The U.S.-Canada Free Trade Agreement

By Watkins, Mel | Monthly Review, September 1988 | Go to article overview

The U.S.-Canada Free Trade Agreement

Watkins, Mel, Monthly Review

In October 1987, the U.S. and Canadian governments announced that they had successfully negotiated a comprehensive bilateral free trade agreement. The full details of the accord were made public in December. On January 2, 1988, President Reagan and Prime Minister Mulroney signed the agreement. If approved by the U.S. Congress and the Canadian Parliament, it will come into effect on January 1, 1989. The Canadian Left, plus some centrist forces, have resolved, however, to prevent this from happening.'

The agreement is sweeping in its scope, going well beyond what has been conventionally involved in the creation of a free trade area. Of course, tariffs between the two countries will disappear, phased out over a ten-year period. These have been eroding steadily since the Second World War through the GATT (General Agreement on Tariffs and Trade), but the process will be accelerated. Canada, which presently has the higher remaining tariffs, faces the larger adjustment, a burden which will fall on its workers.

The Perils of Protectionism

In recent years, however, tensions in U.S.-Canada relations have been associated not with the tariff but with non

tariff barriers. Much of the impetus for this agreement on the Canadian side came from a desire to deal with those issues. Specifically, as Reaganomics generated a massive U.S. trade deficit-with corresponding trade surpluses by major trading partners like Canada-protectionist pressures grew in the United States. Americans were tempted to blame their rising propensity to import on the alleged unfair trading practices of other nations, and to cast the net widely in defining an unfair trade practice. Regional development policies, special unemployment insurance payments to seasonally unemployed fishermen in the Atlantic Provinces, lower stumpage charges on lumber in British Columbia than in the Pacific Northwest: all have been cited by Americans as unfair Canadian trade practices instead of as the Canadian government insists, legitimate policies lying within its purview.

The U.S. response to these perceived inequities was to impose countervailing tariffs or anti-dumping duties in specific cases, to the detriment of Canadian exports and jobs. Many Canadians feared that the United States would adopt still more punitive protectionist measures across-the-board; given Canada's extraordinary reliance on exports to the United States (which constitute about 80 percent of the total), its vulnerability was evident.

The reaction of the Canadian government was to try to cut a deal which would somehow exempt Canada from the general U.S. trend toward protectionism. The strategy was based on the view that U.S. protectionism was such a serious threat that it required an extraordinary response by Canada, and that concessions could be wrung out of the United States at a cost tolerable to Canada.

The resulting agreement sets up a binational dispute resolution mechanism that is empowered to judge whether either party applies its trade law unfairly. Hence, U.S. law remains in place, and can even be extended. Canadian critics have properly insisted that this mechanism falls to speak to the main problem-the continued existence of U.S. protectionist law and policy.

Nor does the agreement contain a subsidy code which would define certain (Canadian) government policies as legitimate and therefore not subject to (U.S.) counteraction. Rather, it sets up a period of five years, which can be extended to seven, during which both parties will try to negotiate such a code; failure to do so can constitute grounds for abrogation of the entire agreement by either party on six months notice. This provision would seem to invite disaster for Canada. The pressure will be on Canada, the smaller country, to align its policies with the United States; should it fall to do so, it will risk the prohibitive costs of disrupting the new patterns of trade and investment which will have been created through the agreement. …

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