Free Trade Between The U.S. And Canada Essay, Research Paper

Free Trade between the United States and Canada

A Historical Standpoint

Free trade between the United States and Canada has existed for many years. The earliest evidence of trade between Canada and the United States can be seen in the Reciprocity Treaty of 1854. Negotiations for the Reciprocity Treaty took 8 years, and the Canadian government found it difficult to arouse much interest from the United States. Canada s persistence finally paid off, and a limited free trade agreement was formed under the Elgin-Marcy Treaty of 1854.

The goods included under the Reciprocity Treaty were mainly natural products including meat and dairy, fish, ores and minerals, forest products, and sundry agricultural goods. Manufactured products (with the exception of dyestuffs and rags) were largely excluded due t the importance of tariffs on manufactures for government revenues.

Trade flourished under the Reciprocity Treaty, although there were many complaints from both sides about violations of the treaty. The period 1854-66 coincided with an economic boom in Canada, which was probably due more to a natural upturn in the business cycle than to effects of the Reciprocity Treaty. In 1866 the United States unilaterally annulled the treaty largely because of ill feeling generated towards Canada during the Civil War.

Attempts were again made by the government of Canada in 1869,1871, and 1874 to negotiate a new trade agreement. These efforts were widely supported in Canada, but there was little interest on the part of the United States, particularly congress who perceived Canadian initiatives as being inconsistent with the protectionist principle that under lay United States tariff legislation.

Five years later, a new government under Sir John A. MacDonald brought in the National Policy of 1879 on an appeal to nationalism and protectionism. This policy of high tariffs was intended to promote manufacturing in Canada, and it was a conscious reaction to the U.S rejection to efforts at free trade. MacDonald argued that it was only by restricting American trade that the U.S would be induced to accept reciprocity with Canada. MacDonald felt that U.S would see the advantages to trading with Canada if they were cut out of Canada s markets.

Free trade again emerged in the Canadian election of 1911. On a U.S initiative, a reciprocity agreement had been negotiated by the Laurier government, and it became the principal issue in the subsequent election. Manufacturing and financial interests again took strong exemption to this plan, and became excessively active in the electoral campaign. The anti-reciprocity forces made blatant appeals to Canadian nationalism and by extension anti-Americanism. These appeals received widespread support and Laurier lost the election to Borden of the Conservatives. This loss was widely regarded as a defeat for reciprocity and closer relations with the United States.

The Canadian government again made efforts at the ministerial level in 1922 and 1923 to interest the United States in trade negotiations. These efforts were not accepted, as the U.S was moving towards a more protectionist policy. In the 1920 s and 30 s little action was taken except that in 1935 and 1938 Canada and the U.S concluded two bilateral agreements pursuant to the Reciprocal Trade Agreements Act of 1934. These agreements were not reciprocity agreements in the earlier sense; nevertheless, they constituted the first commercial agreement between the two countries since the 1854 Reciprocity Agreement.

Finally in 1947-48, on the initiative of the U.S government, Prime Minister Mackenzie King authorized a secret negotiation, which lasted several months, to draw up a comprehensive free trade agreement. In the end, because of uncertainties in the approval process in the United States, King formally decided not to proceed, and talks were broken off.

One of the early fruits of Canadian-American cooperation was the successful conclusion of the General Agreement on Tariffs and Trade (GATT) in Geneva in 1947. In effect, the GATT became Canada’s trade agreement with the United States and Britain as well as with the rest of the world. After a slow start, the GATT succeeded in providing a regime consonant with the new business practices and governmental policies developed over the previous 20 years. The GATT allowed national firms in industrialized countries to take greater advantage of their economies of scale by finding foreign markets for their products, either directly or on the basis of foreign direct investment. The combined effect of advances in transportation, communications, and the reduction in trade barriers made it possible for companies to compete for much wider markets, face much stronger competition in the home market, and become increasingly specialized. The result was unprecedented expansion in global production, trade, investment, and prosperity. Increased international trade and competition in turn accelerated globalization or harmonization of consumer tastes and demand, setting the stage for further internationalization of the economy. Canada’s new multilateral trade policy rapidly became the mainstay of government policy and enjoyed remarkable success.

In the quarter century from the founding of the GATT to the first oil shock (1948-1973), the real value of world trade expanded by a factor of six, while world income quadrupled and population doubled. Canadian trade grew by a factor of seven, GNP by a factor of five, and population doubled. While exports remained largely resource-based, the domestic economy diversified, and more and more goods were exported at higher stages of processing. A wide array of imports enriched the lives of all Canadians. It appeared that Canadian trade policy was finally paying the kind of dividends that had long been sought.

Not surprisingly, there was not always a congruence of interests between Canada and its increasingly important trading partner, the United States. Canada maintained protection that harmed US export interests while the US took measures that harmed Canadian interests. Canadians found US protectionism particularly galling in the face of the overwhelming economic superiority enjoyed by the United States.

By this time, opinion in Canada was beginning to question the wisdom of such close ties to the American economy. As if to prove the critics’ case, President Nixon and his Treasury Secretary, John Connally, brought the special relationship to a crashing halt in 1971. Faced by a mounting drain of dollars caused by the Vietnam War and US overseas investment, as well as US responsibility as the reserve currency under the fixed-exchange regime of the International Monetary Fund, Nixon took dramatic action that effectively altered the postwar consensus on monetary cooperation. The various measures, including a ten percent import surcharge, hit Canada hard. Canadian officials trooped to Washington to explain that Canada should be exempted from the measures only to learn that they were considered a major part of the problem. There would be no exemptions and Canada would have to make its own adjustments. In case the point had been missed, President Nixon told the House of Commons the following year that he respected “Canada’s right to chart its own course” – the United States would follow its own course and respect Canada’s right to do the same. There would be no more special relationship. Canada’s ability to use quiet diplomacy to advance its trade interests had in part reflected the fact that during the first three decades after the Second World War, trade was much less important to the United States than to Canada. With few exceptions, American firms manufactured goods and produced services for American consumers, and American consumers relied almost exclusively on American goods and services.

By the early 1970s, Canadian vulnerability to US actions had become acute, particularly as the long US economic lead over its trading partners began to erode and US firms learned that they would have to compete with foreign suppliers not only abroad, but also at home. Many were convinced that foreigners could only beat them on the basis of some unfair advantage, and Congress agreed by strengthening the US unfair trade laws. The payments crisis that led to the Nixon measures of August 1971 may have been caused in large part by the outflow of US investment as well as the cost of the Vietnam War, rather than by the inflow of imports or the paucity of US exports, but American producers found it easier to blame foreign trade policies and practices. Congress agreed.

Soon after the crisis of the punitive Nixon trade and monetary measures, Canadian officials had to deal with Britain’s decision to abandon the Commonwealth and join the new and exclusive European club. The increasingly urgent demands of developing countries further intruded into the cozy world of postwar multilateral institutions. The dominance of the United States, the EC, and Japan during the Tokyo Round of GATT negotiations (1973-79), the seventh and, at the time, most complex, and longest of the postwar multilateral trade negotiating conferences, and their rejection of Canadian negotiating objectives, further suggested just how marginal a player Canada had become in the multilateral world. By this time GATT was seen by Canadian business leaders and politicians alike as a bogeyman preventing actions they saw to be in the national interest rather than as the best means for achieving Canadian goals. For years, Canada’s trade policy had been synonymous with its industrial policy, but in the 1970s nationalist experiments such as the Foreign Investment Review Act (FIRA) and the National Energy Program (NEP) accentuated the growing gulf between those who preferred an more interventionist industrial policy and the trade policy professionals who continued to advocate a liberalixing trade policy. Strengthening the Canadian economy was unexceptionable. More controversial, but widely accepted, were various policy measures aimed at “Canadianizing” the economy by reducing Canadian reliance on US investment capital and ensuring that new, particularly US, investments would be of “net benefit to Canada.”

Not as controversial but wholly ineffective was the effort to diversify Canadian trade relations. The 1976 agreements with the EC and Japan represented political commitments, but were never backed up by policy measures with any clout. Little Canadian trade and investment was in fact diversified.

Because trade with the United States continued to expand, issues and irritants in the relationship also grew. US officials could appreciate Canadian anxieties about over-dependence on the US market, but they did not appreciate some of the policy measures chosen, whether in the realm of investment (FIRA), energy (the NEP), or culture (various measures to increase Canadian content in publishing and broadcasting). All were considered confiscatory and discriminatory. The net result was a deterioration in Canada-US relations.

While the 1971 Nixon measures may have symbolized the end of the special relationship, the handwriting had long been on the wall. Even if Canada had remained the most constant of US allies, prepared to give Americans the benefit of the doubt in return for which Canada could count on its friends to defend its interests, its friends could no longer deliver what Canada needed. During its heyday, Canada did not expect to win all its battles in Washington, but it had won enough of them in the more than 35 years since the two countries had entered into a reciprocal trade agreement to make the special relationship into a central canon for the conduct of bilateral relations. By the end of the 1970s it was clear there would be no return. Other means would have to be developed to ensure that Canada could defend its interests in the US capital. It took a few years, however, for the full implications of these developments.

The decision to negotiate a bilateral free-trade agreement

By the early 1980s, Canada’s economic dependence on the United States had reached new heights, while rules and institutions to underpin that degree of dependence had not kept pace. Efforts to launch a new round of multilateral negotiations at a ministerial meeting of GATT in 1982 proved premature, leaving Canada in what was perceived to be an increasingly intolerable situation: heavily dependent on a single market but without sufficiently free and secure access to that market to make investment on the basis of a North American economy feasible.

The early 1980s proved a difficult time within Canada’s trade bureaucracy. While some Canadians advocated an interventionist and protectionist industrial policy, others had begun to consider once again the benefits of a comprehensive reciprocity agreement with the United States. Public debate focused on the economic, cultural, and political dimensions of competing views of Canada and finally forced first an internal and finally a national debate. Officials were forced to address the insistent demands of outsiders, whether bilateralists or nationalists, and, more fundamentally, to respond to the politicians and their immediate advisors.

It was not an easy task. Free trade had proven one of the most divisive issues in the history of Canadian politics. At least two elections had been fought on the issue, in 1891 and 1911, and the supporters of free trade had lost both. It was not surprising therefore, that the origins of the decision to negotiate with the United States in the mid-1980s lay more in professional than in partisan considerations. After tremendous deliberation, Prime Minister Brian Mulroney and his ministers were prepared to accept the advice of officials and of other influential voices that free trade and better relations with the United States were not unrelated. The result was the negotiation of a free-trade agreement with the United States, which generations earlier had been the goal of both Liberal and Conservative politicians but which had been quietly buried as an unattainable and unnecessary goal.

Negotiating free trade

The negotiations were the most public and controversial trade negotiations in Canadian history. For three years, they dominated the public agenda. Experienced observers of the national political scene regularly concluded that the negotiations would be drowned in a sea of controversy, abandoned by a government that could only take so much.

The actual negotiations and the resulting agreement were in many ways only incidental to the debate in Canada. At stake were different views of Canada and of the role of government in society. The debate was about fundamental values and perceptions. In such a debate, it is no wonder that the facts of the matter and sober analysis were often pushed aside to make room for passion and rhetoric.

In the United States, the negotiations hardly caused a ripple. Outside of a few politicians, lobbyists, and officials in Washington and a specialized academic and business audience in the northern tier of the country, no one was aware that the United States had any pressing interests in Canada or was pursuing a precedent-setting international agreement. For most Americans, Canada is really not a foreign country, and commerce between the two countries is perceived to be little different from trade between Michigan and Ohio.

As the negotiations hovered between indifference and neglect, many experienced US observers concluded that important as the negotiations might be, there was not enough American support behind them to bring them to a successful conclusion.

The pundits and pessimists in both countries, however, were proved wrong. The Canadian government stuck to its guns and determined that it had to have an agreement. Also surprisingly, both the US administration and the Congress demonstrated that they were prepared to come to terms with the hard issues and to look forward rather than backward. In a dramatic series of events during the fall of 1987, political leaders from both sides hammered out a satisfactory package that had until then eluded the professional negotiators. The result, however, was acceptance of the Free Trade Agreement in both countries, and its implementation on January 1, 1989.