January 1, 1998, will mark the ninth anniversary of the Canada-U.S. Free Trade Agreement (FTA). In its short life, this agreement has instigated major changes in the Canadian economy and had significant consequences for the conduct of Canadian and U.S. international trade policies. It now seems appropriate to ask: Has the FTA delivered on its promises? Without question, the economic policy context of the late 1990s is much different than that of the early 1980s, when initial interest emerged within Canada's policymaking bureaucracy for negotiating freer trade with the United States. A fair assessment of the FTA requires consideration of this context and the goals the two nations established for their experiment in continental integration.
The Historical Context
In early 1980s, the Internet, office faxes and personal computers, and such private delivery services as Federal Express were only emerging as ordinary features of business life. Globalization, then, was not seen as a compelling force. Protection and industrial policy were still viewed by some significant policymakers and intellectuals in the developing world, parts of Europe, Australia, and Canada, as viable options for guiding national economic development. Free trade and reliance on markets had not emerged as the new orthodoxy for coping with the accelerating pace of technological progress and the intensifying competitive pressures posed by industrialization in East and Southeast Asia.
From the 1940s through about 1960, the Canadian economy had been powered by the rapid development of mineral resources and other natural resource exports to the United States. After 1960, the combined contribution of mineral, petroleum, farm, forest, and fishery products to Canadian exports to the United States declined significantly, and the attention of policymakers increasingly turned to Canada's manufacturing. (1) From the early 1960s to about 1980, federal and provincial governments experimented with a number of trade and industrial policies. Examples include high import tariffs on secondary manufactures, subsidies for industrial modernization and new product development, strategic targeting of government procurement, product standards and professional licensing requirements favoring Canadian suppliers, aggressive regulation of foreign-controlled enterprises, and limitations on foreign ownership in key sectors such as oil and gas. These policies were intended to reduce Canadian dependence on the U.S. markets and improve the competitiveness of Canadian manufacturing. Ultimately, they failed--as of 1980, the United States still accounted for 64 percent of Canadian exports and Canadian manufacturing productivity was estimated to be 77 percent of U.S. levels. (2)
In 1979, the Tokyo Round of Multilateral Trade Negotiations (MTNs) was completed and there Canada agreed to cut tariffs substantially in eight increments from 1980 to 1987. Policymakers in Ottawa believed that tariffs would no longer be sufficient to protect Canadian manufacturing from U.S. competition; yet, in key industries, they believed U.S. tariffs and nontariff barriers could still block important Canadian exports. Moreover, the increasing reliance by the United States on contingent protection--that is, the case-by-case application of supplemental duties when U.S. producers were found to be injured by subsidized or dumped Canadian imports--was seen as a real threat to investment in Canada. After all, many Canadian and American firms receive some help from federal, state, or provincial governments to build new or modernize existing facilities. Why should U.S. or Canadian multinational corporations invest in Canada if they risk losing the U.S. portion of the North American market by the sudden application of punitive U.S. duties?
Conversely, to Canadian internationalists, the appropriate response was to negotiate a free trade agreement that would eliminate remaining U. …