External Conditions Of Canada Essay, Research Paper

The External Conditions of the Canadian Situation

Summary Statement; an Historical Perspective

The Late Nineteenth Century [in contrast, not necessarily in substance]

Canada had strong economic and political ties with Britain. Trade flowed

more east and west in association with Britain, than it had during the

Reciprocity Treaty Period, 1854-1866. Primary product exports, decreasingly

forest products, increasingly wheat, were the policy basis of expansion.

Porfolio capital flowed into Canada from Britain to build transcontinental

railways. In short, the expansion of industrialism around the globe, and

the force of the British Empire, developed and integrated Canada, with

primary product exports the leading element in expansion. To Sir Wilfrid

Laurier it seemed like the twentieth century belonged to Canada.

The Late Twentieth Century [in contrast, not necessarily in substance]

By 1990, the British Empire was irrelevant. Canada had strong economic and

diplomatic ties with the United States. The frontier of global industrial

expansion had moved from America to Asia, and to developing countries in

South America. This is not to say that the United States had fallen into

permanenet relative decline. The stagflation of the 1970s and 1980s

evaporated in the 1990s. With innovations in information technology

leading the advance, by 2000, the United States was enjoying one of the

longest expansions and increases in productivity in its history.

Canada’s primary product export industries were no longer forceful engines

of expansion, though they experienced continuing development. Canada was

a settled frontier, a permanent northern frontier. Compared to frontiers

in Information Technology, its resource frontier was a dead frontier.

Its finished goods exports exceeded its primary product

exports by two to one in value. The standard

of living in Canada was was falling in relation to other, more rapidly

advancing countries. In the 1990s, it fell absolutely, though by the

last two years of the decade it rose with the growth of GDP, which

reached an annual rate of 4% in the first quarter of 2000. The

relative decline in the demand for Canada’s resources, and the associated

decline in foreign investment and in the value of the Canadian dollar,

together will a heavy burden of taxes associated with both cyclical and

systemic fiscal problems, accounted for the decline in average real income

in the 1990s. Attempts to keep the economy expanding by seeking a niche in

external market for manufactured goods, and by upgrading producitivity in

the new telematic information economy, were successful only at the end of

the decade. The nineteen nineties were a time of incomplete adjustment

for Canada.

The Main Lines of Historical Development

Late Nineteenth and Early Twentieth Century Capital Flows.

Throughout the nineteenth century, and into the twentieth Canada had an

unfavourable Balance of Trade with the United States. It had a favourable

balance with Britain, but mostly it paid for its excess of imports from the

United States with capital imports from Britain — toward the end, mostly

to pay for the building of transcontinental railways. The flow of goods

from the United States, to Canada, to Britain, to the United States, was

matched by a flow of money the other way. There was a small, but growing

flow of capital from the United States to Canada, but that was equity,

rather than portfolio capital. There was no question of the value of the

Canadian dollar. The Gold Standard was in effect internationally, and

Canada’s currency was, by 1913, virtually a gold certificate.

This perfect beginning for the century – Canada growing quickly, immigrants

pouring in, capital pouring in – was about to change, but not, at first,

for the worst.

The Great Shift 1910-1930

The First World War hastened the economic reduction of Britain,

the decline of the British Empire, and the rise of the United States to

the position of the most industrialized and richest nation in the world.

The automobile and the aircraft replaced the railway, which began its

long decline into obsolescence. A new primary product frontier came to

the fore in Canada; really two frontiers, as mineral and forest products

exported to the United States rose in value in relation to wheat exports

to Britain.

The exhaustion of British capital, in part because of the war, and in part

because of her relative decline, caused Canadian interests to turn to

United States sources. Canada became indebted to the United States, and

as United States electrical, automobile, and pulp and paper and mining

interests moved north, more of the capital inflow came in the form of

equity. American capital replaced British capital to offset Canada’s

trade deficit with the United States. The international corporation and

“foreign ownership”, mostly American, rose to prominence in Canadian concerns.

Expansion on the Prairies came to an end. Two transcontinental railways

bankrupted and were bought out to form the one, government owned, Canadian

National Railway. Still, the advance of the consumer capital industries,

that is, of the innovation of durable consumer goods like radios,

automobiles, and vacuum cleaners, and new resource exports, particularly

of mining and pulp and paper exports, kept Canada afloat economically

until the global depression of the 1930s.

Depression and War

The depression of the 1930s was probably the end of the last upswing based

on investment in railways and of the first upswing based on investment in

paper, minerals, and consumer capital goods [cars, wash machines, radios,

and other electricity dependent production and consumption goods]. The

expansion of real GDP having outrun the expansion of the gold base of

of the monetary system, during this remarkable, double Kondratief recovery

and boom, a shortage of currency was given as one cause of the depression.

Accordingly, the Gold Standard was abandoned, globally. This was

accompanied by competitive devaluation of currencies and increasing

protectionism, as countries tried to export unemployment with so-called

“begger thy neighbour” policies.

Perhaps the severity of the depression was passing by 1939, but it was

the Second World War that brought a return to prosperity in North America.

It brought devastation to Europe and Japan.

After the War

Following the War there was a concerted effort, through the International

Monetary Fund, the World Bank, and the GATT,

to prevent the disorderly economic nationalism of the Nineteen Thirties.

But, more importantly, the Cold War set in. North America, having

emerged from the War industrially intact, found itself facing great demand

for its goods. The United States was wealthy enough to lend the

money needed to buy them. [This was the source of "Euro dollars"]

The U.S.’s consequent great expansion required

even more natural resources that its great expanse held. It developed

new sources in Canada, Latin America, and the Middle East. In this

however, the politics of the Cold War had as much influence as

merely economic concerns.

It has to be noted here that the GATT was successful in reducing tariffs

around the world, remarkably successful. By the time of the Canada-

United States Free Trade Agreement in the late 1980s, fully 80% of the

formal tariff barriers to trade between the two countries had been

removed. However, the reduction in tariffs was accompanied by

a global proliferation of non-tariff

barriers: quotas, voluntary export restraints, safety regulations

government procurment quotas, labour regulations, content regulations

subsidies and financial supports in the form of unemployment, housing

and social policies. Out of this “New Mercantilism” emerged the

United States – Canada Free Trade Agreement.

For Canada the period was marked by a resource boom, and an increase in

U.S. ownership of Canadian industry. Manufactured exports to the U.S.

increased, particularly by way of the 1950s “Auto Pact”, which generated

a common continental market in automobile production. In this period the

value of the Canadian dollar was controlled by the Balance of Payments

modified by the Bank of Canada’s ability to alter the money supply.

Under the pressures of the time it rose to $1.10 (U.S.) Canada became

the second richest country [measured by average standard of living] in the

world.

The effect of this, of course, was that Imperialism, Nationalism, and

Regionalism – the three corners of the 19th century Canadian Triangle – had

transmogrified into Continentalism, Nationalism, and Regionalism; with

Regionalism supported by Continentalism though differently from the way

that Nationalism had been supported by Imperialism in the late nineteenth

century.

Eventually Europe and Japan recovered. Europe began the process of forming

a single, continental European economy, and Britain chose to join. This

left Canada in a dilemna: to stay with Britain, or make common cause with

the United States in a North American Common Market. Recovery in Europe

and Japan brought an end to expansion in North America, and a recession

between 1957 and 1962. Thereafter North America expanded again on the

demand generated by industrial expansion in Europe, Asia, and other

rapidly developing countries.

The Relative Decline of North America

The United States, caught up in the cold War, and eventually the war

in Asia, fell behind Europe and Japan in economic growth and growth of

productivity. The excesses of currency expansion, as the world tested

fiat monetary systems, led to inflation, as did the inflationary financing

of the Vietnam War, and the United States response to the OPEC oil cartel.

[The source of "Petro Dollars"]

Then it was that the United States continuing deficit in international

trade, emerging from the advances of Europe and Japan, was funded by

capital imports as foreign interests purchased United States concerns. The

capital inflow was not enough to prevent the eventual devaluation of

the United States dollar, and the end of the so-called Breton Woods system

in which the United States dollar was used as the reserve currency of

the world, just as gold had been used under the Gold Standard.

[Yet another factor in the importance of Euro and Petro Dollars.]

The Canadian dollar fell with the American dollar. Indeed, as

United States investment leaned toward Asia, away from Canada, and Canada

inflated its currency supply [and its rate of inflation] beyond that of

the United States, and, finally, as the demand for Canadian primary

products levelled, the Canadian dollar began its long decline in relation

to the United States dollar. When the Canadian government moved to

have oil and gas production owned in Canada [indeed, nationalized in

Petro Canada, which was later privatized in the neoconservative

reduction of government activities in the 1990s], during

the OPEC oil crisis, the Canadian dollar took a precipitous fall, from

about 90 cents to about 80 cents, from which level it continued its slow

decline in relation to the United States dollar.

This was a bad time for North America. The whole world suffered from

inflation with Euro Dollars and Petro Dollars in abundance, but North

America suffered from stagflation. It stagnated in productivity growth.

It had inflation and unemployment. It also experienced obsolescence in

its “smoke stack industries”. Iron and steel, and automobiles

were better made in other countries with cheaper labour and more recent

technologies. It looked like the beginning of the end of American

superiority. There was talk of the deindustrialization of America,

but, America was not going to fade all at once. Indeed, it was going

to recover its position.

At this time, when globalization was replacing nationalization, just

as nationalization had replaced regionalization in the United States

in the nineteenth century. American national industries, under threat,

became protectionist. The Congress took back from the Executive some of

the initiative in legislation related to commerce. Countervailing and

retaliatory duties were placed on incoming goods. Canadian exports of

fish, meat products, iron and steel, and forest and agricultural products

were favourite targets. In these circumstances

Canada began to seek an agreement on trade, and, indeed, before the

1980s were out, a Free Trade Agreement was achieved. The most important

part of the FTA was a “disputes settlement mechanism” by which Canada hoped

to stop United States neo protectionism from piecemeal destruction of its

exports to that country. The subsequent North American Free Trade Agreement

seems to have been motivated more by an attempt to get a market as large

as possible, and to permit the exploitation of comparative advantages

throughout the continent: a matter of intercontinental competition,

North America, vs. Asia, vs. Europe.

Tarnished Golden and Silver Ages

In the 1990s Canada accepted its attachment to the North American Continent

and its need to find a different entry into world markets, particularly

a niche in the market for manufactured goods. Of course, a strong

vestigial reliance on primary products remained, particularly in Western

Canada. Atlantic Canada is a more complicated case. The west continued

to rely on exports of primary products to rapidly industrializaing

Asian countries. Despite its general acceptance of the new global

situation, Canada remained in recession with sluggish productivty gains

through the middle of the 1990s.

In 1996 the economy of North America seems to have bottomed out. In 1997

and 1998, employment grew, productivity grew, inflation remained low.

GDP grew at an acceptable 3% to 4%. The United States, perhaps because it

had accepted the readjustment process of downsizing, privatizing,

deregulation, and reduction in wages, more than Canada had, [but more

likely because Canada had a more sever adjustment to make, and had to cope

with internal political problems related to the structure of the

federation and its entanglement with a more fully developed social welfare

system]

experienced a fuller recovery than Canada. Neither had a full

blown Golden Age. It was more likely a Tarnished Golden Age for

the United States, and a Silver Age for Canada. The United States

continued to have a serious deficit in trade, financed by imports of

capital. That is, superiority in production of goods continued to slip

away. In the provision of certain computerized services, of course, the

United State retained its lead. Canada continued to have high unemployment

and slow growth in productivity until late in the 1990s, and it continued

to rely to a significant

extent on “commodity” exports, the prices of which continued to fall until

1999. Real living standards in Canada fell over the 1990s.

In 1997, the advance of Asia ended, temporarily, and a fairly deep

recession set in. From an historical perspective, there was nothing

unusual in this. The frontier of the expansion of industrialism had

always experienced a boom and bust cycle. What happed in Asia was

typical. There was over expansion as the investment process itself

generated profits for projects that would never produce a profit

once the investment was in place. Gross inefficiencies and corruption

once again characterized the boom period of capitalistic expansion.

This became particularly evident in Thailand. Investment stopped,

pulling down the value of the baht, the Thailand currency. This meant

that Thai debts could not be paid, and Thai markets collapsed

This affected sales and profits in Malaysia, where similar problems and

a similar process occurred. Indeed, the “contagion” spread to most of Asia

outside of China and India, to Russia, and it would have spread to

Brazil, and then to the United States [perhaps], if the United States

had not rapidly increased its money supply, and consequently lowered

the rate of interest to allow support for debts in Brazil. The problem

of trade imbalance in the United States worsened as the U.S.

dollar rose in response to international capital seeking a safe

haven from the troubles elsewhere. Profits fell

in United States industry, but only temporarily. The contagion was

contained, and expansion continued in American and, by 1999 the West

Pacific Rim was beginning to recover.

Canada, perhaps one should say British Columbia, with

greater reliance on Asian markets, and Alberta with reliance on world oil

prices [which have been sustained by poltical instability and an unstable

unstable cartel in the Middle East], has suffered more than the United

States. The United State’s Golden Age is more tarnished. Canada’s Silver

Age is also tarnished. We wait to see what happens when Asia recovers.

It has been suggested that we are in the upswing of a Kondratief long

cycle, based on biotechnology and the internet, thought not to peak until

2010. If so, so much the better, for now.

Late Twentieth Century Capital Flows

Canada now has a favourable balance of trade with the United States, and

and unfavourable balance with the rest of the world. The balance with

the United States easily outweighs the balance with the rest of the world.

Still, the value of the Canadian dollar continues to fall, as it has since

the nineteen seventies. Past foreign investment, particularly from the

United States, still has to be serviced, and profits flow out to foreign

owned companies. Net unfavourable monetary flows, including net outflowss

of investment (about $130 billion over the past decade) outweigh net

favourable commodity flows, making it difficult to hold the value

of the Canadian dollar. Falling

interest of foreign investors in Canadian industry, particularly with the

unreliability of recent reverses in the fall in “commodity” prices,

including oil prices, has kept the Canadian dollar under attack, even with

lower rate of inflation that that of the United States