Economic Integration in North America

Article excerpt

Canadians have gained enormous economic benefits from progress in freer global trade since the Second World War. In the face of obstacles to further progress in tearing down global trade barriers, however, more immediate gains might be reaped by freer trade within Canada and within North America. But even here there are difficult hurdles to overcome and costs that must be faced. The factors involved in closer North American economic integration are assessed. Speech to the 72 annual Couchiching Conference, August 7, 2003.

For more than 70 years now, the Couchiching Institute on Public Affairs has been bringing Canadians together with the purpose of asking some thought-provoking questions and encouraging lively, stimulating debates and actions on a variety of key public policy issues. For example, it was at Couchiching, 56 years ago, that the idea of creating a North Atlantic Treaty Organization was first floated publicly by Escott Reid, a senior official with the Canadian Department of External Affairs. NATO was established a year and half late, reflecting almost exactly the vision that Reid outlined in his speech at Couchiching.

I am delighted to have been invited to participate in this year's conference, the them of which is "Continentalism: what's in it for us?" True to form, here again is a topic that is thought-provoking and, some might say, provocative!

I'm not a politician; I'm an economist. So what I intend to do tonight is to lay down some parameters for an appropriate discussion of the issues relevant to greater economic integration in North America.

First, I would like to review the benefits and cost of economic integration. By economic integration, I mean the free movement of goods and services, capital, and labour and the harmonization of the rules governing the operations of these three key markets. I will briefly review the progress Canada has made on each of those fronts, and the benefits we have derived from opening up our markets to international competition and to the free flow of capital. Next I will talk about the remaining impediments to fuller economic integration. And finally, I will briefly discuss where we might go from here.

The economic benefits and costs

(i) Free trade

International trade in goods and services takes place because countries have different resource endowments and labour skills and because consumer tastes vary from country to country.

David Ricardo, a 19th-century British economist, argued that a country could gain from trade even with another country had an absolute advantage in producing all goods and services. He argued, rightly that by concentrating on producing those goods and services in which a country was relatively more efficient, and importing those products in which it was relatively less efficient, it could increase national income. And this would be so even if that country was absolutely less efficient in producing all products. This is the famous principle of comparative advantage. It is on this principle that economists base their view that barriers to trade reduce economic welfare in all countries. When countries export goods and services in which they are most competitive and import those in which they are less competitive, consumers everywhere benefit, the potential output of all nations increase, and so does the global standard of living.

Opening up national borders also opens the door to greater global competition. And this acts as a potent incentive for businesses everywhere to become more efficient and productive. To relate this to Canada, international competition puts pressure on our domestic market to be more competitive, even in industries where the optimal scale may have only one or two Canadian firms operating. In the end, competitive pressure leads to greater efficiently, greater productivity, and higher standards of living.

So there are clear economic benefits to greater economic integration with the rest of the world. …