Free Trade and Protection: The U.S.- Canada Case

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FREE TRADE AND PROTECTION: THE U.S.-CANADA CASE

Few issues arouse so many mixed feelings of fervor and trepidation in Canada as the question of free trade between Canada and the United States. The fervor stems from the much touted argument of neoclassical economists, embraced by the current Conservative government of Canada, that a free-trade arrangement will produce substantial gains to Canada in real income and employment through unfettered access to the world's richest market. The trepidation comes from concern that free trade may undermine one of the central objectives that led to the establishment of Canada as a nation: to create and preserve a social and political culture different from that of the United States. Concern over cultural domination is nowhere more real than in Canada, given the facts that the United States accounts for about three quarters of Canadian trade, 90 percent of Canadians live within 200 miles of the U.S. border, and two thirds of Canadians speak the lingua franca of the United States, itself the greatest purveyor of market-oriented culture.

History since about the mid-nineteenth century bears eloquent witness to Canada's love-hate relationship with its neighbor to the south. The debate over free trade dates back to 1854 when Canada, after losing preferential treatment as a British colony following the abolition of the Corn Laws in 1846 in Britain, signed a reciprocity treaty with the United States. However, the treaty, entailing free trade in primary products, was short lived, being abrodated on American request in 1866.

A new era began in 1879 when a Conservative government under the leadership of John A. Macdonald adopted protectionist measures to promote and sustain an indigenous manufacturing sector. The struggle over trade policy, however, continued, and by the turn of the century a free-trade arrangement with the United States was concluded under the auspices of the Liberal Party. This in turn gave rise to an alliance between the capitalists of central Canada and the Conservatives which helped bring down both the free-trade deal and the Liberal government in 1911.

Washington's passage in 1930 of the notoriously protectionist Smoot-Hawley bill led to tariff wars between the United States and its trading partners. A truce, involving tariff reductions, was agreed to by the United States and Canada in 1935; and later, after the Second World War, another free-trade deal between the two countries was nearing completion during 1947-48. However, Canadian Prime Minister McKenzie King, after much pondering, shelved the agreement for fear of being labeled the first prime minister to sell out Canada's national interests.

Canadian policies since the 1960s reflect the growing contradictions of trying to live distinct from but in harmony with its giant neighbor. Through the Auto Pact of 1965, Canada and the United States moved to a sectoral free-trade deal in automobiles--a deal facilitated by the fact that in both countries this sector is dominated by the three big U.S. multinational auto companies. The forces of economic nationalism, however, did not take a back seat. Growing concern over foreign, especially American, ownership in Canada, led to the establishment in 1971 of the Canada Development Corporation to promote Canadian ownership; the Foreign Investment Review Agency in 1974 to control foreign investment; the national energy program in 1981 to promote Canadianization of the energy sector; and a host of policies, to be discussed later, to foster domestic "cultural industries.'

Since the Conservatives came to power in 1984, the pendulum has been swinging back to the other side. Many of the nationalistic policies have fallen into disfavor: most of the restrictions on foreign investment have been removed, and the national energy program has been abandoned. Above all, Conservative Prime Minister Mulroney has rekindled the debate over trade policy by embarking on negotations toward a comprehensive free-trade deal with the United States. …