Canada and the United States once experienced a dozen years of free-trade linkages way back in the 1850s and 1860s. At the time of the negotiation of the Elgin-Marcy Reciprocity Treaty of 1854, Canada was known as British North America and British officials were ultimately in charge of reaching an accord with their federal government counterparts in Washington, DC. Unfortunately, Washington abrogated the agreement soon after the end of the US Civil War, and in spite of many requests from Ottawa to renew the pact, nothing was accomplished for the remain- der of that century. In 1911, however, Washington did agree to a free-trade arrangement, but Canadian voters proceeded to toss out the Liberal government of Sir Wilfrid Laurier, which had initiated the trade discussions. Following the Second World War, the Mackenzie King government negoti- ated yet another trade pact with the United States, but the Prime Minister had second thoughts and decided to scrap the proposed accord in 1948. Both in 1911 and again in 1948, many Canadian political leaders and regular citizens consid- ered that a free-trade accord would inextricably entrench Canada into the US orbit and chip away at Canada’s econom- ic and political sovereignty. Many of the same concerns were still being voiced when the Brian Mulroney government and Ronald Reagan administration reached another deal in 1988. The Canadian Senate refused to ratify the Canada-US Free Trade Agreement (FTA), forcing the 1988 ”œfree-trade” election. The campaign was filled with warnings from political leaders opposed to the pact that Canada’s days as a sovereign nation would be numbered if the accord were ever imple- mented. This time, however, enough Canadian voters were willing to take a chance on free trade and returned Mulroney’s Progressive Conservatives to power in the House of Commons, albeit with a reduced majority. After a hiatus of more than 120 years, the neighbouring countries were once again linked via a comprehensive free-trade accord.
This new era of free trade between Canada and the United States has been in effect for two decades, first under the FTA, which was negotiated in October 1987 and began to be implemented in January 1989, and later under the North American Free Trade Agreement (NAFTA), which superseded the FTA and was implemented in the period between 1994 and 2008. Canadians remained cautious at first about the ram- ifications of free trade, especially during the economic slow- down of the early 1990s. Today, however, a solid majority favours the free-trade arrangement with the United States and almost three-quarters are optimistic about future relations between the two countries, according to a 2007 survey by the Association for Canadian Studies. Americans, on the other hand, have been consistently supportive of the concept of free trade, but in recent years have been very lukewarm about NAFTA, with roughly half in favour and half opposed. To be fair, much of the opposition has been focused on economic ties with Mexico and the fear of increased illegal immi- gration and the loss of jobs to compa- nies situated south of the US border.
In the aggregate, 20 years of free trade have actually been very good for both Canada and the United States. Canada’s gross domestic product (GDP) at the end of 2007 was in the range of C$1.5 trillion, ranking it as the eighth- largest economy in the world. This is a remarkable achievement because each of the seven nations ahead of Canada and the five nations immediately behind Canada has a much larger population base than Canada’s, with Canada having only the 35th-largest population among the world’s community of nations.
Canada’s economic growth rate over the past several years has been near the top of the major Western countries, it has enjoyed net job creation for 15 consecutive years, and its unemploy- ment rate has fallen to a 33-year low. Canada’s major stock market is near record highs and Ottawa has experi- enced budget surpluses for each and every year since 1997. Canada’s net debt for all levels of government, when meas- ured as a percentage of GDP, has also improved dramatically from being the second-worst in the G7 to the best. Canada’s current-account balance is in the black, its net international debt has fallen from C$311 billion in 1996 to C$99 billion in 2006, its merchandise trade surplus with the United States has been approaching C$100 billion per year, and the loonie has appreciated dra- matically vis-aÌ€-vis the US dollar. Total Canadian merchandise exports to the United States have increased almost 350 percent in nominal terms from US$88 billion in 1989, the first year that free trade began to be phased in, to US$303 billion in 2006. For most Canadians, their national economy has never been better during their lifetimes than it has been over the past several years.
The GDP of the United States at the end of 2007 surpassed US$13.5 trillion, roughly three times larger than second- ranked Japan. Its major stock market has also reached record highs and its unemployment rate has been in the range of a historically low 4.5 percent. Almost 50 million jobs have been creat- ed in the United States since 1980, an average of nearly two million addition- al employment opportunities every year. Unlike Canada, the US has suf- fered major deficits in merchandise trade, its current-account, and the fed- eral government’s budget. Its trade deficits with Canada and Mexico have been sizeable, but this has been offset in part by the fact that most merchandise trade in North America is intra-firm, and many of these firms are US-owned.
Two decades of Canada-US free trade have been beneficial to consumers in both countries who now have a better selection of products at more competitive prices. Companies have also been able to abandon their branch-plant tactics in favour of regional or global mandating for their facilities scattered across the two countries. Trade between the two neighbouring countries has gone beyond ”œinternational” to the level of ”œintegrative,” and North American companies, adopting ”œjust- in-time” and other strategies which flourish in a regional free-trade environ- ment, are better prepared to cope with competition from industries in Europe, Asia and elsewhere in the world.
In Operations of US Multinational Companies, authors Raymond J. Mataloni, Jr., and Daniel R. Yorgason note that majority-owned US affiliates operating in Canada now provide over one million jobs for Canadian workers and account for almost 10 percent of value added in Canada on an annual basis. Critics of free trade argued that US direct investment would completely dominate the Canadian landscape, but in actuality US investment has decreased both as a percentage of total foreign direct investment and overall economic activity in Canada. In the meantime, say authors Thomas W. Anderson and William J. Zeile, in US Affiliates of Foreign Companies, Canadian investors have poured US$150 billion into the American economy in direct investments measured on a historical-cost basis, and provided in 2004 almost 400,000 jobs for Americans. The ratio of US direct investment in Canada versus Canadian direct invest- ment in the United States is only about 1.6 to 1, and jobs created in both coun- tries by these investors is about 2.7 to 1, surprisingly low when taking into account that the US economy and popu- lation base are both about nine times larger than Canada’s.
Some companies which were not competitive before free trade went into effect have been driven out of business, but this would have eventually occurred even in the absence of the FTA and NAFTA, because globalization in general and the World Trade Organization (WTO) in particular would have subject- ed these companies to much greater international competition. Both nation- al governments need to provide trade- adjustment assistance to employees of these adversely affected firms, and their records have been far from spotless in carrying out this task. Manufacturing jobs in both countries have been on a downward spiral, but this is attributable to more intense global competition, short-sighted government policies and a continuing transition to service-orient- ed economies.
The auto sector in Michigan has never suffered a worse period since the Great Depression and more cars and light trucks are now manufactured in Ontario than in Michigan, the historic home of the Big Three auto companies. Part of this shift was due for a long time to the low-valued loonie, but another impor- tant factor was the different health-care plans in the two countries which made manufacturing an average car in Canada at least US$1,000 cheaper than doing so in the United States. The US persists in spending almost 16 percent of its GDP on health care while no other country in the developed world spends more than 12 percent, and these other nations cover all of their people, whereas the US has 45 million without any health insurance at all. This health-care travesty is not only a human-rights issue, but is also eroding America’s eco- nomic competitiveness. Critics in Canada of free trade with the United States warned that their health-care system would become a sacri- ficial lamb. Ironically, after 20 years of free trade, the Canadian health-care system has not suffered at all and it is now likely that the United States will move toward a Canadian-style program over the next decade.
Just as consumers have been big win- ners from North America free trade, they have also been losers in sectors that have been sheltered from market com- petition. It is very difficult for a foreign observer to understand why Canada has not moved toward domestic free trade. The Agreement on Internal Trade reached by the provinces and imple- mented in 1995 to bring about such an open market has been woefully inade- quate. Alberta and British Columbia have now agreed to free trade between these two provinces, and Premier Charest in Quebec has suggested that Quebec and Ontario do likewise. Canadians would benefit substantially from a nationwide agreement, much as the United States did when its constitu- tion of 1787 abandoned the regional protectionism enshrined in the Articles of Confederation and created instead a national economic union.
The preponderance of special-inter- est politics in the United States at the expense of the general interest has also damaged consumers in both countries and hampered US competitiveness at home and abroad. The softwood-lumber episode which has dragged on for decades is exemplary of this sad state of affairs, and although the 2006 softwood accord is a step in the right direction, it represents temporary managed trade and is far from being free trade. Agricultural protection- ism and subsidies represent another major manifestation of this special-inter- est disease. Farmers in the United States represent fewer than 2 percent of the nation’s population, but tens of billions of dollars are allocated annually to bolster large agribusinesses or to protect these businesses from international competi- tion, such as in the sugar industry. Half of the agricultural subsidies are allocated in approximately 20 congressional districts, out of a total of 435 districts. One would think that members of Congress in the other districts would wise up and bring an end to such largesse, but the pork barrel and log rolling, combined with the con- stant need to raise money from well- heeled interests for congressional and presidential campaigns, keep this deplorable system in motion. For their part, Ottawa and the provincial govern- ments should reform some of their own agricultural and dairy industry practices in order to benefit Canadian consumers. At the same time, both levels of govern- ment in Canada should work to loosen parochial regulations in the financial sec- tor, relax foreign-investment restrictions in finance, telecommunications, trans- port and some cultural industries, and agree to a common set of trans-Canada regulations governing securities.
Canada and the United States have benefited from two decades of mostly free trade relations. Now that NAFTA has been fully implemented, it is time to push for additional economic and busi- ness harmonization and liberalization. It is certainly within reason to establish a customs union with com- mon external tariffs. Labour mobility across the 49th paral- lel should also be enhanced, and this can be done because all three NAFTA governments have agreed that Canada and the US can proceed at a pace which may differ from what the US and Mexico, or Canada and Mexico, agree to do bilaterally.
Both the United States and Canada will be fac- ing a labour crunch within the next few years and additional flexibility for the cross-border movement of workers would benefit both economies. Washington should also adopt many of Canada’s standards in recruiting skilled immigrant labour. Microsoft’s recent decision to expand facilities in Vancouver and hire Canadian software specialists was done in part to take advantage of Canada’s immigration laws, laws which are far superior to current US practices, especially in terms of Washington’s self-destructive H-1B visa limitations. In addition, as Gary Hufbauer and Jeffrey Schott note in NAFTA Revisited, NAFTA’s dispute-settle- ment panels should be made perma- nent, staffs within the three NAFTA secretariats combined, and the new con- solidated secretariat given a much larger operating budget so that it can improve its efficiency and visibility. The dispute- settlement panels keep both nations on their toes and make it more difficult for special-interest politics to water down clearly enunciated NAFTA commit- ments. Greater harmonization in com- petition policy should also mitigate some of the negative consequences of anti-dumping and countervailing prac- tices in the United States, and Ottawa must work closely and persistently with sympathetic domestic groups in the US in order to stave off efforts on Capitol Hill to revive a broad array of protec- tionist policies. The two national capi- tals should also do much more toward liberalizing trade in services, the sector which dominates economic growth and job creation in both countries.
Although chances of it occurring are remote, this is actually a propitious moment for Canada to adopt the US dollar as its national currency while the loonie is near parity with the dollar. Robert Pastor’s notion of a North American currency called the amero has some merit, but it will never fly in Washington. Any North American cur- rency will have to be the US dollar because of its global presence and the vast economic and population size of the United States versus Canada. In addition, Benn Steil may be prescient in suggesting that one day there will only be three major global currencies: the dollar, the euro and an eventual Asian unit agreed to by China and Japan. In adopting the dollar, Canada would be abandoning the monetary leadership of the Bank of Canada in exchange for per- haps one seat on the Board of Governors of the US Federal Reserve System. Canadians would also be increasingly affected by the fiscal policies of the US Congress, and these policies have left much to be desired for a number of years. Nonetheless, many major Canadian businesses are already using the US dollar in their accounting ledgers and a common currency would end the uncertainty associated with fluctuating loonie-dollar valuations which have swung dramatically from the 62-cent range six years ago to near parity in recent months. Economically, this is an optimal time to make the move to the common currency, but Canadians are understandably skeptical about the overall ramifications of doing so.
The energy sector will also provide excellent financial opportunities but result in a lot of soul-searching and internal disputes among Canadians. Only Saudi Arabia has more proven oil reserves than Canada, and the United States is desperate for imported oil. The US is currently responsible for almost a quarter of the world’s oil consumption but accounts for only 9 percent of global oil production and 2 percent of the plan- et’s oil reserves. Americans will certainly be willing to pay US$100 or even more per barrel of Canadian oil in the future and this will repre- sent a steady stream of rev- enues for Ottawa and the oil-producing provinces. Canadians, however, will eventually face the fateful decision of either taking the easy money or deciding at some point to keep a major proportion of this precious non- renewable resource in the ground for their own children and grandchildren. Canada must also contemplate why it is a net oil exporter, but still imports 40 percent of its oil for use mostly in Central Canada. Should more money be allocated to developing the oil and natu- ral gas infrastructure within Canada so that almost all Canadians could rely on the shipment of domestic instead of foreign oil products to meet their needs? In all probability, a compromise will be reached in which significant oil will con- tinue to flow southward across the bor- der, but not in the quantity that Washington would like to see. This will lead to some cross-border tensions, but even under NAFTA, Canada is not nor will ever be obliged to send most of its oil to the United States.
In a similar vein, water may well become the next major resource issue dividing Canada and the United States. Canada has been blessed with a huge quantity of the world’s freshwater reserves, and some people in northern countries are already willing to pay far more for bottled water than an equivalent amount of gaso- line. If global warming accel- erates and Americans continue to flock to sunbelt locations where potable water is already scarce, the pressure by Washington on Ottawa to per- mit major water exports will intensify. However, no provi- sion in NAFTA will ever force Canadians to ship vast quanti- ties of water to the United States, even though the profit margin for such shipments could be staggering.
In addition, the border should not be allowed to become any ”œthicker” as a result of post-9/11 trauma and insecurity within Washington’s Beltway. Border rules dic- tated by the US Department of Homeland Security (DHS) could dimin- ish some of the big gains achieved by free trade over the past 20 years, such as the ability of corporations to employ ”œjust-in-time” manufacturing and deliv- ery strategies. The Western Hemisphere Travel Initiative (WHTI) has been a per- fect case study of how not to conduct border relations. Ottawa and Washington need even greater coopera- tion in the security arena and in harmo- nizing some immigration and visa policies. Another 9/11-type episode in the United States, especially if this inci- dent involved terrorists who had previ- ously taken up residency in Canada such as the case of Ahmed Ressam, represents the worst-nightmare scenario imagina- ble for the future of a seamless North American economic relationship. All lev- els of government in the two federal sys- tems must work together to insure that this never happens. More optimistically, increased levels of cooperation in estab- lishing a security perimeter should improve the level of confidence to the point that Canada and the United States will one day introduce a program for the cross-border movement of people pat- terned after the Schengen Accord in Europe, rather than more restricted bor- der access in line with the fortress America mentality perpetuated by DHS and a few lawmakers in Washington.
Security concerns are not the only worrisome issue which will confront the two neighbours in the future. The bilateral economic relationship will face a number of peaks and valleys over the next few decades, in large part due to myriad problems afflicting the United States. It is quite possible that the United States will no longer be consid- ered as a superpower by the year 2040, attributable to three major factors: the further entrenchment of globalization which will increase international inter- dependence and mitigate the capability of any single nation to solve problems unilaterally; the rise of new competitors such as China and India and regional groupings in Europe and Asia which reduce the overall economic and politi- cal influence of the US superpower; and domestic difficulties within the United States itself which are weakening the foundation upon which its superpower ranking was con- structed. These internal prob- lems include a massive federal government debt which has increased nine-fold since 1980; unprecedented trade and cur- rent-account deficits which have relegated the United States to the status of the world’s largest external debtor nation; a grow- ing reliance on foreign govern- ments and overseas private investors to finance this massive debt, with foreigners currently purchasing half of Washington’s IOUs; out-of-control increases in entitlement obligations linked to Social Security, Medicare and Medicaid; and massive concen- trations of wealth and income reminiscent of the Gilded Age and which will eventually lead to a populist backlash and significant political and social disquietude.
Nevertheless, the formidable chal- lenges which the United States will confront over the next few decades should not diminish Canada’s commitment to North American free trade. Indeed, Canada has seen major economic benefits from two decades of free trade with the world’s largest economy, and the United States will still grow economically, even though its share of global production, trade and investment will diminish over the next quarter of a century. Canada’s identity and sovereignty are intact and, if anything, Canada has become progressively more distinctive from the United States over the past 20 years. In effect, it has achieved major economic gains with little in the way of offsetting political or social costs, even during the two-term presidency of George W. Bush, characterized by overt unilateralism and controversial foreign policy pursuits.
Canada must remain vigilant and develop a much more competitive and diversified economy. It has a huge cur- rent-account surplus with the United States, but a large deficit with the rest of the world. Much of its recent economic prosperity has been based on higher commodity prices, and this cycle will not last forever. The high-valued loonie will also hamper growth in manufactur- ing exports which are mostly fabricated in central Canada. Labour productivity must improve significantly, and Ottawa should be actively engaged in signing free trade agreements and other market- opening accords with selected nations around the world.
Gradually, Canada should reduce its almost total reliance on the US market which absorbs four-fifths of Canadian merchandise exports and accounts for over a third of Canada’s total GDP. However, this shift in emphasis should not be mistaken for a Trudeauesque third-option strategy. Instead, Canada can continue to increase its exports to the US, while at the same time expanding exports to the rest of the world at a high- er rate. Continued progress in liberalizing trade, investment and labour relations with the United States should be viewed by Canadians as but one big step in improving their nation’s economic com- petitiveness with the rest of the world.
NAFTA will be fully implemented at the beginning of 2008. Its goals have been limited and focused, with the intent ”œto eliminate, progres- sively, tariff and non-tariff barriers, to trade in goods and services, to estab- lish clear rules for investment, and to strengthen intellectual property rights, and, in the process, to create effective dispute settlement mecha- nisms.” Most of these objectives have been achieved, and a new Canada-US economic agenda with more ambi- tious goals is now required as North America gears up for even greater competition from across the Atlantic and the Pacific and even within the Western hemisphere. As clearly mani- fested by a century and a half of on- again, off-again bilateral trade negotiations, Ottawa and the provin- cial governments must take the lead in introducing this new agenda. How unfortunate it was that it took so long for Canada and the United States finally to implement a free trade agreement, and how unfortunate it is today that no new ”œNAFTA-plus” agenda has as yet been championed by Ottawa or any of the provincial capitals. What is taking so long?