs as by limiting Canadian incomes. This lowering of demand for inputs from the US worsened the American slump, further separating Canadian and American business cycles (Cross 2002: 3.6, 3.8). This dynamic helps explain why Canada is less materially dependent on the US than is usually assumed and reduces the appeal of policy prescriptions, such as a common North American currency, that presume common North American business cycles. As Table 1 above shows, more of the decline in gross exports relative to GDP between 2000 and 2003 reflected a drop in import content than a decrease in value-added exports.
A third trend supposedly propelling re-peripheralisation is the particularly rapid growth of Ontario’s manufacturing exports to the US. Thomas Courchene argues that rising manufactured exports – as opposed to resource exports – increase Canada’s reliance on an open border with the US, while obviating the need for an independent Canadian dollar. Ontario’s trade-induced transformation from ‘Canada’s heartland’ into a ‘North American region state’ further limits the scope of Canadian policy (Courchene and Telmer 1998). A value-added approach to trade statistics calls into question these perceptions of manufactured versus resource exports and of Ontario’s economic status.
Whereas many Canadian natural resources could easily be sold outside of North America, manufacturing industries characterized by the flow of components between Canada and the US rely on an open border. Although the import content of exports reduces Canada’s vulnerability to US recessions given an open border, many commentators fear that American policy could tighten the border to the detriment of Canada’s economy (Dobson 2002). However, closing the American market to Canadian exporters would automatically reduce their demand for inputs imported from the US. American officials could hurt Canada’s economy only by doing significant damage to their own economy.
For example, Ontario and Michigan automobile manufacturers jointly depend on the free flow of goods through Windsor-Detroit. Canada need not cater to American demands in order to keep the border open for Ontario’s auto industry. Michigan’s powerful automakers, requiring access to their Ontario counterparts, will block American attempts to obstruct the border, whatever policies the Canadian government pursues (Hurtig 2002: 393-394).
In any case, manufacturing accounts for a smaller share of Canada’s exports than is generally thought. By 2004, rising commodity prices had pushed resource exports ahead of manufactured exports in gross terms. Because import content is concentrated in manufacturing, resource exports far exceeded manufactured exports in value-added terms (Cross and Ghanem 2005). In previous years, when commodity prices were lower, manufacturing accounted for a majority of gross exports. Even then, however, resources equaled manufactured goods in value-added terms (Weir 2005b). Growing Chinese demand seems likely to further increase the resource share of Canada’s exports and to reduce the proportion of it flowing to the US.
Some Canadian resource exports, such as lumber, are vulnerable to American policy. However, US officials disputed Canada’s lumber exports for decades, regardless of Canadian policy on other issues. Furthermore, an important shift has occurred in Canada’s resource exports: ‘For the first time ever, forestry products did not make the largest contribution to our trade surplus in 2001. Instead, energy took the lead’ (Roy 2002: 3.1). By 2006, fossil fuels and electricity accounted for nearly two-thirds of Canada’s trade surplus with the US and other resources comprised the remaining third (Weir 2007). Canadians continue to rely on resources, but more as ‘pumpers of oil and gas’ than as ‘hewers of wood.’
Surely, being the ‘leading foreign supplier of crude oil, natural gas and electricity’ to the American market (Bradley and Watkins 2003: 3) gives Canada bargaining strength with the US, rather than dependence upon it. Even Pat Carney, who was Mulroney’s Minister responsible for deregulating the fossil-fuel industry and negotiating CUSFTA, called on the Government of Canada to retaliate for American softwood-lumber duties ‘by reviewing U. S. takeovers of Canadian energy infrastructure’ (Carney 2005).
The Canadian dollar’s fluctuations serve to cushion Canada’s economy against volatile commodity prices. Courchene argues that this purpose is no longer relevant by showing that, in terms of gross exports, ‘Canada’s wealth-generating process is shifting away from resources towards human capital and high technology activities,’ which undermines ‘the wisdom of allowing the exchange rate to track commodity prices’ (Courchene 1999: 308). Since natural resources predominate among Canada’s value-added exports, these fluctuations may make more sense than he suggests.
High import content buffers manufacturing against such exchange-rate fluctuations. If the Canadian dollar falls, manufacturers gain higher Canadian-dollar revenues on their exports, but pay higher Canadian-dollar costs on their imported inputs. If the Canadian dollar rises, manufacturers receive less revenue from exports, but save on their imported inputs (Roy 2004: 3.3). This dynamic reduces Canada’s vulnerability to external economic forces and weakens the case for fixed exchange rates with the US.
With Colin Telmer, Courchene contends that Ontario’s manufactured exports to the US are pulling it away from the other provinces. This transformation of Canada’s largest province allegedly limits the scope for national policies to develop economic linkages, or redistribute wealth, on an east-west basis within Canada. For example, Courchene writes, ‘with nearly 50 percent of its GDP destined for US markets, can Ontario successfully make its way in North America without North American currency integration? Telmer and I say no.’ (Courchene 2000: 105).
In 1999, gross international exports were equal to 53 percent of Ontario’s GDP, compared to between 30 and 39 percent for eight other provinces (and 25 percent for Nova Scotia). However, Ontario’s exports were by far the most inflated by imported content. Factoring-out this content reveals that Ontario depended proportionally less than Saskatchewan on markets outside Canada. Value-added international exports accounted for 32 percent of Ontario’s GDP, compared to between 24 and 33 percent for eight other provinces (and 18 percent for Nova Scotia). As Statistics Canada notes, ‘The provincial dispersion of export shares also is much less than it appears’ (Ghanem and Cross 2003: 3.5).
‘The “economic determinism”, as it were, that underpins Ontario’s emerging economic-region-state status’ (Courchene and Telmer 1998: 2) is far less convincing in value-added terms than it seems to be in gross terms. Since Ontario does not depend substantially more than most other provinces on international exports, trade flows need not pull it away from pan-Canadian political structures. On the contrary, since conventional figures overstate the province’s share of Canadian exports, Ontario interests may even have been accorded excessive weight in formulating federal trade policy.
Re-peripheralisation is not an inevitable result of Canada’s global economic position, but a product of organizations and individuals who wish to curtail the Canadian state and/or support American policies. These actors have effectively used gross-export numbers to promote policies that further Canada’s international competitiveness and North American integration at the expense of other social priorities. Value-added figures reveal that Canada’s exports contribute less to the national economy, depend less on the US, consist more of natural resources, and are more evenly distributed between provinces than gross figures suggest. Although CUSFTA and NAFTA impose appreciable constraints on public policy, these material realities allow Canadian governments more latitude than is generally acknowledged. Chapter Seven explores how Canadians might mobilize the political will to use this latitude to implement independent policies.
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