Free trade's best friend

A historic debate begins

KEN MACQUEEN September 16 1985
Free trade's best friend

A historic debate begins

KEN MACQUEEN September 16 1985

A historic debate begins

“In 10 years this sleepy Canada will be ripe for annexation. They may tug and resist as much as they like; the economic necessity of an infusion of Yankee blood will have its way and abolish this ridiculous boundary line.”

—Friedrich Engels, a founder of modern communism and a successful businessman, in Letters to Americans, 1848 to 1895: a Selection.

A century after Engels’s confident prediction, Canadians are feeling with renewed force the intense economic attraction of “Yankee blood.” Few Canadians seriously suggest that the “ridiculous boundary” be erased, but there is a growing momentum among Canadian business leaders, economists and the government to pull down the ragged wall of tariffs between the two neighbors. That could touch off repercussions

I far beyond the bloodless world of economics, cutting into the jealously defended realm of Canadian cultural and political sovereignty.

Under the vague banner of “free trade,” proponents and detractors alike have used a variety of terms—common market, customs union, bilateral, multilateral or sectoral free trade—to define a dizzying series of options for a new trading relationship with the United States. For a worried Quebec textile worker, a hopeful lumberman in British Columbia or a concerned economic nationalist, each scenario carries with it a markedly different set of costs and benefits. The options include:

Common market: the purest example of free trade and the most complete type of economic integration. Under the generally accepted definition of a common market, all tariffs or quotas would be lifted on all products crossing the Canada-U.S. border. All services, from trucking to petroleum consulting, would cross freely as well. The open border also would allow the unrestricted flow of money and workers between the two countries and require a common set of trade barriers against all other nations. It could also include a common currency or a fixed exchange rate.

Prime Minister Brian Mulroney has already dismissed the option of totally unrestricted trade, and the concept of a common market received only a brief mention in the discussion paper on trade issues that International Trade Minis____ ter James Kelleher released in January.

Indeed, the degree of economic and political union that could result from a common market is, for opponents of enhanced trade, a worst-case scenario. The common tariff barriers would require Ottawa and Washington to have a common foreign policy on such issues as

trade with Cuba, Nicaragua or South Africa. And the free movement of workers would require common immigration laws. Most observers agree that because of the vast difference in the size of the two countries, there is little doubt that the American view would prevail on most policy issues.

A common market seems to be unpalatable even to such staunch advocates of liberalized trade as the C.D. Howe Institute in Toronto. Said Richard Lipsey, senior economic adviser to the economic think tank: “Canadians who wish to maintain their independence in political and economic policy would never accept such a restriction on their freedom of independent action.” Customs union: a limited form of common market. A customs union provides for the free movement of goods and services—but not people and money—from country to country. It also requires a single set of tariffs and trade barriers against nonmember nations. A majority of Canadian trade specialists appears to

reject the arrangement as too much of a threat to Canadian sovereignty.

Sectoral free trade: a series of limited accords to ease barriers in specific areas, such as the steel or lumber trade. There has been practically no progress in making such arrangements since the Liberal government first proposed talks on the issue in 1983. The difficulty of finding a fair trading balance in each sector—whether it involves the removal of U.S. tariffs on steel or the lifting of so-called nontariff barriers like the “Buy American” policies which make sales of Canadian-made buses and subway cars extremely difficult—will likely drag negotiations into the next century with little hope of resolution. Critics say disparate sets of negotiations lack the guiding vision of an all-encompassing trading relationship. Recently, in fact, there have been some advances in talks on enhancing free trade in agricultural products and equipment; but at the same time, there has been renewed pressure in Washington to restrict the $2billion annual import of Canadian softwood lumber.

Retiring Alberta Premier Peter Lougheed, who visited the United States in May as part of his campaign for a free

trade agreement, later told Mulroney that sectoral negotiations have no support in Congress or the administration.

Comprehensive free trade agreement: also known as a free trade area, a comprehensive agreement is considered the most likely form of a liberalized trade accord. It would eliminate across the board almost all tariffs and trade barriers between the two countries without tying either government to common economic or foreign policies on trade with outside countries. But even if talks begin immediately, some free trade advocates predict that negotiators would need at least 18 to 24 months to draft an agreement for study by the two governments. Even then, most observers say that tariff reductions would be phased in over at least 10 years to permit producers in both countries to minimize the costs of adjustment. As a result, an agreement would not be in full effect until near the turn of the century.

The scope of negotiations would be staggering, acknowledged Jock Finlayson, director of research for the Business Council on National Issues, a proponent of freer trade. Almost all sectors of the economy would have to come under discussion if the talks were to have any hope of success.

As well, a mechanism would have to be created to guarantee each nation’s right to its own foreign policies on trade matters—ensuring, for example, that Canada would not have to adhere to the U.S. ban on Cuban imports.

Whatever form a Canada-U.S. trade pact may take, most economists say that it would have to include some mechanism to arbitrate future trade disputes. Quebec Liberal Leader Robert Bourassa, a longtime advocate of liberalized trade with the United States, says that a sort of “North American court” would be essential. “If you don’t have a court that exhibits power, the nontariff barriers will go on,” he said.

There are numerous other potential obstacles. A succession of Ontario governments have resisted a free trade agreement because of the potential danger of a massive disruption of its manufacturing sector. And because Ontario produces more than half of Canada’s exports to the United States—indeed, the value of Ontario-U.S. trade alone exceeds that of U.S.-Japanese trade—its concerns carry significant weight. Some economists also say that the United States would likely demand the removal of several nontariff barriers, including provincial and federal agricultural marketing boards.

Washington would also likely challenge Canadian legislation aimed at protecting institutions of culture and communication. Bill C-58, introduced in 1976, would be a particularly strong protectionist symbol for American negotiators. Under one of the bill’s provisions, Canadian firms cannot deduct the costs of advertisements in magazines unless the publication is Canadianowned, has 80-per-cent Canadian content and is printed in Canada. “We had no significant magazine publishing industry in Canada prior to 1976,” said Donald Campbell, chairman of Torontobased Maclean Hunter Ltd., owner of Maclean's and numerous other publishing and broadcasting properties. “But with protection, hundreds of magazines have started up since 1976.” According to Lipsey, negotiators would probably have to jettison Bill C-58 because “it is probably inconsistent with any

concept of free trade.” But the business council’s Finlayson says that the Americans are sensitive enough to Canadian fears of cultural domination that they would accept some form of protection for Canadian publishing, broadcasting and film industries. Lipsey added that a subsidy, rather than the tax penalties of Bill C-58, would be less offensive to the Americans.

Still, there is a rapidly growing degree of support for freer trade with the United States. The clear reason for the enthusiasm: the prospect of a free trading market of about 250 million Americans and 26 million Canadians in a single geographic zone. Lipsey’s study for the C.D. Howe Institute concluded that Canada’s gross national product—the value of all goods and services produced —would increase between three and 10 per cent under liberalized trade.

Free trade winners

If tariffs and barriers fall, each nation could expect exports to increase in these key sectors:

In addition, Lipsey predicted a sweeping series of benefits: up to a seven-percent increase in living standards resulting from lower consumer costs through increased competition from U.S. products and from larger production runs in Canadian plants able to serve an expanded market; a wider variety of consumer goods; a reduced flow of investment to the United States by Canadian companies who move there simply to avoid U.S. tariffs; and an end to the branch-plant nature of the Canadian economy caused by U.S.-owned companies establishing Canadian subsidiaries to escape tariffs.

The same optimistic tone flows through an ambitious and influential study on liberalized trade by economists Richard Harris, a professor at Queen’s University in Kingston, Ont., and David Cox of the University of Western Ontario in London. Their economic projections, based on the removal of tariff barriers with all Canada’s trading partners, indicate real wage and productivity increases of between 20 to 25 per cent from their 1976 levels. According to the study, published in 1983 by the Ontario Economic Council, “The major effect of free trade would be higher real incomes for Canadian labor, and lower prices for many imported and domestically produced goods.” And because three-quarters of Canadian trade is with the United States, the authors concluded that most of those benefits would emerge from a bilateral agreement with Washington. One group of winners would be Prairie farmers, who, according to a study commissioned by the three west-

ern wheat pools, would gain another $60 million a year by 1995.

For some Canadian consumers, free trade offers the prospect of shelves stocked with American bourbon or designer clothes no longer prohibitively priced because of tariffs. But for a number of Canadian workers, free trade might result in job loss, dislocation and retraining. Even the firmest proponents of free trade predict that the flood of U.S. products that would follow any accord would

wash out or badly injure numerous Canadian industries.

The Harris-Cox study listed five of the most vulnerable sectors—furniture and fixtures, leather, miscellaneous manufacturing, tobacco and machinery. The study added that all of those sectors would suffer an initial 10-per-cent decline in profits with free trade. As well, the report concluded that about six per cent of the work force would be “reallocated intersectorally,” with the workers involved losing their jobs and retraining for different lines of employment. “It turns out one industry, knitting mills, is all but wiped out,” the study added.

In fact, as many as 30,000 of the 80,000 jobs in the Canadian textile industry could be lost because of U.S. imports. In Winnipeg alone, 8,000 garment workers

are potentially at risk. In Sherbrooke, Que., 30year-old Peter Sauer, operations manager for Santana Inc., a footwear manufacturer, declared that even after a recent $500,000 modernization of his factory, the firm still needs the protection of import quotas for at least five more years. Sauer, who started work at the shoe and boot plant at 18, said he feared the footwear industry would be destroyed by abolishing quotas. He added: “If that happens, I am really puzzled as to

To that, confirmed free trade exponents respond with a kind of corporate Darwinism: any industry that cannot adapt and survive without the protection of tariffs—which contribute to artificially high prices for consumers— should be allowed to collapse. They add that many of the industries that would be threatened by a Canada-U.S. pact, such as footwear and textiles, are under even greater pressure from cheap imports from undeveloped countries.

what I will do. This is where all my experience lies.”

Still, many supporters of free trade acknowledge that extensive support for the inevitable losers in any Canada-U.S. free trade arrangement would be a critical part of an accord. Wage subsidies, job retraining, mobility grants for displaced workers who have to move and assistance grants to hard-hit industries would all be needed.

Indeed, a central issue in the debate is whether the price of a free trade agreement would outweigh the benefits. “The cost of compensating the losers becomes the real issue,” said Ross Preston of the Economic Council of Canada. But Gordon Jansen, for one, a research associate with the independent Conference Board of Canada, said that the rewards would outweigh the costs. “I haven’t seen any empirical study that says Canada would be a net loser,” said Jansen. “If you just go on the basis of pure economic theory, if you have a small country making an arrangement with a big country, the small country is going to gain.”

Some economists say that the impact —positive or negative—would be reduced by a phased implementation of the treaty. One method suggested by Ronald Wonnacott, an economics professor at the University of Western Ontario and a longtime free trade crusader, would be to cut tariffs in both countries by one-tenth or by one percentage point per year, whichever is larger. The proposal would eliminate the Canadian footwear tariff, now an average 22 per cent, within 10 years. The American footwear tariff, now about 8.8 per cent, would be eliminated in nine years. In most sectors U.S. tariffs, which are usually about half as large as their Canadian counterparts, would be eliminated a year or more ahead of those in Canada. The result would be a brief period in which Canadian producers would have free entry into the U.S. market while enjoying some tariff protection at home, said Wonnacott.

There is no indication that American negotiators would agree to a phased-in accord. But Wonnacott and other Canadian economists say that the advantage is necessary because Canada will bear the heaviest cost of adjustment in any trade agreement. The $150-billion annual trade between Canada and the United States is the world’s largest. But while Canada sends three-quarters of its exports south, U.S. trade with Canada accounts for just 22 per cent of its exports.

Proponents of a trade agreement say that there are several international trade relationships that prove the profitability of tearing down tariff walls. One of those is the Australia-New Zealand Closer Economic Relations agreement, for example, which will lead to the gradual elimination of all tariffs, import quotas and export incentives by 1995. One year after the agreement was signed on March 28,1983, trade between the two countries had increased by 40 per cent.

But many experts are still concerned that, for Canada, freer trade might prove to be only the prelude to a loss of sovereignty. In the introductory essay to The Other Macdonald Report—a book containing briefs submitted to the commission, released last week to dispute the commission’s findings—editors Daniel Drache and Duncan Cameron wrote that “free trade is only a code word for continental integration.” Other critics say that in a future bilateral dispute, Washington could exercise immense influence on Canadian policy by simply threatening to cancel a free trade agreement on which Canada had become economically dependent. It is an issue that troubles many Canadians on both sides of the debate. But the Business Council on National Issues, for one, studied the likelihood of the United States abrogating a trade treaty. The verdict: unlikely. Out of hundreds of international treaties it has signed since the Second World War, the United States has cancelled just 10, most of them with Communist Bloc countries.

And Business Council researcher Finlayson said that Washington can already put pressure on Canada at any time by blocking imports. “We are very vulnerable now—2.2 million workers are dependent on exports for their jobs,” he said, dismissing the danger of a treaty being broken. Added Finlayson: “That argument would be more compelling than it is if we weren’t already so dependent on the American market.”

KEN MACQUEEN

in Ottawa with

bureau and correspondents’ reports