“I am not a nationalist, I am not a protectionist — if you were going to take a very protectionist trend, our whole economy is so importantly tied to yours, we’d have to make some very fundamental decisions.”
Trudeau said this to the US President after Canada was unable to get an exemption from the American administration’s 10 percent import surcharge — Pierre Trudeau, that is (speaking to Richard Nixon). Faced anew with US tariffs in 2018, Justin Trudeau is confronting another decisive moment, or a “turning point in the Canada-US relationship,” he has said.
The Prime Minister’s encounter with Donald Trump is also another episode in the tale of Canadian trade policy, which is always reacting to the United States. If both countries did what made the most sense economically, the whole story of the relationship could be read in its numbers. Instead, getting a full picture of Canada-US economic relations requires a look back over a long history of threats and mirages.
A history of dependence
Economic history in Canada has been defined by one thing: dependence. A dependence on exports — of only a few products — and on one market. Reliance on this one market has meant that Canada has had to weather waves of America First protectionism from the 1860s on, evident in the beggar-thy-neighbour attitudes of the 1890s, 1900s, 1920s and 1930s. Each decade had its own special tariff designed to grow local American economies without any hospitable sentiment for the rest of the global community. Moments of common sense were few in this era of unbridled nation-building tariffs, spiralling downward into the Great Depression.
The two economies grew more intertwined throughout the world wars and their aftermath. It took such cataclysmic events to rock the foundations of these high tariff walls. The US led the world into a new economic system based on the simple principle of reciprocity: each country would agree to liberalize its trade to the extent that other countries would liberalize theirs.
But by the 1960s, America began questioning its leadership role. The US began grappling with its own balance of payments problems as its long-standing trade surpluses turned into deficits. In 1963 and 1965, the US introduced taxes meant to slow down the flow of American dollars abroad. Crises in the Canadian financial markets ensued, and Canada was able to obtain conditional exemptions. Then, in 1968, to reduce the deficit, American-controlled firms abroad were taxed to encourage them to send more profits back to the US. This repatriation of earnings from foreign subsidiaries back to the coffers of the American multinationals — predicted to amount to a billion dollars — had Canada begging for another exemption. Eventually the US obliged, but the episode further revealed Canada’s vulnerabilities.
These weaknesses were fully exposed by President Richard Nixon’s New Economic Policy, under which Canada was no longer exempt from trade measures. With a continuing balance of payments problem, the Nixon administration, at a secret Camp David meeting in 1971, decided to abandon the gold standard, applied an import surcharge and froze US prices and wages for three months.
In the end, the announcement was well received, because Nixon framed the closing of the gold window not as a confession of national bankruptcy or an abandonment of the American postwar role but as an attack on foreign irresponsibility that was threatening global stability. But very little regard was given to the foreign policy or diplomatic consequences of Nixon’s actions. In fact, neither the Secretary of State nor the National Security Advisor, or even any of their subordinates, had been invited to the Camp David meeting. There were options other than closing the gold window: the US could have raised interest rates and imposed austerity on the domestic economy, devalued the dollar or reduced the scope of American commitments abroad. But the US was simply unwilling to preserve an integrated world monetary regime, and so the postwar order collapsed for political, not technical, reasons.
What had changed between 1968 and 1971? Why was Canada unable to get an exemption from the import surcharge? Possibly because Nixon viewed Canada as uncooperative and a contributor to America’s woes. Possibly because Canada did not support the Vietnam War. The attitude of Secretary of the Treasury John Connally was that “foreigners are out to screw us. Our job is to screw them first.” Nixon believed, as he pointed out in his 1972 address to the Canadian Parliament, that whatever the historical ties between the two countries, each had to follow its own path based on self-interest. The Nixon administration even threatened the cancellation of the Auto Pact, convinced that its northern neighbours had cheated and cost the US jobs and investment. Canada could no longer take its relationship with the US for granted.
These events were known as the “Nixon shocks” everywhere but in the US. Only the domestic well-being of the country mattered to the Nixon administration, but the events of 1971 shook the allies’ faith in the consistency and even the motivation of American concern for the well-being of the world. Just as the Smoot-Hawley tariffs of the Depression forced Canada to respond with a set of preferential trade deals with Britain, Canadians would need to react to the Nixon shocks.
The push for diversification
The Canadian government drew up an options paper for Canada-US relations. One option would be to maintain the status quo, and another would be to integrate more closely with the US economy. The third was the strengthening of Canadian ownership, protection of Canadian culture and diversification of Canada’s trade abroad. The report also noted that the US would become “an even tougher bargaining partner than in the past” as it addressed its own economic problems.
As it had done in the 1930s, Canada would look to trade diversification as a means of reducing its vulnerability to US policies and pressures. In the 1970s, this meant turning toward Europe and Japan. France, one potential partner, had its own view of the Third Option. Although the two countries had much in common, the French recorded in their briefing books and memorandums that Canada still lacked an industrial strategy and was overly preoccupied with the main-mise, or stranglehold, of foreign powers. Canada needed to be more open with trade deals, to lower tariff barriers and to regulate investments.
For a short time, the Canadian government did try to monitor and limit foreign investment coming into the country. But the Foreign Investment Review Agency, created to screen these takeovers, was quickly accused of having no teeth. Today it is studied as the interesting quirk of the 1970s that it was, because US investment was already on the decline even before it was monitored. But these sorts of agencies are seeing a renaissance in Europe today.
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Meanwhile, Canada has completely reversed its stance. Foreign direct investment in Canada hit a seven-year low of $34 billion in 2017. And so, early in 2018, Minister of International Trade François-Philippe Champagne announced the official launch of the new Invest in Canada hub. The Liberal government has earmarked $218 million over five years to provide concierge-like services for investors navigating the ins and outs of the Canadian financial landscape. The purpose of this new government agency is to bring money into the country. It is also the clearest example of the Trudeau government’s efforts to make Canada less dependent on the United States.
Free trade and globalization
Credit for the Canada-US and North American free trade agreements is often given to the Conservatives, but their intellectual foundations actually originated with a Liberal government. Pierre Trudeau set up the Royal Commission on the Economic Union and Development Prospects for Canada, known as the Macdonald Commission. It was the largest in Canadian history and included representatives from diverse regions and language groups in Canadian society, from all three national political parties and from labour, business, academia and the public service.
The Macdonald Commission’s report was a creative document that analyzed all aspects of what free trade with the US could possibly entail. The commission saw free trade as giving Canadian businesses the economies of scale needed to be more competitive; encouraging the processing of natural resources in Canada; bringing an end to the threat of US protectionism; and leading to a permanent exemption from any US trade remedy actions. (Such an exemption was never achieved.)
For Canada, a small open economy, the international environment is a given. And much in this economy is unchanged since the end of the Second World War: natural resource exports are prominent; foreign capital, technology and labour contribute significantly to growth; and the US remains the dominant influence. Canadians also tend to see government as a more positive force in the economy, hence the willingness to use public policy tools — like Crown corporations — to develop the economy and industry to meet broader Canadian needs. Evidence of this view of government can be seen in the development of Canada’s national bank in the 1930s, the economic nationalist policies of the 1970s that aimed to buy back Canada from foreign multinationals and, most recently, in the buyout of the Kinder Morgan Trans Mountain pipeline. These were also periods of intense American protectionism, when Canada had to look for market options beyond the neighbour to our south.
The language barriers and time zones that proved problematic in the past are less significant in today’s globalized world, but the issue of trust, or rather distrust, is ever present. The Canadian government had been hoping that the numbers on Canada-US trade would speak for themselves, but Trump’s admission in mid-March that he does not know the facts of the relationship only confirms that the fiction of the American view of Canadians as villains is more important than the truth. Revelations like this one highlight the destruction of trust among countries that have long been close trade allies of the US.
The American administration claims Canada is treating the US unfairly and taking advantage of bad deals negotiated by previous administrations. The Nixon administration (the Auto Pact) and the Trump administration (NAFTA) are interchangeable here. The silver lining is that the next president could easily undo any tariffs with the stroke of a pen. However, repairing the image and reputation of the US as a reliable negotiating partner will be harder.
The world’s economies are far more interdependent now than they were during the Great Depression. If, as the American President has proposed, all world leaders begin following a my-country-first trade policy, the impacts could be disastrous. The idea that such a policy could succeed is based on the false premise that a country can separate its foreign and domestic policies. This is simply not the case for Canada: the domestic is the international, and the international is the domestic.
History has also taught Canada that reciprocity works. Canada has secured preferential access to both the European Union — through the Comprehensive Economic and Trade Agreement — and the markets of the 11 signatories of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. American trade policy and the decision to withdraw from the latter deal have created a window of time when Canada’s businesses have better access to these major markets than their American competitors. Canada should take this opportunity to consolidate these gains and advantages while they exist, and to capitalize on its reputation as an attractive site for investment for US companies that are looking for alternative routes of access to these massive markets. That means streamlining the investment review processes and Canada’s competition policies.
In the past, when faced with American protectionism and an American government unwilling to make concessions, the Canadian government has looked for other options. Now, as we confront these obstacles again as well as an unpredictable leader, there are certainly dangers for Canada, but there is also an opportunity for the government to rethink some widely held beliefs and push for more innovative policies. What are we protecting? Historically, tariffs were meant to protect manufacturers. But who are the manufacturers of the future? The next generation of competitors will have an entirely different set of materials to work with, many of which may be intangible and borderless. And while the Canadian economy today might be less dependent on the United States, the focus of our bureaucracy and elected leaders right now is squarely on revising NAFTA; they have no time or attention for anything else.
The Canadian government recently called for comments on potential countermeasures to the imposition of US tariffs on imports of Canadian steel and aluminum products. Maybe this consultation should be broadened. Maybe we need a Macdonald Commission for the 21st century, because questions about the country’s economic performance are nothing new, but the strategy might need to change.
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