Toward Free Trade? : The Dilemma of Canadian Trade Policy

Review Article: Toward Free Trade? The Dilemma ofCanadian Trade Policy W.T.HUNTER Canadians have been bombarded in recent months with the repeated assertion that their manufacturing industries are not internationally competitive. Labour productivity, it is argued, is about 20% below the level of the United States while wage rates are the same or higher; and the resulting higher labour costs are reflected in the trade statistics which show a deterioration in the balance of trade in end products from a deficit of $3.6 billion in 1971 to a shortfall in excess of $10 billion in 1975 and 1976.1 Such blanket indictments ignore the variations in performance between specific industries. Evidence that the performance does in fact vary widely has been provided in a recent study published by the Conference Board in Canada.2 Moreover, some of the competitive disadvantage has undoubtedly been erased by the depreciation of the Canadian dollar from a high of almost $1.04 U.S. in June, 1976 to a low of just less than 904: U.S. in October, 1977. However, it remains the case that many parts of Canadian manufacturing industry are uncompetitive and in need of rationalization. The Economic Council of Canada's proposed solution to this problem is freer trade, as argued in Looking Outward: A New Trade Strategy for Canada, published in 1975, and reiterated in the Council's Fourteenth Annual Review of October, 1977. In Looking Outward the Council concludes: Multilateral free trade would provide the most remarkable improvement in the economic well-being of Canadians that could result from a single step by the government today - or at any time since the Great Depression.3 Protection, the Council argues, has fostered inefficiency in Canada's manufacturing industries, has promoted foreign investment and has exacerJournal ofCanadian Studies Vol. 13, No. 1(Printemps1978 Spring) bated regional economic disparities. The economic growth of the post-war period has been based to a much larger extent than in other countries on increases in the labour force, and to a much smaller extent on increases in productivity; and the key to improving productivity is the development of wider markets which will allow Canadian industry to exploit economies of scale through specialization. In fact, however, Canada's markets are shrinking rather than growing. As other countries form free trade areas, Canada finds itself unable to compete across tariff barriers with the members of a free trade area who have dutyfree access to the same market. In the event of freer trade, the Council is confident that adjustment would take place within rather than between industries. Most firms now produce a wide range of products, but access to larger markets would encourage them to specialize in one or a few of these products and thereby achieve longer production runs without the disruption attendant .upon the closing down of whole plants no longer able to compete without tariff protection. The Council estimates the potential gains from freer trade to be between 5% and 10% of GNP, with the size of the benefit and its distribution between regions depending upon the areas to which tariff free access is gained. Multilateral free trade would be the most desirable objective, and the Council recommends that Canada pursue this course vigorously in the current round of negotiations under the General Agreement on Tariffs and Trade (GATT). However , the Council is chary of the success of these negotiations and thinks that at the same time, Canada should explore the possibility of an open-ended free trade area with the United States, the European Economic Community and Japan. Although all these countries might not join, it is essential that the United States be a member if the free trade area is to be of clear economic benefit to Canada. In the event that neither the GATT negotiations succeed nor can a free trade area be negotiated, then the Council recommends that Canada rationalize its own tariff structure by reducing unusually high nominal tariffs, and that it pursue the possibility of sectoral free trade. The Council recognizes that the benefits 49 accruing from freer trade will to a large extent be realized only in the longer run, and that there will...