In recent months, the same people who championed the FTA and NAFTA have been promoting the ”œbig idea” of still closer economic integration with the United States. What Tom D’Aquino of the Canadian Council of Chief Executives, former prime minister Brian Mulroney and Wendy Dobson of the C.D. Howe Institute have in mind is a grand ”œstrategic bargain” in which Canada would give the US a strong North American security perime- ter (including close co-ordination of immigration and defence policies), and even greater access to Canadian ener- gy resources. In return, we would (yet again!) supposedly obtain secure access to the US market.
The ”œbig idea” seeks to strike down US trade and border measures through negotiation of a customs union. As noted by the recent House of Commons Committee Report on North American Relations, a customs union features com- mon external tariffs and border measures which involves a loss of national autonomy in international trade and invest- ment policy. The European Union, for example, speaks with just one voice at the WTO. While the precise shape of any future North American deal is hard to predict, not least given the distinct lack of interest in Washington, it is clear that Canadian business is prepared to surrender a lot of pol- icy levers in return for the holy grail of Canadian trade pol- icy, ”œprotection from US protectionism.”
The ”œbig idea” is a bad idea for many reasons, not least the explicit threat it poses to the expression of distinctive Canadian values on defence, international affairs, and immigration and refugee issues. It is also a very bad idea in terms of its implications for economic and social policy. Specifically, the ”œbig idea” challenges our necessary ability to shape industrial development, to control our energy sec- tor and move toward a more environmentally sustainable economy; to levy taxes at the level needed to maintain a dis- tinctive Canadian social model, and to limit the impacts of international trade and investment agreements on our social and cultural policies.
Canadians are commonly told that ”œfree trade” has been a huge success in terms of boosting exports to the US. In truth, almost all of our export growth has been due to the growth of the American market in the 1990s, the low level of the Canadian dollar, soaring energy exports, and the historical strength of the auto sector. The trade deals have dramatically failed to do what they were supposed to do: close the long-standing Canada-US gap in manufactur- ing sector productivity. Between 1992 and 2000, manufac- turing output per hour worked rose by just 16 percent in Canada compared to 43 percent in the US, and the gap grew wider as the decade wore on. This carries a significant price in terms of foregone wage growth and prospects for our future prosperity.
Ironically, the large and growing productivity gap is con- stantly lamented by the same people who said that free trade would give a major boost to industrial efficiency. But, NAFTA has done little to solve the underlying structural problem: an industrial sector which is still too heavily tilted to the produc- tion of crude resource-based and basic industrial goods (45 percent of exports), and far too weak when it comes to the production of sophisti- cated finished products. To be sure, we have some strong non-resource sectors like auto, steel, and telecom equip- ment. But, less than one-sixth of Canadian manufacturing production is of machinery and equipment, well under half the US level, and it is this key gap which explains our weak pro- ductivity growth. Canadians do as well or better than the US in the resource sector, steel and auto indus- tries, but the greatest productivity gains have taken place in the advanced capital goods sectors, where we are still very weak.
One problem with the ”œbig idea” is that it distracts attention from our real problem, a collective failure by corporate Canada to innovate and to invest adequately in research and development, ”œworkers” skills, and new plant and equipment. Worse, a new deal would almost certainly limit our ability to pursue national industrial polices to help build ”œknowledge- intensive” industries. Would we retain our (regrettably largely unused) right to screen foreign takeovers of Canadian industrial lead- ers? (Would we really want Nortel or Bombardier to be taken over, given that Canadian taxpayers have sunk huge amounts of research and development subsidies into these companies to build our innovation base?) Could Canada and the US really speak with one voice at the WTO when it comes to the nego- tiation of future industrial subsidies rules? Our interest lies in building up capacity in sectors where we lack a his- torical advantage, while the US wants to challenge threats to its dominance in advanced industries.
When it comes to industrial poli- cy, a much more sensible approach would be to retain and expand our room for manouevre under the cur- rent WTO rules, while exploring possibilities for closer North American co-operation in the few very closely integrated sectors where we have joint interests. It is possible, for exam- ple, to think about common trade policies to expand North American content and jobs in auto, steel, aero- space, and lumber.
Proponents of the ”œbig idea” favour closer continental energy integra- tion, even though we surrendered most tools of control, such as differen- tial export pricing and quantitative export controls under NAFTA. Canadians should be deeply con- cerned about our fast-rising natural gas exports and high oil level of exports given rapid depletion of the cheapest, most accessible convention- al resources, and the prospect of rising real prices as the US rapidly exhausts its own resource base. While it is far from clear that we would want to return to a Trudeau-era regulatory regime, it is surely reasonable to make use of our right under WTO rules to make sure that exports of non-renew- able resources do not hinder our abili- ty to meet future Canadian needs. Rather than even closer integration in the oil and gas sector and joint devel- opment of environmentally-fragile Arctic resources, we need to restore export regulation by the National Energy Board for conservation purpos- es. And, tight integration of electricity grids is a very bad idea indeed. Today, cheap hydroelectric power gives most Canadians much lower prices than American consumers and industries. In the wake of the Enron and California power deregulation fiascos, the case for publicly owned and regu- lated power utilities is much more compelling than that for deregulated continental markets.
Moreover, deeper energy integra- tion would undermine our ability to build a more sustainable economy and deal with the very serious chal- lenge of global warming. Ratification of the Kyoto protocol and its first stage targets prompted a storm of crit- icism from Alberta and most of the oil and gas industry, on the grounds that charges for carbon emissions would undercut the development of the tar sands and frontier resources. The pri- mary oil and gas sector is a major pro- ducer of greenhouse gas emissions, and the carbon intensity of non- conventional resource develop- ment which will dominate the future of the industry is very high. Initially, Kyoto will have a very limited impact. But, the fact remains that there is a fundamen- tal longer-term contradiction between completely integrated continental energy markets and rapid primary energy sector devel- opment on the one hand, and energy conservation measures, slower resource development, and the fostering of ”œgreen industries” and soft energy paths, on the other. We should retain control of our own energy future.
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When it comes to preserving the Canadian social model, proponents of the ”œbig idea” like to talk of a purely economic arrangement. That is hardly surprising since the great majority of Canadians remain deeply committed to a more egalitarian and secure socie- ty than that to be found south of the border. But, there is no such thing as a purely economic deal. As soon as the ink was dry on the FTA, business began to complain vociferously that the Canadian model was a barrier to com- petitiveness.
Canada is a significantly more equal society than the US because of a higher level of tax-funded social pro- grams and public services, and a high- er floor of labour rights and standards. The 15 percent US per capita income advantage over Canadians is enjoyed only by the top one-third or so of the income distribution. Canadian pover- ty rates, by a common definition of less than half of median income, are much lower than in the US (10 percent vs. 17 percent), and the minimum gap between the top and bottom deciles of the family after-tax income distribu- tion is 4 to 1 in Canada compared to 6.5 to 1 in the US. The private sector unionization rate is more than double that of the US.
Canada’s more social democratic model is positive in economic terms in many respects. It gives us a more highly skilled work force, and more cost-effective and accessible social protections (with health care being the key example). But, the same organizations promoting the ”œbig idea” have consistently lobbied for cutting income taxes on corporations and high earners to US levels, not to mention more privatized delivery of social services. The ”œtax cuts for com- petitiveness” argument has clearly had an impact on public policy. After the elimination of the federal deficit through deep cuts to social programs in the early to mid-1990s, the lion”˜s share of the growing federal surplus went to the Martin tax cuts. As a share of GDP, federal taxes have fallen by about two percentage points since 1997, notwithstanding the consistent- ly strong support of most Canadians for re-investment in social programs and public services. Public opinion research shows that only the very affluent have strongly supported the tax cut agenda, not least because the US model of low taxes and low social provision would leave them better off. At a cultural level, it is only the cor- porate elite who routinely compare their level of after-tax income to that of Americans.
The ”œtax cuts for competitiveness” economic argument was hugely exag- gerated. But, it had credibility because of the threatened shift of investment and jobs to the US. Extending deep economic integration from the goods sector to the many parts of the servic- es sector still not greatly impacted by NAFTA would lead to much higher lev- els of cross border movement of pro- fessionals and managers, and would surely strengthen downward competi- tive pressures on the tax base.
The Canadian social model has been strained rather than under- cut by NAFTA. It would not automati- cally disappear because of closer economic integration. But, the equaliz- ing impact of progressive taxes would be further diminished, and there would be strong pressures not to increase gen- eral tax levels to finance better social programs and public services.
The Canadian social model would also be directly threatened by a customs union with its implication of a common (read US) voice in interna- tional trade and investment negotia- tions. The current formal position of the Canadian gov- ernment is that social and public services should not be ”œon the table” for WTO services negotiations, and that our ability to maintain not-for-profit delivery of public services should be maintained. There are already clear threats under NAFTA, as argued in the Romanow report. If a province privatized hospital or home care services, for example, it would be difficult for a future government to return to not-for-profit delivery with- out paying compensation to the US corporate health care interests which are a growing presence in the system. It is in Canada’s interests to defend measures to ”œcarve out” social servic- es and culture from WTO negotia- tions to preserve the space for choice and to shut out a US commercial presence. But, the US is promoting further liberalization in both areas at the WTO. The direct implications of a common trade policy for sovereignty in ”œnon-economic areas” is a hidden time-bomb in the ”œbig idea” of a cus- toms union.
To conclude, on a wide range of policy fronts, the ”œbig idea” is a bad idea that would undercut the neces- sary space for defending distinctive Canadian values and interests. That does not mean that the status quo of NAFTA is ideal. On some fronts, we should seek to reverse NAFTA con- straints, such as the Chapter 11 investment provisions which threat- en legitimate government regula- tion, and the one-sided commitment to unimpeded energy exports. On other fronts, we might want to deep- en the relationship through new arrangements. Simplifying a lot of border procedures clearly makes sense. And, sectoral trade deals could work in closely integrated sectors. Also on the agenda should be replacement of the largely toothless side-deals of NAFTA with more effec- tive means to create a high floor of labour rights and environmental standards. Pressures to tax harmonization in a world of mobile capital and transnationals could be coun- tered by explicit agreements to create a North American tax floor.
The future of North America is open, but it does not lie in further reinforcing the neo-liberal economic and social model which lies at the heart of the ”œbig idea.” Canadians have no desire to abandon our dis- tinctive social model, and every rea- son to doubt that ”œfree markets” are the path to prosperity. They want sensible working arrangements to manage economic linkages, measures to stop destructive competition which serves only transnational cor- porate interests, and preservation of sovereignty in those areas where it is most important.
