A Further Comment on Economic Integration

Dialogue: A FURTHER COMMENT ON ECONOMIC INTEGRATION J. H. DALES In the course of clarifying his remarks on Canadian -American economic integration Professor Johnson deals with two points, one in economics and one in political economy, that I think deserve further discussion because each relates to a major preconception of Canadian economic policy which is badly in need of examination. The economic issue concerns the long-run effects of Canadian-American free trade, so far as they can be foreseen, on the amount of manufacturing in Canada and on the wages paid in Canadian manufacturing. Readers will notice an asymmetry in Professor Johnson's views on this subject. On page 36 of his Reply he apparently agrees that our tariff has been "effeotive in leading to high-cost manufacturing activity in Canada"; I take it, therefore, that he agrees that the adoption of the tariff has increased the amount of manufacturing in Canada. However on p. 38 he tells us that the high cost of Canadian manufacturing "is not immutable but is itself the consequence of protection" [i.e., of the Canadian tariff; the American tariff does not protect us!] and that therefore - although here he uses carefully-worded qualifications that I shall discuss in a moment - free trade with the United States "would either raise the wage rate or expand the Canadian manufacturing seotor." In brief, Professor Johnson seems to be arguing that adoption of a tariff increases manufacturing and that its repeal also increases manufacturing. This result is so "unnatural" that we must question its validity. Let us proceed slowly and try to sort out the whole complicated issue. Let us, also, agree to ignore all third countries and argue as if there 36 were only two countries in the world - Canada and the United States. We now ruk: What will be the effects on the efficiency, and output of, and the wage rate paid in, Canadian manufacturing if (a) Canada alone removes its tariff, and (b) both Canada and the United States remove their tariffs? By efficiency we shall mean the ability of Canadian manufacturing firms to produce at or below the cost of production of similar output in the United States. Anything that increases the efficiency of Canadian firms that are already efficient, or anything that makes presently inefficient firms efficient, will result in those firms earning higher profits, or paying higher wages (or other factor prices ), or charging lower prices for their products (and thereby expanding their output), or experiencing some combination of these three possible outcomes. I agree with Professor Johnson that there are firms in Canada that are efficient even with the Canadian tariff, and that there are others that are inefficient with the Canadian tariff but would be efficient without it. Removal of the Canadian tariff would increase the efficiency of all these firms and they would make one or more of the three adjustments outlined above. But I certainly disagree with Professor Johnson if he means, as his words imply, that all inefficiency in Canadian manufacturing industry results from the Canadian tariff, and that the removal of protection would therefore make all firms efficient. There is, I believe, a large third category of firms those that are not efficient with the Canadian tariff and would not be efficient without it. Removal of the Canadian tariff would force these firms out of business. Considering only the removal of the Canadian tariff, then, we can draw two conclusions. First, the industries that survive will expand output, or pay higher wages, or make larger profits than they now do. Second, whether total output of manufacturing will rise or fall depends on the balance between the decrease in output of the firms that fail and the increase in output of the firms that survive. No one knows what that balance will be. Professor Johnson seems to believe that very few, if any, firms will fail - which amounts to saying that the Canadian tariff is a disadvantage to all, or most, firms Revue aetudes canadiennes and an advantage to few, or none, and that it does not do what it is intended to do and what everyone thinks it does, namely, allow many inefficient firms to...