Posted by: Nathan M. | April 22, 2009

Canadian Protectionism

The Canadian economy has been based upon external trade for the entirety of its history, and this has made free trade and limitations on tariffs crucial for Canadian well-being.Because of this, Canada has always felt a strong need to protect its rights of trade with other nation-states’ economies. This need came to a head when Prime Minister Mulroney entered into negotiations with U.S. President H.W. Bush and Mexican President Carlos Salinas concerning a free-trade agreement that would encompass North America. Mulroney believed that free bilateral trade between America would provide significant benefits to the Canadian economy, such as specialization, a larger purchasing market, and larger investments. This essay shall endeavor to prove that free trade was vital for the maturing of the Canadian economy during Mulroney’s time, and free trade is still essential for the continued prosperity of Canadians, particularly during this time of economic recession which calls for cooperation between different nations. This is especially true in Canada because the Canadian nation has grown in a historical timeline that has largely been based upon the interaction of Canada and other nations.

Canadian growth has been heavily based on a strong intertwining of economies, primarily between Canada and Britain, and following this, Canada and America. The need for this interlacement of economies was established from the initial thrust of settlement from Europe to North America. The purpose of North American colonization was not for the purpose of establishing a new nation or country. Rather, the different European powers acted out of a self-interested drive to gain and accumulate a greater amount of wealth. This desire pushed the monarchs and governments in place within the European structure to expand into North America, out of a desire to extract the many resources that the land offered. These resources would then be transferred back to Europe, where the Europeans would benefit from the growth in access to wealth, particularly in competition with the other European nations. The Bristol Traders were particularly dedicated to the idea of using North America as an avenue for economic expansion as they were the ones who initially sponsored many of the initial exploration voyages, as well as some of the colonization of North America. They were businessmen who saw an opportunity for wealth. Through their and other economic bodies’ actions, a significant trade connection between North America and Europe came into development.[1]

The extraction of resources does not necessitate the colonization of the land that the resources are being acquired from, so what drove the French and the British to colonize North America? The answer to this question is important in understanding the development of Canada as a nation of exports. King Francis I of France, who was at war with Spain and Britain, understood that economic victory is just as important as militaristic victory. Because of this, Francis wanted to undercut British and Spanish economic profits that came from North America. To do this, Francis alleged that a claim to land was not legitimate unless actual settlement occurred. Following this declaration, the King of France instructed his explorers, including Cartier and Roberval, to establish colonies in North America as a means to establish indisputable claims on the land and resources.[2] These colonies were designed in a way that made them specifically beneficial to France. Resource extraction was their only platform for economic stability. As one historian put it, “their economies grew naturally, organically out of the very earth of the new world”.[3] The colonies were entirely based on extracting raw goods, and shipping these goods overseas to Europe, where they were manufactured. Because of this, the initial structures of the colonies in North America were designed and based upon an interlocking of trade between North America and France. Resources were sent to France to be manufactured, and then sent back to North America to be sold.

The transition from French control to British control in September 1759 came with significant shifts in the economic focus of the North American colonies. Britain was a large world power, and had control over colonies worldwide. This meant that the North American colonies became a part of a world-wide economic system through the emersion into the British Empire. Despite this, however, the main purpose that Britain had for the Canadian colonies was primarily the same that France had held for the colonies. This purpose placed Canada as an exporter in the market. The Canadian colonies were to continue their extraction of goods, particularly furs during this time, and refrain from any type of significant manufacturing. In this way, the Canadian economy became entirely based upon the economy and trade of Britain. For example, by the 1850’s, New Brunswick was exporting 400 000 tons of timber to Britain. Furthermore, in 1870, agricultural products, fish, lumber, and timber made up almost 85% of Canadian exports.[4] Through this method of economic interaction, Canada become more and more based on external forces for the continuation of the Canadian livelihood.

The Corn Laws that Britain had in place for the protection of the Canadian economy and Canadian access to British markets were repealed in 1846, as a result of growing political pressure from factory owners who wanted to be able to compete more effectively in world markets. This created a great deal of economic turmoil in Canada, as our economy was no longer able to simply base itself on the British economy. Canadian exports through the St. Lawrence initially dropped by one third of their value from 1845 to 1848.[5] Because of the overseas shipping expenses and greater market competition, Canadian colonies could no longer afford to sustain a British-based economy. Canada was in need of a replacement for the gap that Britain had left in the Canadian export-based economy. This economic collapse made the Canadian leaders more aware of the fact that the Canadian economy was inevitably interlocked with outside trade. The survival of the colonies in North America was dependent on the discovery of a new market that was accessible to Canadian exports. This led to the reciprocity treaty with America, which was the beginning of the significant Canadian trend of free trade agreements.

George Grant described Howe’s national development policies from 1945 to 1957 as proceeding from “the recognition of certain realities: that the Canadian economy was part of the total resources of North America; that Canada was an undeveloped frontier within that total, and the capital necessary for that development would come largely from the United States; that North America was committed to a capitalist structure in which the control of production would be in the hands of “private” corporations, while the government would only play a supervisory role”.[6] Although Grant disagreed with the logic that this reality presented, he still provided a valid insight into the actions taken by the Canadian government during this period. The Pearson administration understood that Canadian development was largely based upon an interaction of economies among various nations. This was one of the reasons why Pearson became one of the most active Prime Ministers in Canadian history. Pearson was actively involved in the formation of many different international bodies, many of which sustained a large focus on economic development and synchronization throughout the world.[7] This tendency towards involvement in international affairs remained a prominent drive for Canadian foreign policy throughout Canadian history, largely due to the need for Canadian accessibility to the outside world for exporters. This drive also created a tendency towards closer relations with America, particularly economically. The Canadian government recognized the fact that without strong connection to the American economy, Canada has no economic stability.

Canadian fears of economic instability in their relationship with America came to a head when the Hoover administration passed the Smoot Hawley Tariff on June 17, 1930. This act, which many believed exacerbated the great depression, hiked American tariffs to an all-time high, and created a policy of extreme protectionism in America.[8] This tariff caused a great deal of turmoil in Canadian export markets, because Canada was being attacked at their most vital vein of life through the attack on exports. This attack caused a reaction in Canadian politics that led Canadian economic thought to think more on the idea of protecting against protectionism. Because the Canadian economy was, and is so very reliant on other economies and external trade, it was and is absolutely vital for the Canadian government to resist protectionism in other nations, particularly those nations that are close trading partners with Canada, such as the United States. This led to the development of GATT (the General Agreement on Tariffs and Trade) which was created for the purpose of setting up some genuine boundaries and limitations on the extent that protectionism was permitted. The organization was created after the United States refused to cooperate in the creation of an international body that would regulate trade. Instead, GATT was created as a series of agreements which led to the deconstruction of various tariffs and limitations on trade. GATT, from its creation in 1947 until 1973, impacted over 357.4 billion dollars in world trade, taking large steps in diminishing protectionism in the world.[9] However, even with this movement towards the diminishment of protectionism, Canadian economic safety was not assured. America still had the ability to increase tariffs and take movements towards higher protectionism, and their history had shown that they would not hesitate in doing so. This issue became increasingly volatile as American export markets faced a surplus of imports. In response to this surplus, the American Government passed the American Omnibus Foreign Trade and Competitiveness Act in August 1988, which worked ” to enhance the competitiveness of American industry” through a series of limitations on foreign trade, and provisions for powers that the American government could exercise in the defence of American industry.[10] This act made it even more imperative that Canada find a way to protect their interests in trade between Canada and America. America had proven that they were still willing to take initiatives that would damage the Canadian economy, while possibly benefiting the American economy.

With the realization of the importance of free trade for Canadian well-being came a steady and, in many ways, inevitable movement towards an all-encompassing fair-trade agreement with the United States. Canada needed an agreement with the United States that would ensure that the U.S. could not and would not create a situation such as that of the Smoot-Hawley Tariff, where Canadian exporters had to struggle to find a market to import their goods to. This need began to penetrate the Canadian culture more and more, especially as the American media began to hold an increasing amount of sway on Canadian political culture. Canadians in general were becoming increasingly aware of their uneasy situation of balancing their relationship with America. There were two solutions to this problem, and both answers followed two different nationalist ideologies. The liberal solution, as expressed by Mitchell Sharp at the O.D. Skelton Memorial Lecture on February 7, 1995, is multilateralism, which is “a persistent strand of Canadian trade policy, although it was breached by entering into a free trade agreement with the United States. That is why we continue to participate in the GATT negotiations; that is why we support the formation of a world trade organization”.[11] This solution ensured that Canada would have economic stability by diversifying trade with nations other than America. In this way, Canada would not be entirely reliant to the tosses and turns of the elephant that is the American economy.

The other solution that has been offered has been promoted largely by the conservative party post-Diefenbaker, and places an emphasis on the relationship between America and Canada. This solution was implemented by Mulroney’s government. Mulroney believed that a close and workable relationship with America was an essential aspect of the sustaining of the Canadian economy. Likewise, the second solution advocates striving “for the best deal possible in its trade with the United States”, as historian Hector Mackenzie writes.[12] This second solution recognizes the interlacing that has occurred within the economies of America and Canada, and the need to sustain this connection between the two nations. Both solutions, however, are inherently linked to the notion that Canadian sustainability is built on the availability of external markets. As Norman Robertson said, “our stake in world trade and the peculiar degree of dependence of our industries on export markets have identified Canada’s real national interest with the revival and liberation of international trade”.[13]

The Free Trade Agreement established during Mulroney’s administration became one of the most controversial decisions made by the government of Canada. Mulroney had made his decision-American relations were more important than multilateral trade. The controversy arose because not everybody had come to this conclusion. There were many, George Grant included, who would resist the steady move towards American influence on Canadian economy. However, the attempt at pulling Canada from America would have had dire consequences on many Canadian businesses. In 1988, 18.5% of American imports were Canadian. Imports from America and Mexico made up 70.7% of Canadian imports, and 15.3% of Canadian GDP.[14]The American hold on the Canadian economy had become a force that could not be unravelled without a lot of money and a lot of elections lost. This developed occurred largely in spite of the fact that free trade between America and Canada was something that was largely viewed with disapproval among the Canadian public. As Michael Hart describes it, “conventional wisdom had held that free trade with the United States was a political graveyard”.[15] Mulroney, however, was experiencing increasing pressure to test the waters of free trade among the Canadian public. Action needed to be taken, that was for certain. The only question was what action was specifically necessary.

In the end, Free Trade was the decision that was the most obvious outcome for Canada. As Andrew Cohen tells us, “historically, the road to bigger and wealthier markets led to the United States”.[16] The Canadian economy, largely as a result of convenience, turned to the American economy for an external market, and continued down Cohen’s road with very little amount of hesitation or reservation.

The Canadian economy has continually grown following the Free Trade Agreement of 1988, and the consecutive North American Free Trade Agreement of 1992. Since the FTA, Canada has successfully negotiated Free Trade Agreements with Columbia, Peru, the European Block, Costa Rica, Chile, and Israel, and has negotiated 35 Foreign Investment Promotion and Protection agreements. There has been a 238.4% growth in export value since 1988 as of 2008, and the Canadian economy has remained as one of the most stable economies in the world. In fact, according to a recent World Economic Forum report, Canadian Banks are the best and most stable in the world.[17] This growth in Canadian economy has been sustainable because of Canada’s constant vigilance in preserving access to external markets.

Canada has needed to fight against a protectionist tendency in the world. The temptation of protectionism is not something that is in the past, it is still present and dangerous. In fact, the New York Times reported that despite a November G20 conference in Washington where the G20 nations vowed to act to help their economies, reject protectionism, and clean up the financial system among other things,17 members of the G20 adopted 47 protectionist measures, including the “buy American” clause in America’s newest stimulus package.[18] This shows how Canadian foreign policy can never relax in its protection of the Canadian economy, through the fight against protectionism in the word. As Norman Robertson said, “this country’s general national interest is, for better or worse, bound up with the prospects of freer international trade and that this paramount interest should outweigh special and local interests which may be deriving exceptional advantages from an uneconomical policy”.[19]

Canada, through a long historical process, has become inherently linked to the American economy. This link has caused a great deal of discussion on Canadian nationality and sovereignty as regards Canada’s relationship with America. However, regardless of whether Canadian sovereignty is in danger or not, it is very apparent that Canadian interests are inevitably tied to American when concerning the economy. Canada must ensure a persistent and stable connection to the American economy and trade in order to ensure Canadian continuity. This is the reason why Free Trade was essentially an inevitable result of a historical continuum, which gave rise to an emphasis on all of Canadian foreign policy on economic stability as it pertains to external trade. This is the reason why one of the most important focuses of Canadian economic foreign policy has been, and remains the policy of fighting against protectionism. This is, in essence, Canada’s version of protectionism for the economy-protectionism against protectionism. This fact is something that cannot be diminished or escaped from, because it is tied up in the very existence of Canada.

Notes


[1] W.L. Morton, The Kingdom of Canada (Toronto: McClelland and Stewart Limited, 1975), 10

[2] Ibid., 21

[3] Donald Creighton, The Empire of the St. Lawrence, (Toronto: MacMillan of Canada Limited, 1956), 8

[4] H. Edward English et al., Canada in a Wider Economic Community, (Toronto: University of Toronto Press, 1972), 12

[5] R. Douglas Francis et al., Origins: Canadian History to Confederation, (Toronto: Nelson Education Limited, 2009), 303

[6] George Grant, Lament for a Nation, (Canada: McGill-Queen’s University Press, 2007), 38

[7] Costas Melakopides, “Lester B. Pearson as Prime Minister, 1963-1968,” Pragmatic Idealism, (Canada: McGill-Queen’s University Press, 1998), 76-77

[8] Douglas A. Irwin and Randall S. Kroszner, “Log-Rolling and Economic Interests in the Passage of the Smoot-Hawley Tariff” Carnegie-Rochester Conference Series on Public Policy 45 (December 1996) 173-200.

[9] Douglas A. Irwin, “The GATT’s contribution to economic recovery in post-war Western Europe” Europe’s Postwar Recover, (USA: Cambridge University Press, 1995).

[10] Omnibus Trade and Competitiveness Act, (Washington: American Congress, 1988) Preamble

[11] Mitchell Sharp, “The Trading Revolution”, O.D. Skelton Memorial Lecture, (Calgary: Department of Foreign Affairs and International Trade, 1995)

[12] Andrew Cohen, While Canada Slept, (Toronto: McClelland & Stewart Ltd., 2004), 107.

[13] Ibid., 104

[14]Daniel Schwanen, Free Trade and Canada-15 Years Later, (Canada: Institute for Research on Public Policy, 2003)

[15] Michael Hart, “Free Trade and Brain Mulroney’s Economic Legacy”, Transforming the Nation-Canada and Brian Mulroney, (Montreal: McGill-Queen’s University Press, 2007), 63

[16] Andrew Cohen, While Canada Slept, (Toronto: McClelland & Stewart Ltd., 2004), 110

[17] Theresa Tedesco and John Turley-Ewart, “Canadian Banks: A better system”, FinancialPost.com (Canada: National Post, April 3, 2009),http://www.financialpost.com/story.html?id=1461341

[18] Mark Landler “Trade Barriers Rise as Slump Tightens Grip” www.nytimes.com (New York: New York Times, March 22, 2009)

[19] Andrew Cohen, 105

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