Twenty years on, those who were there remember the high drama of the final moments of the negotiations to achieve a free trade agreement between Canada and the United States. Canada’s need to gain a measure of shelter from the protectionist elements rampant in Congress, as well as from the politically inspired administra- tion of US trade law, was clear to those involved, if not to the Maude Barlows of this world.
The threat to Canada of the US Omnibus Trade Bill and protectionist Congressional sentiment (and the battles waged to combat these and re-create a level playing field) have been admirably documented, among others, in for- mer ambassador Allan Gotlieb’s recently published Washington Diaries.
A high degree of ignorance in the executive and leg- islative branches of the US government of Canada’s origi- nal motivation for the negotiations (and therefore of our bottom-line bargaining position ”” namely a satisfactory dispute resolution mechanism) and the ”œwar-of-attrition” negotiating style of the chief US negotiator, Peter Murphy, had led to an impasse which threatened to produce the total collapse of the process. What was needed was the political will on both sides to snatch victory from the jaws of defeat.
This is what led to the highly publicized walk-out by Simon Reisman, and his carefully calculated press campaign to impress upon our interlocutors that we were serious, and that, although they (correctly) assumed that Canada needed the agreement more than the US, this did not mean an agreement on any terms and at any price. Rather, we need- ed to accomplish the original objective of introducing the rule of law into the settlement of disputes involving allega- tions of subsidy and dumping.
It worked. Direct communication between the Prime Minister’s Office in the Mulroney government and the Reagan White House led to the dispatching of a high- level Canadian team, led by PMO Chief of Staff Derek Burney, to Washington to make one last ditch attempt to carve an acceptable deal before the ”œfast-track” negotiat- ing authority granted to the President by Congress ran out at midnight on October 3, 1987. The Americans named James Baker III, Secretary of the Treasury and among the most trusted advisers of the President, as Burney’s counterpart.
Michael Hart, in his excellent reconstruction of the negotiating history of the FTA called Decision at Midnight, has captured the flavour of what transpired. With no time left for posturing, Burney and Baker took over the Secretary’s boardroom. Each of the Sectoral Negotiating Teams, which had been working diligently since the begin- ning of the talks, was summoned to an audience with the two lead figures (each assisted by members of their respec- tive Chief Negotiators’ teams). The sectoral team leaders were asked to give a brief summary of what issues still separated the parties in their area of responsibility. Burney and Baker then suggested ways to resolve the controversy and create a mutually acceptable basis for the rele- vant chapter of what was to become the elements of the Free Trade Agreement. If the format proposed seemed workable to the sectoral teams, they were sent away to work it out with a view to meeting the deadline.
Nerves were on edge in the corri- dors as teams waited to be summoned to the inner sanctum, because months of work came down to a very quick judgment call with virtually no time left on the clock.
But overshadowing all of this was the one sine qua non element: dispute res- olution. As a result, the ”œgo/no go” deci- sion never depended on autos, energy or services, let alone financial services.
The Americans had decided that, as long as they were confident that the elements of an agreement could be arrived at, they could safely send messages to the chairmen of the House and Senate committees to the effect that ”œfast-track” authority had successfully been exercised to pro- duce the elements of an agreement. The importance of this was that, under fast-track authority, Congress granted the president the right to enter into an international agree- ment that they, Congress, agreed to approve or defeat in a yes or no vote (which they liked to call ”œup or down”) and to waive the right to nickel and dime the deal to death with congressional amendments.
No self-respecting country could agree to make its concessions in direct negotiations with a negotiating team, and then begin all over again to re-nego- tiate with the denizens of Congress!
This is how it all came down to a final proposal from Jim Baker on judi- cial review of decisions by dispute res- olution panels to break the impasse on the major sticking point. Baker’s initiative preserved the Canadian insistence that these reviews remain true inter- pretations of law and not become ”œhelpful” attempts to assist a congress- man or ssenator with an industry in his or her district or state with a real or imagined grievance. When Baker pro- posed his creative compromise to the eight Canadians waiting in his ante- room (Burney, Finance Minister Michael Wilson, Trade Minister Pat Carney, Chief Negotiator Simon Reisman, Deputy Chief Negotiator Gordon Ritchie, Ambassador Allan Gotlieb, Associate Deputy of External Affairs Don Campbell and me), both sides agreed that the messengers should be dispatched with only min- utes to spare before the expiration of the President’ss fast-track authority, leaving the details of the language of several of the important chapters to be worked out on the next and subse- quent days.
The next afternoon (Sunday, October 4, 1987), Michael Wilson and I were chatting with Baker in the sit- ting area of his office when he abrupt- ly got up to leave. ”œWhere are you going?” Wilson asked. ”œTo the press conference,” Baker replied. Wilson asked, ”œWhat press conference?” ”œTo announce our deal,” Baker said.
Wilson: ”œYou can’t do that!” Baker: ”œWhy not?”
Wilson: ”œBecause you don’t have a deal yet.”
Baker: ”œWhy? What remains to be done?”
Wilson: ”œWell, financial services haven’t been fully resolved yet, for one thing.”
Baker (to Wilson and me, as he sat back down on one of the couches): ”œOkay. You guys have 15 minutes.”
Unable on no notice to locate Bill Hood, the former Finance deputy who had so ably led the financial services sectoral negotiating team throughout the prolonged gestation of the FTA, we undertook to address the challenge of finalizing the arrangements to be included in the agreement regarding this important industry.
Financial services were an area in which Canada’s regulations had been reformed and modernized more than a decade in advance of developments in the United States.
As a result of the liquidity pressures on smaller domestic banks in the fall of 1985 and continuing into 1986, which had resulted in two very high- profile bank failures and consolidation into more stable institutions for seven others, Canada had acted to eliminate the depression-era rules that separated the financial services industry into the so-called ”œfour pillars” ”” banks, insur- ance companies, trust companies and securities dealers ”” and to permit enterprises in each of these fields to own businesses in each of the others.
This was designed to strengthen the remaining institutions and to respond to the evolution of financial markets where full-service or universal banks were emerging as the standard.
So, as a result of the government’s actions, Canadian banks rapidly bought up the leading securities dealers, and for- eign securities dealers were permitted to enter Canada and establish 100-percent- owned affiliates, in much the same way as the Bank Act revision in the early 1980s had made possible the establishment of what were then called Schedule B banks (now Schedule II). This extensive reform of financial services legislation in Canada has come to be referred to as our ”œlittle bang,” echoing Margaret Thatcher’s 1986 ”œbig bang” which changed the shape of the City of London.
The problem was that the United States was lagging in its own financial services reform. Glass-Steagall, the legis- lation prohibiting commercial banks from being associated with investment banks, was still very much on the books, as was the 1978 enactment lim- iting interstate branches of US banks. So when we sat down to hammer out Chapter 17 on financial services, we had to work our way around this dis- proportionate legislative evolution.
The first preoccupation was to negotiate to have Canadian secu- rities dealers authorized to deal in and underwrite the securities of Canadian governments and their agencies (feder- al and provincial) which otherwise would have been prohibited to Canadian dealers by the Glass-Steagall provisions because of the ownership of the dealers by Canadian banks. Second, we obtained an indefinite grandfathering of the interstate branching rights of Canadian banks, which otherwise would have been subject to a decennial review. The US promised Canada national treatment (regardless of how other foreign financial institu- tions were treated) in any legislation to amend or eliminate Glass-Steagall.
Canada, for its part, exempted US firms and institutions from the ”œ10/25” rule pro- hibiting ownership by a single non-res- ident of more than 10 percent, and non-residents collectively from owning more than 25 percent, of a Canadian- controlled, federally regulated financial institution. Instead, we established the ”œnational treatment” rule that requires such institutions to be widely held and to have no shareholder of whatever nationality controlling more than a 10 percent interest.
We exempted US banks from the ceiling of 16 percent of aggregate banking assets, which until then had applied collectively to all Schedule II (i.e., foreign-controlled) banks and from the rule limiting the number of branches they could establish to five, as well as the requirement that such banks focus on the so-called middle market in their lending activities.
All in all, a substantial piece of business, which was accompanied by a commitment on both sides to work toward the further liberalization of the rules governing the financial sector.