The Decline of the Tariff — but not of Protection

The Decline ofthe Tariff-. but not ofProtection W. T. HUNTER* Economists are in substantial agreement about the consequences of the protective tariff in Canada - the National Policy of Macdonald's national policy. First and foremost, it has raised prices of goods in Canada relative to those available from the rest of the world, and it has helped to promote an inefficient manufacturing sector in this country. Several attempts have been made to measure the costs of these effects and the techniques employed have been subject to debate. While the various estimates are not strictly comparable because of differing methodologies, they are all high, particularly in comparison to the results of research in other industrialized countries , where the costs of the tariff and the corresponding benefits from free trade are customarily found to be in the order of 1OJo of GNP. In 1954, John Young measured the extent to which Canadian prices exceeded those in the rest of the world, and after deducting the revenue collected by the government in customs duties, arrived at a figure of 3.5 - 4.5% of gross private expenditure (after deducting indirect taxes) as the "cash cost" of the tariff.I This has usually been rounded off to 4% of GNP, and could perhaps be compared with personal taxes at the federal level, which in the same year amounted to just under 70Jo of GNP, in order to get some impression of the magnitudes involved. Recognizing that the· inefficiency of the Canadian manufacturing sector means relatively lower incomes in Canada, other writers have measured the cost of the tariff in terms of lower incomes. John Dales tried to account for the difference in income per worker between Canada and the United States, and after allowing for all the possible explanations he could think of, still found 8% of the difference unexplained, and he laid this at the doorstep of the Canadian tariff.2 Journal ofCanadian Studies Vol. 14, No. 3(Automne1979 Fall) Converting this back-of-the-envelope calculation to a percentage of GNP gives a figure of 10.6% in 1955. More sophisticated attempts to assess the effects of the tariff on Canadian incomes are usually carried out in the context of estimating the cost not only of the Canadian tariff but also of the American tariff, since the latter limits the market accessible to Canadian producers, and without this market they may not be able to achieve comparable efficiency. In a 1967 study, the Wonnocotts estimated the income effects of both tariffs to be in excess of 6% of GNP, which when added to the consumption cost gave a total cost to Canada from both tariffs equal to 10.5% of GNP.3 This estimate was brought up to date in 1975, incorporating the work of other researchers and acknowledging the improvement in Canadian productivity relative to the United States, resulting mainly from improved efficiency in the automotive sector as a consequence of the Automotive Pact. The new figure was 8.2% of GNP.4 These are the kinds of estimates which lie behind the Economic Council of Canada's conclusion in Looking Outward that the ''total gains from free trade would amount to at least 5 per cent of GNP and perhaps somewhat more.''5 If the Canadian tariff has promoted development of Canadian manufacturing industry which is more labour intensive than resource based industry, it is responsible for a relative increase in demand for labour, and has thus benefited labour relative to the owners of natural resources .6 Such increased demand has been reflected both in higher wages and increased immigration into Canada. The United States tariff, on the other hand, has the opposite effect, since it promotes the export of Canada's natural resources in unprocessed forms as well as inhibiting the development of Canadian manufacturing by limiting the market to which Canadian producers have access. However, recent research casts some doubt on the extent to which the ratios of labour, capital and other components (''factor content'') of imports and exports is significantly distorted by Canadian and foreign tariff restrictions, and thus on the extent to which income distribution is altered.7 111 As far as regional impact is concerned...