History is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present, and the only history that is worth a tinker’s damn is the history we make today.
Henry Ford, as quoted in the Chicago Tribune, 1916
Fortune-telling has never been held in high repute in the community; and it is as hazardous when carried out under the most respectable auspices as when practised in a back street and in a manner liable to attract the attention of the police.
Gordon Royal Commission, 1957
If history is bunk and forecasting is a mug’s game, what are we to make of this assignment: to celebrate 25 years of Policy Options by looking back at the past 25 years of Canadian trade and economic policy and anticipating the next 25? If truth be told, of course, Henry Ford did make some pretty important history and the Gordon Commission’s forecast of Canada’s next quarter-century of economic devel- opment turned out to be remarkably perceptive. But fore- warned is forearmed as we look at the past 25 years of Canadian trade and economic performance and appreciate the extent to which policy mattered. With that experience to fortify us, we can bravely sketch how policy ”” good, bad or indifferent ”” can make a difference over the next 25 years.
In 1957, the Gordon Commission forecast that Canadians needed to be wary of creating too many competing claims on their tax dollars. Commissioners were confi- dent that Canada’s economic development would create sufficient wealth to allow governments to do more to make Canada not only a more prosperous country, but also a fair- er country. They went on to warn, however, that
at any one time we may have to decide that some [claims] are beyond our present means and have to be deferred. For if they were accepted indiscriminately and all superimposed on the normal operations of the econo- my, the result might well be an inflation that would bear cruelly on some groups in the community and that would price us out of some of the world markets in which we must compete. If that were to happen, we might wake up to find that our prodigality had cost us dear.
In 1980, the year Policy Options began publication, Canadians were in the throes of learning just how pre- scient the Gordon Commission’s warning had been. The fed- eral governments led by Lester Pearson and Pierre Trudeau, as well as most of the provincial governments of the 1960s and 1970s, had taken Canadians on a breathtaking ride, promis- ing the moon, convinced not only that we could afford it, but that we would be remiss in our duty to ourselves if we did not go for it. Government’s role in society had grown at a dizzy- ing pace, as had the resources required to pay for these excit- ing new policies and programs. Rather than raise taxes commensurate with the new levels of spending, Canada’s governors had used their credit cards, confident that the economy would eventually outgrow the mounting debt. By the time Pierre Elliott Trudeau took his walk in the snow in February 1984, the federal gov- ernment was borrowing one-third of its annual fiscal requirements and the fed- eral debt had increased by 1,100 per- cent from the time he took office to the time he left it. The provincial govern- ments were not far behind.
Canadians were not alone in their profligacy. Throu-ghout the OECD, governments from the 1950s through the early 1980s were committed to what had become known as the Keynesian Consensus: an obligation on govern- ments to manage the economy, largely by assuming a larger and larger role and creating more and more demand. The part about counter-cyclical fiscal man- agement ”” expanding during bad times and retrenching during good times ”” had long been sacrificed on the altar of political expediency. The result was an ever-expanding state, growing govern- ment debt, rising inflation, and increas- ing unemployment. By the early 1980s, double-digit inflation was rampant throughout the OECD area and 1981-82 marked the worst recession since the Great Depression of the 1930s.
On the trade front, the Pearson- Trudeau era witnessed a determined effort to make Canada a global trader with a strong home-grown industrial base. The way there lay through a thicket of government policies and programs coaxing and coaching Canadians to make it happen. The forces of geographic proximity and market familiarity, however, frustrated all efforts to supplant the US market and the resource base of the economy. Between 1963 and 1984, the postwar pattern of growing reliance on the United States as our principal trading partner continued unabated; contrac- tual links with Europe, broader and deeper relations with Japan, and over- tures toward the third world mesmer- ized ministers and officials alike but made not an iota of difference in the behaviour of Canadians as either pro- ducers or consumers. Similarly, a suc- cession of industrial and regional development policies consumed much government energy and many dollars without in any way altering the funda- mental structure of the economy.
Not surprisingly, the political screw turned, ushered in by the election of Margaret Thatcher in Britain and Ronald Reagan in the United States. Trudeau and his immediate successor, John Turner, in classic Liberal fashion, tried to catch the new wave themselves and become market-oriented fiscal conserva- tives, but Canadians rejected this deathbed conversion, and in September 1984 they handed Brian Mulroney and the Progressive Conservatives the largest electoral mandate in Canadian history. They would have the unenviable task of telling Canadians that the cook- ie jar was empty.
Mulroney and his ministers were not alone in their assessment that the policies of the 1960s and 1970s were not sus- tainable. Senior officials in both the Finance Department and External Affairs had concluded that the time had come for some serious rethinking of Canadian economic and foreign policy priorities. Both groups produced major think pieces to help the government work its way through the options. The first became the basis for Finance Minister Michael Wilson’s November 1984 economic policy statement, A New Direction for Canada; the second, How to Secure and Enhance Access to Markets, prepared the ground for the government’s September 1985 decision to sue for free trade with the United States. Both changes in direc- tion echoed the new tenor of society, well-captured by the research, hearings, analysis, and recommendations of the Royal Commission on the Economic Union and Development Prospects for Canada chaired by Donald Macdonald. Many of the Macdonald Commission’s ideas and recommendations soon found their way into the toolkit of a government ready to accept the need for a more market-oriented approach to solving society’s problems.
Over the next decade, the federal government systematically put these more economically sustainable ideas into practice. Free trade with the United States (the FTA) may have been the most controversial and publicly debated aspect of the government’s agenda, but its impact would not have been as positive if it had not been for a series of complementary policies, from regulatory reform to privatization and from the GST to monetary policy. All followed a common theme: the need to trim the role of government in soci- ety, enhance the role of markets, and reward individual initiative.
The extent to which Mulroney had confirmed in the policy preferences of his Liberal successor, Jean Chrétien. There was brief concern in 1993 that the change in government might lead to a change in the basic orientation of policy. After all, the Liberals had cam- paigned vigorously against the FTA dur- ing the 1988 election, had been critical of the North American Free Trade Agreement (NAFTA) negotiations, and were uncomfortable with other aspects of what Sylvia Ostry has called ”œRonald Thatcherism.” In the event, despite an early flurry of words, Chrétien and his colleagues concluded that the changes effected by Mulroney should not be undone. Indeed, Chrétien embraced the changes and, for example, pushed the free-trade revolution even fur- ther over the next decade, negotiating free-trade agree- ments with Israel, Jordan, Chile, Costa Rica, and Central America, and announcing a willingness to negotiate with any partner similarly inclined. Market economics had clearly become the default position. Brian Mulroney had successful- ly effected a revolution in Canadian thinking about the economy and the extent to which it should be shaped by market forces and internation- ally agreed rules.
The new paradigm was also evident in Chrétien’s determi- nation to address the one eco- nomic goal that had eluded Mulroney: a balanced budget. Mulroney’s two ministers of finance, Michael Wilson and Don Mazankowski, had succeeded in reduc- ing growth in federal spending and had brought the federal budget into operational balance, but they had failed to stem the annual increase in the federal debt. As Andrew Coyne has noted, every dollar added to the federal debt during the Mulroney years reflected interest on Trudeau-created debt, interest that was considerably more than anticipated because of Trudeau-induced high interest rates. Chrétien and his finance minister, Paul Martin, succeeded, however, where Mulroney had not. Starting with the 1995 budget, they began a single-minded effort to trim spending and by 2000 had brought in the first of a continuing series of budgetary sur- pluses, some of which were devoted to paying down some of the debt created in the 1960s and 1970s. Additionally, the magic of compound economic growth began to gradually whittle away at the national debt as a share of GDP. In less than a decade, the federal debt shrank from 70 percent to 40 per- cent of GDP.
The federal government’s efforts were replicated to some extent at the provincial level, partly due to the pres- sures created by reduced federal trans- fer payments and partially by voter preference for leaner governments. Ontario’s brief flirtation with an NDP government in the 1990s, for example, led to the two-term government of Mike Harris and the Conservatives. Ralph Klein in Alberta demonstrated to his provincial colleagues that good fiscal management could be both good policy and good politics.
The impact of this turn toward more sustainable economic policies was evident throughout the 1990s and into the early years of the 21st century. In its December 2004 annual review of Canadian economic performance, the International Monetary Fund conclud- ed that ”œCanada’s recent macroeco- nomic performance has been enviable and has reflected the benefits of sound institutions and a strong policy framework. … Canada has been the fastest growing G7 economy since 1997.” Canada may not lack for economic problems to solve, from lagging pro- ductivity growth to the remaining holdovers of past adventures in demand management, and from crum- bling infrastructure to a dysfunctional medicare system, but the fiscal and policy framework within which to address these issues remains funda- mentally sound.
On the trade front, the past 25 years saw Canada evolve from a trading nation into a nation of traders. In 1980, Canadian trade was still very much resource-based and focused on a limited number of products and customers from a small number of suppliers. Total trade in goods and services added up to 188 billion current dollars, representing close to 60 percent of GDP. Stimulated by the FTA, trade grew prodigiously and became much more diversified in terms of products, customers and suppliers, even if much of it was concentrated within North America. By 2000, total trade reached a new high of over $900 billion or 90 percent of GDP, declining somewhat since then as domestic growth outpaced growth in export mar- kets. Two-way Canada-US bilateral trade in goods and services represented about two-thirds of the total or 40 percent of Canadian GDP in 1980. Two decades later, that figure had nearly doubled to reach $700 billion annually, represent- ing three-quarters of total trade and 70 percent of GDP. Two-way flows of for- eign direct investment (FDI) similarly reached new highs: in the early 1980s, the value of annual two-way flows aver- aged under $10 billion; by 2000, they had reached $340 billion, and reflected a much greater balance between US- and Canadian-origin flows.
While the IMF may not have mentioned cross-border integration as an important part of the sustainable framework underpinning Canada’s economic performance, we believe it to be the second critical element. Over the past two decades, Canada and the United States, while nominal- ly committed to no more than a free-trade area, have in reality seen the development of two deeply interconnected economies. The artificial east-west lines of Cana- da’s post- Confederation economy have been replaced by the geographi- cally and economically more natural north-south contours evident today. Integrative trade and investment have replaced the old pattern of resources for manufacturers and services. Based on broadly shared goals and perspec- tives and common needs, the two gov- ernments have also developed a dense framework of formal and informal net- works and relationships that ensures a high degree of convergence in the design and implementation of a wide range of rules and regulations, further facilitating the growing range and extent of economic and other links between the two countries.
But just as the political screw turned in the 1980s, will it turn again toward a desire for more activist gov- ernment and less fiscal discipline, and for trade diversification and reduced reliance on the United States? The answer is more likely to be no than yes. Despite occasional calls for a return to the heady days of the 1960s, we believe governments will resist the temptation for two reasons. While elites may think differently, Canadians like the world created by the past 25 years of policy and carry no brief for a return to the past. One of the more important legacies of the past 25 years is the extent to which governments have willingly bound themselves inter- nationally against returning to the economic interventionism of the 1960s and 1970s through bilateral, regional and multilateral agreements.
Starting slowly but with increasing confidence and determination, gov- ernments have over the course of the past fifty or more years actively and enthusiastically divested themselves of many of the tools of industrial policy and similar interventionist economic policy and committed them- selves to market-oriented trade and economic policies through international trade and invest- ment agreements. They did so because they were convinced that such self-denying ordi- nances were in the long-term interests of their citizens and would discipline the natural but self-destructive impulse of dem- ocratic governments to curry short-term favour with their electorates through such pop- ulist measures as tariffs, import quotas, subsidies, regional devel- opment grants, supply manage- ment schemes, and various other kinds of home-country preferences. There remain fron- tiers to cross, but the direction of policy is now so well cemented into both domestic and interna- tional commitments that it is hard to envisage a fundamental change in direction.
One of the most basic rules underpinning modern trade and investment agreements is the rule of non-discrimination, a rule that is critical to letting markets work. Discrimination, on the other hand, is the essence of governance. Trade agreements have thus narrowed the scope for activist governance. The retreat of the state has altered the sta- tus of groups within countries and changed long-established power rela- tionships. Unions, disadvantaged regions, and protected economic sec- tors are all losing in varying degrees the power to influence policy, a direct consequence of their diminishing capacity to affect the lives of their con- stituents.
While we remain confident that the basic direction of policy is unlikely to change over the next 25 years, there is no shortage of critics with a different outlook. Trade agreements that discipline governments’ ability to discriminate are seen by some, for example, as a threat to the achievement of a host of policy goals. Dressed up as concerns about ”œsovereignty” or ”œnational identity,” they boil down to concerns about who governs, to what purpose, and with what toolkit.
Two groups of critics in particular will continue to compete for attention: the transformative and the anxious. The first group is relatively easy to understand. Theirs is a wholly different view of society. They are unhappy not only about trade agreements, but also about everything else that defines mod- ern life and governance. They are the voices of the statist, collectivist left who are working to transform the world into a New Jerusalem, whose watchwords are justice and compassion, and whose biggest worries are markets, corpora- tions, and individual freedom. The Internet and similar communication tools have given them an ability to make their numbers seem larger and to craft trans-border networks, but in the end, Canada’s politicians have got their measure about right: they don’t com- mand many votes. There are not enough of them to matter and most people, while perhaps sympathetic to some of their ideals, are not prepared to adopt the measures they advocate, knowing full well that in almost every instance, the cure will be considerably worse than the problem.
The anxious, on the other hand, are much more numerous and important, and the transfor- mative have learned to exploit them. The anxious reflect a wide range of concerns, most of which are manageable, but all of which can move public opinion in ways that may undermine government’s will to stay the course. The pace of economic change, for example, is much faster today and thus may dislo- cate more lives and do so more quickly and unexpectedly than in the past, even if in the end we are all much better off. Many of the concerns raised by these groups are genuine, if perhaps sometimes overwrought. There is a reason, for example, why govern- ments have approached trade liberaliza- tion as a progressive project; it provides the time and pace to address some of these anxieties. The move toward improving transparency and accounta- bility in trade negotiations and agree- ments is a further part of addressing these anxieties. Nevertheless, over the long run, we believe that sound eco- nomic management, properly explained, will continue to find favour with Canadians.
Well-functioning markets are profoundly democratic, and accelerating integration is a natural process flowing from the impact of the billions of discrete and seemingly unrelated decisions by individuals in their daily decisions about what to eat, wear, drive, read and otherwise spend their resources. Overwhelmingly, those choices in Canada and the United States favour North American products and suppliers. For those concerned about democratic deficits, there is nothing more democratic than the market, where Canadians and Americans vote every day and express their preferences. Canadians have demonstrated that they like Wal-Mart and do not mourn the demise, for example, of Eaton’s. They tell the poll- sters they are comfortable with inte- gration, and they prove it in their everyday market decisions.
Economic interventionism has become disciplined by international agreements and no longer appeals to the majority of Canadians, but the urge to meddle remains strong. Over the coming decades it is most likely to find its outlet in quality-of-life regulations rather than in efforts to effect econom- ic outcomes. Over the past 25 years, as government retreated from public enterprise and from regulating eco- nomic behaviour, it channeled more and more energy into other forms of regulation, from product safety to envi- ronmental protection, from the pro- motion of human rights to the encouragement of specific life styles. These new forms of regulation have their own economic consequences, but require different approaches to curb their excesses. Rather than agreeing internationally to eliminate such forms of intervention through negative pre- scriptions, governments are looking for ways to cooperate and agree to consen- sus standards and common approach- es. For Canada, such cooperative efforts will become increasingly focused on the United States.
For Canadians, asymmetry in power and resources has always been critical to seeking rules-based trade and steering clear of more flexi- ble, institution-based approaches. The GATT and the WTO at the multilater- al level, and the FTA and NAFTA at the regional level, were negotiated, in part, to offset Canada’s natural disad- vantage as a North American invest- ment location and to help reduce the disparity in power between Canada and the United States. They have worked to the mutual advantage of Canadians and Americans, but remain incomplete.
The strategic challenge facing the Canadian government is whether to help or hinder accelerating economic integra- tion. The first step in coming to grips with this challenge is to understand that the texture of bilateral relations as it affects the lives of Canadians is largely beyond the control of governments. While the geriatric left would express horror at any policy explicitly aimed at helping integration, there are no voices for active measures to hinder it. Who would support imposing barriers to the 200 million visits of a day or more that Canadians make to the United States each year, to the 45,000 trucks that cross the border every day, to the new bridge at Windsor that the president and the prime minister announced in December, to extending pre- clearance at Canadian airports? The default position is integra- tion, and the policy choices for the government are the most effective measures available to that end.
Against this background, there is a growing array of issues on the Canada-US front that point to the need to seek innovative solutions. The payoff will be as much social as economic. Well- conceived and implemented economic agreements provide a secure frame- work within which governments can tackle evolving priorities on more than the trade front. By strengthening their confidence in each other as economic partners, Canada and the United States will also add to their confidence in each other in addressing a range of other mutual concerns from terrorism to the interdiction of illegal drugs.
Reaping the full benefits of growing interdependence requires that Canada and the United States and, per- haps eventually, Mexico, address three fundamental challenges:
How to minimize the role of the physical border in conditioning trade and investment decisions, including the costs of compliance and the potential costs created by delays
How to limit the impact of regu- latory differences, again involv- ing costs of compliance; both intergovernmental agreements and the pressures of silent inte- gration have accelerated regula- tory convergence and narrowed differences, but they have nei- ther eliminated existing differ- ences nor discouraged new differences from emerging in regu- latory design, objectives, imple- mentation and compliance
How best to manage the relation- ship and strengthen institutional and procedural frameworks to iron out differences, reduce con- flict, and provide a more flexible basis for adapting to changing circumstances
Key to meeting this challenge is the development of appropriate institution- al mechanisms to resolve problems and promote dynamic rule-making and adaptation for the North American market. Historically, Canada and the United States have managed their com- plex relationship on an item-by-item basis. Great care has typically been taken by both countries to prevent the treatment of individual files in the rela- tionship from affecting the handling of other issues. This pragmatic manage- ment scheme may have served both countries well in the past, but is now out of date. Prior to September 11, 2001, bold initiatives to construct a new trade and economic relationship could be considered on their merits. Now it is evident that no initiative has any chance of acquiring traction in the United States unless it also addresses US preoccupations about security.
The relationship with the United States is the indispensable founda- tion of Canadian trade and foreign policy in all its dimensions. It is only with the Americans that Canadians have a relationship embracing virtual- ly the whole range of public policy, economic development, and human contact. The principal challenge for Canada is to manage the forces of silent integration drawing us ever clos- er to our giant neighbour and obtain maximum benefit from that integra- tion. A new accommodation with the United States is essential to releasing the necessary political energies to chart a new course for global foreign and commercial policy for Canada.
In 1985, The Macdonald Commis- sion recommended that ”œCanadian eco- nomic policies be developed increasingly in a global context. This process requires a fuller recognition of the long-term and structural changes evolving, particularly in the areas of trade, technology and the role of governments.” Canadians did well over the subsequent two decades in heeding that advice. Today, however, the challenge is slightly different. While not ignoring the global context, Canadians will do well over the next 25 years to come to grips with what it means to be part of a deeply integrated North Ameri- can economy. To this end, they need to work with their American neighbours to build the necessary institutional frame- work to profit from deepening and accel- erating integration.