Free Trade 2 Essay, Research Paper

Free Trade Agreement and Its Affect on Canadian Business

With the coming of the Free Trade Agreement (FTA) there have been very

serious implications for Canadian business and for that matter, Canada as a

whole. Many aspects of the previous economic climate have changed such as

the reduction or eliminatation of tariffs and the restrictions on subsidies

to name only a few. There has been much heated debate on the pros and cons

of this deal: whether Canada will prosper or become the 51st. American

state. This paper will not take this approach to the issue of whether or

not it is a wise agreement, but will look at what business can do to better

itself with the existing FTA.

If Canadian business is to survive and prosper in this radically

changed North American and Global atmosphere of easier trading, then it

must adapt. Some of the main areas that will have to be addressed is the

need for more productive and efficient operations, a new focus by business

on the new trading reality, and a change in policies by Government to

enable Canada to function better with the FTA.

The FTA stands to alter Canadian business which has grown rather

relaxed and inefficient behind walls of tarrifs. While these may have

initially spurred industry, they have after time encouraged complacency.

With these rapidly disappearing walls, business will have to become “lean

and mean” in order to compete in a very competitive global market. Looking

at the present state of affairs our status in research and development

(R&D), labour costs and expansion, there is much that must be done.

Compared to the other industrialized western nations we lag far behind in

nearly all areas.

Take for example R&D. In 1990 Canada spent approximately 2.1% on R&D.

Japan spent 5.6% and Germany 4.8% Even the US spend more at 3.1%. Given

these statistics, it will be very difficult for Canada to compete in any

form of new technology if all parties are on a level field with less

protective trade barriers. Another reason for a dire need for an increase

in efficiency is the trade relationship we are currently involved in. While

countries in say the EEC are in more or less the same economic power

bracket between Canada and the US, there is a major size difference. So if

we are to have any hope of competing with a power so large clearly we must

become more efficient even more so than other countries.

Another key aspect which business must deal with is that of becoming

better suited to dealing with the North American, and to a lesser extent,

other foreign markets rather than only to Canadian or even in some cases,

to provincial markets. Corporations which do so stand far better of to gainfrom the FTA than those that do not. It would be wise for the example of

Northern Telcom Ltd. to be followed. Where production and market presence

are global and not just Canadian. Unfortunately many companies are not

following this example and are still very much “Canadian” in their outlook.

According to a Toronto Management consulting firm – Ernst and Young 62% of

all Canadian manufacturers have no significant exports to the US. As Al

Lituka a Professor at York, says: “The FTA has gven a strong phsycological

impetus to thinking North American”. 1

One trend of becoming better oriented for new markets is that of

specialization. By taking a “niche” in the market and becoming very

profficiant in it has proven to be very successful, as has also been the

case with Northern Telecom Ltd. with its many hi- tech telecommunications

equipment. Another example, albiet one in Europe, is Aerospatible, a French

areospace firm. Through creating a superior product the Airbus commercial

passenger plane, they have been able to capture a large share of the market

even though France has never been considered a large power in production

before and lacks the manufactuing ability of the US or Germany.

Another trend is that of US and Canadian firms banding together. This

makes a great deal of sense since not only can they handle the North

American market in a more unified fashion, but they are stronger and thus

more able to compete with Japanese and EEC competitors. Many multi-national

corporations are following this continental incorporation to take advantage

of the realigned tarrifs. One such company is Procter and Gamble. Before

the FTA they had separate US and Canadian offices for marketing and

production which resulted in a considerable duplication of tasks. As their

director, David Elliot says: “We increasingly look at North American

business on a unitary basis.” 2 This method is beneficial for both

countries as with the rationalization of production efficiency is

increased.

Canadian business can do many of the things listed above such as become

more efficient but is not entirely up to the private sector to make a

successful adjustment to the FTA. Government is an integral part of any

major change and in the case of the FTA it is even more so.

Certain fields of the economy will be helped or hurt by the FTA. This

will also be the case among various businesses within certain fields.

depending on how well they can adapt. To aid this adaption the government

should by giving financial and other forms of assistance to businesses that

will have to change substantially to meet the new trade climate. This

should at least limit the need for costly programs such as unemployment

insurance if they cannot adapt successfully.

Another major aspect that the Government controls is that of thedollar. The value of the Canadian dollar will have an equal effect on small

business as the FTA will. Even small changes in the dollar can mean the

difference between success and failure. Says Carl Beigie: “If the dollar

continues to go up, it will wipe out any benefit from the deal.” 3

There are also numerous other government policies which must change to

better Canada’s standing in international trading. Some of only a few are

the retention of interprovincial trading barriers, shortages of skilled

workers and a mounting and excessive debt at both the provincial and

government levels. The defecit, in particular, is a very serious problem.

The many aspects of a high defecit will not be examined here, though. Its

impact on the FTA is that is that it keeps interest rates high which thus

greatly increases the cost of borrowing. Which is critical in that business

will have to borrow in order to change to become more efficient with the

FTA.

In summation, the FTA has provided Canada with access to a market of

over 250 million people at much kinder terms than before. How well this

market can be utilised depends on how well we can adapt to it by meeting

the conditions outlined here. As Jim Conrad, a Canadian economist says:

“What Canada really needs is a window of the world to leap out of”. 4 The

window has come and it is up to business and government to make this great

leap and allow Canada to reach its full potential.

Bibliography

Cameron, Duncan. The Free Trade Papers. James Lorimor & Company,

Publishers, Toronto, 1986

The Canada and US FTA (Complete Doccument), External affairs

Canada, Ottawa

Laxer, James. Leap of Faith: Free Rade and the Future of Canada.

Hurtig Publishers, Edmonton, 1986

The Case Against the Critics of Free Trade. John Miora. Finanical

Post, Feb. 8, 1986

Brave New World. Marc Tait. Maclean’s, Jan. 9, 1989

Firms going continental. Jennifer Sachsa. Globe and Mail, June

12, 1990

Roundtable: The Canada-US FTA. Fred Swift. Globe and Mail. August

1988

End Notes

1 Firms going continental. Jennifer Sachsa. Globe and Mail, June

12, 1990

2 Brave New World. Marc Tait. Maclean’s, Jan. 9, 1989

3 Firms going continental. Jenniger Sachsa. Globe and Mail, June

12, 1990

4 Roundtable: The Canada-US FTA. Fred Swift. Globe and Mail.

August 12, 1988

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