Canadian Trade Policy: Imperial Preference to Free Trade Agreements
Montgomery Bohna
August 4, 2013
Canada, throughout its history, has faced a single simple fact in regard to its international trade: le fait américain. From the perspective of the present, reviewing the last seventy years of trade policy, and most especially perhaps when viewed from south of the 49th Parallel, the preponderant or even overwhelming role of trade with the United States seems natural and inevitable, dictated by the demands of geography if not actually by the manifest will of Providential Destiny. The facts seem to speak for themselves: exports to the United States have amounted to at least three-quarters of Canadian total exports over the last decade, while the only significant change in the pattern of Canadian export trade over that period have been the share of exports to China and the United Kingdom, both of which have approximately tripled since 2003. The American share of Canadian imports in the same period have declined from about 61% to 51%, principally because the Chinese share has doubled from about 6% to about 11%. Nevertheless, given that the share of U.S.-bound Canadian exports are nearly eighteen times greater than the next largest destination (China), while the share of American imports to Canada are about four and a half times their next largest competitor (again, China), the overwhelming role of the United States in Canada’s foreign trade is both obvious and apparently inexorable, immutable, and inevitable.[1]
Since the conclusion of the Free Trade Agreement (1987) and the subsequent North American Free Trade Agreement (1994), the often-strident political controversy generated while those initiatives were being negotiated has largely subsided in Canada. While debate on the virtues of continentalist economic integration continues on both sides of the border among academic figures such as Robert Porter and John MacDougall, the issue played only a relatively minor role in the last Canadian general election or the last American presidential election.[2] NAFTA was the capstone to a half-century continentalist progression in Canadian trade policy, and it would seem that NAFTA will remain the dominant force in Canadian trade for the foreseeable future.
And yet, since 2006, the Government headed by the Rt. Hon. Stephen Harper, M.P., the first lasting Conservative Government for more than forty years, has been remarkably busy pursuing alternatives to the North American trade status quo. Since Mr. Harper’s Conservative Party came to power (with a minority) in 2006, and particularly since the Conservatives gained a majority in the House of Commons in the 2011 general election, Canada has concluded no less than six free trade agreements, is currently engaged in free-trade negotiations with fifteen other nations or regional trade organizations, and has concluded fourteen Foreign Investment Protection and Promotion Agreements. Almost all of these have been with countries (such as Honduras, South Korea, or India) with which Canada’s trade is very small, almost infinitesimal by comparison with Canada-U.S. trade, though at least one, the Canada-European agreement (CETA: Comprehensive Economic and Trade Agreement), has real and significant potential to alter the pattern of Canada’s foreign trade. Nevertheless, if the stakes on the table are so far relatively small, the Harper Government’s trade negotiations outside NAFTA is the largest, most sustained effort by a Canadian government to pursue alternatives to American trade since the Third Option initiative of Pierre Elliott Trudeau’s Government, a fact with some irony considering that in almost every other respect the present Canadian Government would almost certainly reject any identification of its policies with those of Trudeau’s Liberals. Moreover, if the European trade deal can be accomplished (and at the moment of writing, it must be said that Canada-EU negotiations appear to have lost some impetus), it has the potential to re-align Canadian trade in a trans-Atlantic direction to a greater extent than any international agreement entered into by HMGC since the heyday of Imperial Preference.
Imperial Preference
At the beginning of the Twentieth Century, Canadian trade policy was orientated toward the United Kingdom and (to a much smaller extent) the other countries of the British Empire largely by means of Imperial Preference; for example, the 1907 tariff revision “established a three-tier schedule, with Imperial Preference rates set at one-third of the general rate”.[3] The origin of Imperial Preference lay a decade earlier, in Sir Wilfrid Laurier’s decision in 1897 to confer, for the first time in Canadian history, preferential tariffs on British exports.[4] Laurier’s decision was motivated chiefly by the political calculation that such a gesture would help to convince English Canada, accustomed to the Conservative legacy of Sir John A. MacDonald, his frequent expressions of loyalty to Great Britain, and his “National Policy” of high protective tariffs designed to encourage domestic Canadian manufactures, that a Liberal administration which happened also to be headed by Canada’s first French Canadian prime minister was no less loyal to the Empire than MacDonald and his Tory successors. The irony of Canada’s role in Imperial Preferences is that what began largely in emotional and political considerations should have ended half a century later in dry-eyed calculations of purely rational self-interest: as the Canadian ambassador to the U.S. (and future prime minister) Lester Pearson observed in 1945, “whereas in Washington and London, Imperial Preferences were charged with a ‘high emotional and political content’, in Ottawa we were more likely to take an economic and commercial view of the question”. Nor was Pearson the only leading figure in official circles to take an unsentimental view of Imperial Preferences: leading Department of Finance officials such as Robert Bryce, Simon Reisman and Mitchell Sharp all adopted similar expressions in the post-war years.[5]
In effect, Canada initiated Imperial Preferences at the dawn of the Twentieth Century for its own purposes, and discarded the system in the late 1940s likewise. In between, Canada’s leaders were also responsible for the event which marked the zenith (and, as it would transpire, the beginning of the end) of Imperial Preferences, the 1932 Imperial Economic Conference at Ottawa. While in the decades before and after the First World War preferential tariffs between Britain and the Dominions had expanded gradually into an extensive system, in the years prior to the 1929 Crash the Dominions “had tended to export to a growing diversity of markets”. The Great Depression changed that trend dramatically, and by the eve of the Conference, the British market “absorbed about 50 per cent of the total exports of Australia, 88 per cent of those of New Zealand, 44 per cent of South Africa’s, and 28 per cent of India’s and Canada’s”.[6] Canada was particularly affected, with American export markets for Canadian wheat, forest products and minerals rapidly drying up, a decline accelerated by the implementation of the Hawley-Smoot tariffs in the United States.
With the Conservative electoral victory in the general election of July 1930, the new prime minister, the Rt. Hon. R. B. (later 1st Viscount) Bennett, entered office determined to “convince the British that they should place a tariff on a number of foreign goods and no duty, or a lower preferential rate, on Empire goods” as the way to rescue the Canadian economy.[7] The result two years later, the Ottawa Conference, coming on the heels of the 1931 Statute of Westminster, was intended to place trade relations within the Empire on a firm, lasting and mutually beneficial footing, just as the Statute of Westminster, by conferring full legislative autonomy on the Dominions, had established a new constitutional basis for the Empire. As Bennett told the (Canadian) House of Commons shortly before the Conference convened in August, 1932, he held “the firm belief…that in such a conference lies the best assurance of the development of every part of the British Empire and of my own country as well”.[8]
In fact, the results of the Ottawa Conference were disappointing. The British did agree to impose higher tariffs on certain foreign imports in competition with Dominion articles, in return for an undertaking by Australia, New Zealand and Canada to limit their protection of domestic industries and refrain from prohibitive tariffs on United Kingdom manufactures. However, the British delegation, headed by their prime minister Stanley Baldwin, were shocked by the single-minded pursuit of local self-interest by the Dominions, particularly the Canadians headed by Bennett and the Australian delegation headed by former prime minister Stanley Bruce: in the words of one British participant, both Bennett and Bruce demanded “concessions brutally…as if they were dictating terms to a beaten enemy”. Neville Chamberlain, heir to his father Joseph’s ambition for imperial unity, was deeply disturbed by the implications for the future of the Empire, while the former (and future) Canadian prime minister W. L. Mackenzie King, temporarily relegated to the opposition benches, expressed concern that the attempt symbolized by the Ottawa Conference to bind the Empire together economically risked damaging its emotional bonds through the ill-will generated by such hard-nosed commercial jockeying. The Canadian diplomat Hugh Keenleyside likewise observed that “the worst failure of the conference was that it made the Empire an affair of huckstering rather than of cooperation, when it should have been both”.[9]
Grit Continentalism
For a time the exigencies of the Second World War saved Imperial Preferences. Nevertheless, for the leaders of the Liberal Party (“the Grits”), enjoying nearly forty years of post-war hegemony in Ottawa interrupted only briefly by the six years of John Diefenbaker’s Conservative majority from 1957-1963 (and hardly interrupted at all by Joe Clark’s shaky 11-month administration in 1979-80), the British Empire as the foundation and basis for Canadian international trade largely ceased to exist as a viable alternative. American opposition to, and determination to use its economic power against, preferential tariffs grew steadily from the early 1930s to the end of the war, culminating in Breton Woods and GATT. In particular Cordell Hull, American Secretary of State from 1933 to 1944, approached the issue with the Cromwellian fervor of a moral crusade, determined to achieve the three interrelated objectives of abolishing British Imperial Preferences, weakening the British Empire, and securing a dominant position for the U.S. in the postwar world.[10] By the end of the war, the Grits were left with very little option but to acquiesce to the American push for trade liberalization: where in 1935 the UK had been the source of 21.4% of Canadian imports, and the destination of 41.7% of Canadian exports, by 1949 those figures had fallen to 11.1% and 23.3%, respectively. Meanwhile, American share of imports to Canada had risen from under 60% in the former year to over 70% in the later, and exports to the U.S. had risen from about 34% to over 50% in the same span.[11] Further limiting a post-war imperial alternative was the fact that, alone of all the major Commonwealth economies, Canada stood outside the Sterling Area, having chosen instead to peg its dollar to the American: Canada had to earn hard currency to pay for American imports, but since the pound sterling was inconvertible during and long after the war, Canada’s war-time balance of payment surplus with Britain was useless in regard to its American trade deficit. A multilateral system to earn hard currency and the contraction of imperial preference rates were virtually the only course Ottawa could pursue.[12]
By late 1949-50, trade relations between the UK and Canada were approaching crisis. The United Kingdom had reduced its purchases from Canada of eggs, bacon, paper, and lumber “almost to the bone”. The Canadian Finance Minister Douglas Abbot pointed out to his counterpart Sir Stafford Cripps that the sterling area’s dollar deficit with Canada was completely covered, since Canadian sterling-area earnings, Marshal Plan purchases, and drawings on Canadian loans to the UK would “exceed by a very substantial margin the deficit arising with Canada from a minimum Import Programme such as we have in mind”. By Canadian calculations, these three sources would permit the UK to purchase goods valued at more than $650 million, and even at that volume of trade the UK would have sufficient dollars for increased purchases from other sources such as the United States.
Nevertheless the British Labour government, determined to pursue a policy which in their eyes was dictated by the need to direct trade to sterling-area and continental European soft-currency markets, remained firm and refused to reconsider their position. The reaction in Ottawa was a mixture of surprise and regret; in the view of Clifford Clark, Deputy Minister (i.e. head permanent civil servant) of Finance, it was “utterly tragic”. In the view of The Economist, the failure of Anglo-Canadian trade negotiations in 1949 meant that the prospect for Canadian agriculture returning to the British market had been “virtually killed” and that “Canadians have every reason to feel that they have been badly treated”.[13]
C. D. Howe, veteran of Liberal cabinets since 1935, St. Laurent’s Minister of Trade and Commerce, and literally the Prime Minister’s right-hand man at the cabinet table, had previously been a firm supporter of the British trade connection but was now dismayed, remarking that given the relatively insignificant sums separating them, the two countries “were heading for fresh trouble in trade relations”. Howe was well aware (perhaps better than anyone in Canada) of the drawbacks to an American-oriented trade policy: while nearly 80% of Canada’s sales to the United States were made up of wood, base metals, fish and certain agricultural products, the St. Laurent government continued to hold to the essence of the National Policy in its belief that Canada’s economic future lay in secondary manufacturing. The United States, the world’s largest industrial power, clearly would never provide a significant market for Canadian manufactured goods: as the Bank of Nova Scotia Monthly Report noted in 1949, the US market for Canadian manufactured goods was not a “real substitute for such markets in the Dominions and Empire”. Nevertheless, his notes on a memorandum from External Affairs Minister Lester Pearson indicate a shift in Howe’s thinking, warning against concentrating on the United Kingdom as putting “all our eggs in one basket”. While he was not opposed to cultivating markets in Western Europe and “Rest of Sterling Area” (RSA, principally Commonwealth) countries, to his mind at this stage the US market was the only one that could ensure Canadian prosperity.[14] The choice for Canada lay between overseas markets and continentalism, but in the context of the late 1940s, the latter was the safest option.
Mid-century Grit ideology also played a role in fostering post-war continentalism: the generation of young Liberals who came of age in the 1940s, such as the future prime minister Lester Pearson, subscribed to a version of Canadian nationalism which saw increased economic ties to the U.S., and decreased economic ties to Britain, as proof of Canada’s arrival as a genuinely independent country: in the observation of Mitchell Sharp, Minister of Trade and Commerce (1963-65) and of Finance (1965-68) in Pearson’s cabinet and Secretary of State for External Affairs in Trudeau’s first Government (1968-74), “to be a North American nation with a dollar rather than a sterling currency and with strong ties to the United States was a sign of national maturity”.[15] In effect, the Liberal Party trade policy of moving Canada in the direction of “a northern extension of the continental economy”, as the concrete expression of a rejection of Canada’s imperial past, was the reality behind such symbolic acts as Pearson’s controversial adoption of the Maple Leaf flag in place of the traditional Red Ensign (which incorporated the Union Flag in its canton).[16]
The result, coinciding with Liberal electoral success under Mackenzie King and Louis St. Laurent from the end of the war until the victory of John Diefenbaker’s Conservative Party in 1957, has often been described as a great “sell-out”: a period of continentalist trade policies amounting to “an unprecedented give-away of Canada’s resource heritage to the United States and the development of a dependency relationship that far exceeded the bound of sanity”.[17] While Diefenbaker’s economic policies seemed to promise revision, his short-lived tenure in power, followed by five years (1963-68) during which Lester Pearson’s Liberal administration pursued economic policies largely inherited in spirit if not in detail from those of Mackenzie King and St. Laurent, meant that Canada’s trade remained oriented toward and dominated by the United States throughout most of the quarter-century after the end of the Second World War.
The Third Option
The end of that quarter-century of Liberal continentalist consensus coincided with the first Trudeau ministry (1968-1979). The Rt. Hon. Pierre Elliot Trudeau, M.P.’s ascent to leadership of the Liberal Party and victory in the general election of 1968 marked a generational change as the first prime minister of Canada born in the Twentieth Century, and a change of governing style considerably more technocratic, dirigiste, and reliant on bureaucratic expertise than the often instinctual policy-making of the King-St. Laurent-Pearson political dynasty to which Trudeau was heir. More to the point for Canadian trade, Trudeau’s arrival at 24 Sussex Drive also coincided with a number of forces at work in the global economy which were to have a great impact on Canada, not least of all the collapse of the Bretton Woods monetary regime with President Nixon’s decision in 1971 to end convertibility of the U.S. dollar to gold. In addition, protectionist calls in the U.S. Congress born of the cost of the Vietnam War, monetary problems and related macroeconomic factors, rapid development of the (then) European Economic Community as a regional trade bloc, the rise of Japan as the first of the new Asian economies, and an increased willingness of the OPEC nations to use their control of oil production to their own benefit, all made Canadian trade in the 1970s a more complicated conundrum than in the preceding quarter-century. The result, in combination with rising concern within Canada for the degree to which post-war Grit continentalism had bound Canada to American economic forces, was the first serious attempt since the 1932 Ottawa Conference to shift Canadian trade in a direction away from the overwhelming influence of the United States: “alliances, agreements, and common cause were sought with a variety of non-traditional partners, all in an effort to diversify Canadian trade…increase the range of the Canadian economy, and reduce dependence on US markets and capital”.[18]
To a considerable degree, this effort was imposed on Canada by American policy: protectionist legislation drafted by the U.S. House Ways and Means Committee in 1970 (the Mills Bill), Nixon’s announcement of the end of the gold standard and the consequent collapse of the Bretton Woods regime, and a general hardening in the Canadian-American relationship by comparison to the rather cozy relations between Pearson-era officials and their counterparts in the Kennedy and Johnson administrations, all seemed to indicate the end of the “era of clear US hegemony”. The eventual substitute for the Bretton Woods structure of monetary and macroeconomic policies, initiated by President Giscard d’Estaing of France in 1975 in the form of annual economic summits among the major economies, also signalled to the Canadian government (despite some ill-concealed chagrin in Ottawa at not having received an invitation from the French president to this first “Group of Six” summit at Rambouillet) that a review of Canadian trade options in order to “search for counterforces” was desirable.[19] Trudeau himself famously expressed the guiding principle of his government’s approach to its economic relations with the United States with his quip, made during his first trip to Washington as prime minister, that “living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered the beast, one is affected by every twitch and grunt”. In 1971, with exports constituting nearly a fifth of Canada’s GNP, 67% of which went to the United States while about 70% of Canada’s imports came from the same source, the more violent twitching and grunting of the Nixon years was particularly worrying.[20]
The result of these concerns was a policy document crafted under the direction of the Hon. Mitchell Sharp, M.P., Secretary of State for External Affairs, and published in the autumn of 1972 in International Perspectives, the in-house journal of the Department of External Affairs. The report laid out three options for the future course of Canadian trade and economic policy: the status quo with minimal adjustments, a deliberate effort to achieve closer integration with the United States, or a long-term strategy to strengthen Canadian economic autonomy. Sharp and his colleagues made it clear they preferred the “Third Option”, which became the guiding principle of the Trudeau Government for the remainder of the decade: self-reliance and reduced dependence on foreign (principally American) capital domestically, married to a concerted effort to cultivate other trading partners abroad.
In fact, as the second Trudeau Government (1980-84) tacitly admitted by its quiet jettisoning of the policy, the Third Option failed in its objectives largely because of factors beyond Canadian control. The most likely alternatives to the United States as trading partners were the U.K., the EEC, and Japan. In 1971, these three accounted respectively for 7.9%, 6.5% and 4.7% of Canadian merchandise exports, and 5.4%, 6.3% and 5.1% of merchandise imports. Unfortunately for the Third Option, its articulation as Canadian policy coincided with major developments in regional integration in Europe, including the United Kingdom’s formal accession (accompanied by Ireland and Denmark) to the Community on 1 January 1973, followed soon after by a series of bilateral free-trade agreements between the Community and the remaining members of the European Free Trade Association (Norway, Sweden, Finland, Austria, Switzerland, Iceland and Portugal). By 1975, the United Kingdom’s trade relations with most of its former African, Caribbean and Pacific colonies (the RSA of the 1940s) was harmonized with its new European Community membership through the Lomé Convention. Hence, at the same moment that the Canadians began to re-consider the Atlantic trade option which it had foresworn with the end of Imperial Preference in the late 1940s, that door finally and apparently irrevocably was shut and bolted with British entry into the EEC.
That left the Pacific Rim, which in the context of the mid-1970s effectively meant Japan. Canadian-Japanese trade in the early 1970s seemed to offer considerable promise: “between 1958 and 1973 two-way trade mushroomed from $75 million to $2,818 million, with Canada enjoying an almost two-to-one advantage.” Moreover, the later inroads made by Japanese automotive, machinery and electronic goods were still in the future, while large Japanese firms such as Mitsubishi and Mitsui were actively courting Canadian firms as reliable sources of industrial raw materials.[21] Nevertheless, while the Canada-Japan Framework for Economic Cooperation gave the Trudeau government something to show for its efforts in 1976, the pursuit of Japan as a key aspect of the Third Option produced little long-term advantage. Japan continued to maintain tariffs designed to promote Canadian exports of raw low-processed resources while Canadian suppliers of medium- and finished-goods continued to find the Japanese market difficult to penetrate. Together, the European and Japanese branches of the Third Option trade negotiations had little to show by the end of the 1970s: where the EEC (including the UK) and Japan had taken 12.3% and 7.1% of Canadian merchandise exports in 1973, by 1981 the respective figures were down to 10.8% and 5.5%. While, in the first years of the second Trudeau Government (1980-84), “a small coterie of officials continued to keep these expressions of the Third Option alive at External Affairs, both [Japan and Europe] proved illusory instruments for diversifying Canada’s trade relations”.[22]
It was unsurprising, therefore, that by 1982, despite such late-Trudeau gestures of economic nationalism as the National Energy Program (the most prominent of several dirigiste economic projects which Clarkson and McCall have collectively called the “heroic delusion” of Trudeau’s last government), the cabinet had come full circle and turned once again to a comprehensive review of Canadian trade policy.[23] The result of these consultations were the first steps toward the formal abandonment of the Third Option and, cautiously, toward bilateral arrangements with the United States. Though it would require much internal discussion, difficult and prolonged negotiations with the Americans, and under the Rt. Hon. Brian Mulroney, M.P., the first lasting Conservative majority since Diefenbaker’s 1963 defeat, in order to accomplish, the first steps had been taken down the road which would lead to the 1987 Free Trade Agreement and, seven years later, its expansion in the form of the North American Free Trade Agreement.
Conclusion
Was NAFTA the final, decisive victory of continentalism in Canadian trade relations, or can the Harper Government’s “trade offensive” alter the fundamental course of Canadian trade patterns since 1945? Certainly, the agreements brokered since 2006 have had a positive effect on Canadian foreign trade relations: for example, “between 2000 and the first trimester of 2013, Canadian companies invested a total of US$1.614 million in Colombia, with the largest growth occurring between 2011 and 2012”, following the Canada-Columbia Free Trade Agreement taking effect in 2011.[24] Assuming that the Harper Government can overcome protectionist agricultural interests and bring CETA to a successful conclusion, the results might be equally striking on a much larger scale: “in 2012, the value of bilateral trade in goods between the EU and Canada was €61.7 billion. An economic study jointly released by the EU and Canada before the negotiations were started showed that a comprehensive trade agreement could increase their bilateral trade by another €25.7 billion”, which would bring the total value of Canada-EU trade to more than US$116 billion, not an inconsiderable portion of the US$916 billion in total Canadian trade in 2012.[25] Such an outcome would fall far short of re-orienting Canadian trans-Atlantic trade to the level it engaged in with the United Kingdom under Imperial Preference in the early 1930s, but would amount to a greater volume of trans-Atlantic trade for Canada since the end of the Second World War. Assuming CETA can be brought safely to harbour (an outcome at the moment of writing rather less certain than was the case even a month ago), the result would likely be a re-orientation of Canadian trade more significant in its consequences than any since that now-distant day when R. B. Bennett invited his imperial colleagues to Ottawa to lay the economic foundations of an empire they had every expectation would survive long into the Twenty-First Century.
[1] Industry Canada, latest figures (2012).
[2] John N. MacDougall, Drifting Together: The Political Economy of Canada-US Integration (Broadview, 2006); Robert A. Pastor, The North American Idea: A Vision of a Continental Future (Oxford, 2011).
[3] Richard Pomfret, The Economics of Regional Trading Arrangements (Clarendon, 1997), 393.
[4] F. McKenzie, Redefining the Bonds of Commonwealth, 1939-48: The Politics of Preference (Palgrave-Macmillan, 2002), 19.
[5] F. McKenzie, Redefining, 51.
[6] D. R. Annett, British Preference in Canadian Commercial Policy (Ryerson, 1948), 60; cf. the tables in McKenzie, Redefining, 22-3, which show Britain as the destination of 30.2% of Canadian exports in 1931.
[7] B. W. Muirhead, The Development of Postwar Canadian Trade Policy: The Failure of the Anglo-European Option (McGill-Queen’s, 1992), 6.
[8] Quoted in Muirhead, ibid.
[9] McKenzie, 21, 25.
[10] McKenzie, 32-6.
[11] McKenzie, figures in Table 2.2, p. 49.
[12] Muirhead, 47-8.
[13] Muirhead, 43-4.
[14] Muirhead, 44-5.
[15] McKenzie, 56.
[16] A point made most forcefully at the time by the Canadian political philosopher George Grant, Lament for a Nation (Carleton, 1991), 8-10; for a recent discussion of mid-century Canadian Liberal ideology, see C. P. Champion, The Strange Demise of British Canada: the Liberals and Canadian Nationalism, 1964-1968 (McGill-Queen’s, 2010).
[17] Muirhead, 179.
[18] Michael Hart, A Trading Nation: Canadian Trade Policy from Colonialism to Globalization (UBC Press, 2002), 278.
[19] Hart, 281.
[20] Trudeau ‘s famous remark was made at the National Press Club, Washington, 25 March 1969; quoted in Hart, 283.
[21] Hart, 290.
[22] Hart, 292.
[23] Stephen Clarkson & Christina McCall, Trudeau and Our Times, Vol. 2: The Heroic Delusion (Toronto: McClelland and Stewart, 1994).
[24] Canada News Wire (CNW), “Record Number of Canadian Companies Investing in Colombia”, July 31, 2013.
[25] The Baltic Course, “EU Free Trade Agreements: an overview”, August 2, 2013; Canadian total trade figures from Industry Canada.