Beggar Thy Neighbor

September 25, 2007

It became official in February. The U.S.-Mexico free trade negotiations will include Canada as a full participant. Subject to Congressional fast-track approval, the formal phase will commence in June. If all goes smoothly, the three parties will sign a North American Free Trade Agreement (NAFTA) by the end of the year, fulfilling in all but name President Reagan's 1980 campaign dream of a common market stretching "from the Yukon to the Yucatán."

Officials have indicated that the Canada-U.S. Free Trade Agreement (FTA) signed in 1988 will form the core of NAFTA, a reality which makes the Canadian perspective instructive. Free trade has been a focus of national politics in Canada since the summer of 1985. For more than two years we debated the concept; for another year we wrangled over the merits of a specific deal and fought a bitter election over it in 1998; now we have lived with it for two years.

Reagan called the FTA "an economic constitution for North America.” The FTA is fundamentally about power. It shifts power from governments (federal and provincial) to the corporate sector. It entrenches that power beyond the reach of the future governments. And it limits govemmental capacity to define and pursue national development goals.

Canada is more vulnerable now to the power asymmetries of its largest trading relationship, which were formerly mitigated by the General Agreement on Trade and Tariffs (GATT). The FTA puts us "one on one" with an economy ten times larger on which we depend for three quarters of our trade. The FTA also strengthens north-south pulls at the expense of structures which maintain the economic and political viability of Canada. This in turn has engendered among the population a rancor which spills over into the constitutional debate now threatening to destabilize the Canadian federation.

Extending free trade to Mexico will provide neoconservative governments and corporations with another tool to undermine Canadian regulatory regimes, and labor and social standards. Ex-trade negotiator Michael Hart euphemistically articulated a key goal for Canada of a NAFTA: "to further lock in the market orientation of the Canadian economy." José Córdoba, a senior adviser to Mexico's President Salinas, confirmed this view. He told the 1991 World Economic Forum in Davos, Switzerland, that Mexico wanted to use a trade deal to lock in deregulation, foreign investment and other policies so they could not easily be changed by future governments.

A few politicians claim the Mexico round will give Canada an opportunity to redress, with Mexico's help, the imbalance in the 1988 accord. But the United States may well use it to extract further concessions from Canada, playing one partner off against the other as they scramble for market preferences. As U.S. Trade Representative Carla Hills told the Senate Finance Committee, "The (trilateral) negotiations will not be a vehicle for retreating from the trade and investment disciplines or liberalization achieved in the U.S.-CanadaFTA." On the contrary, "the FTA sets a floor for commitments between the two countries."

However, the NAFTA negotiation is providing a platform for reopening the free trade debate in Canada, where only a minority believe that it has brought net benefits. The Mulroney government has plummeted to depths of unpopularity (14%-17% approval rating) never before recorded in an industrial country. Angry voters in Ontario last fall elected to the provincial government the social democratic New Democratic Party (NDP), which opposes NAF`TA. And a grassroots movement against free trade has re-emerged.

Several weeks after the FTA was signed, U.S. Trade Representative Clayton Yeutter told a Toronto Star reporter, "The Canadians don't understand what they have signed. In 20 years they will be sucked into the United States economy." Free trade critics understood very well. Author Margaret Atwood, testifying before a parliamentary committee, offered the following metaphor: "Our national animal is the beaver, noted for its industriousness and cooperative spirit. In medieval bestiaries it is also noted for its habit, when frightened, of biting off its own testicles and offering them to its pursuer." Was the FTA an act of national castration?

Canada is a vast and thinly populated country. Barely 123 years old, it is bilingual, comprising two "nations," and multicultural. Most of its 26 million people are dispersed thread-like along the 3,000 mile border with the United States.

Historically, government has played an active role in the Canadian economy and society. There are public enterprises: a national railroad, a national broadcast network, a national airline, a national oil company, provincial hydro-electric companies, provincial telephone companies. Government has sought to manage the nation's rich natural resource base to ensure resource security (food and energy), to promote greater domestic processing or value added (fish and forest products), and to provide comparative advantages to certain industries (aluminum and petrochemicals). Government has also used access to the national market as a development tool, for example, through tariffs or, as in the auto industry, through domestic content requirements.

Given the extraordinarily high level of foreign ownership (mainly U.S.) of the manufacturing sector (50%) and key resource sectors (petroleum 75%), Canadian govemments have regulated foreign-controlled companies with a view to ensuring their conduct confers "net benefit to Canada." Such benefit, we have learned, cannot be expected automatically.

The state has also been a vehicle for realizing Canadian values of community and social justice. The public obligation to make income equalization transfers to poorer regions is actually enshrined in the constitution. There is national universal health care, unemployment insurance, old-age security, family allowance and other income supports. While not as generous as benefits available in northern Europe, they are generally superior to those of the United States.

Government has also established standards for collecfive bargaining, pay equity, health and safety, pesticide use, etc., which constitute the social and ethical "rules" governing how companies do business in Canada. These standards have, for example, allowed unions to grow to 37% of the work force, helping to maintain relatively equitable patterns of income distribution. Again, while not as effective as their northern European counterparts, Canadian unions are significantly stronger than those in the United States.

The record of Canadian government development policies contains both successes and failures. The complex of social and environment standards is flawed in many areas. However, the power shift represented by the FTA -- directly through specific provisions and indirectly through the inexorable pressure to harmonize the rules of competition downward to the lowest common denominator -- has greatly reduced the "policy space" available to governments to pursue national development and maintain social standards.

Brian Mulroney came to power in 1984 with strong backing from corporate Canada. Free trade with the United States was central to his neoconservative vision of the country's future, a view shaped by his years as the manager of the Canadian operation of the U.S.-owned Hanna Mining Co. of Cleveland. Mulroney announced his government's intention to negotiate a free trade agreement at a meeting with Ronald Reagan in March 1985.

The Conservative government had three main objectives in seeking a free trade deal: 1) to secure and enhance access to the U.S. market; 2) to secure "citizenship rights" for a small group of Canadian corporations which had been expanding and investing heavily in the United States; and 3) to use a trade deal as a lever to circumscribe and ratchet down the capacity of the government to meddle in the economy.

These goals were generally consistent with Washington's aims to secure rights for its own formidable corporate presence, as well as access to Canadian resources. The United States also saw the FTA as a precedent, a wedge with teeth, to further its agenda in the GATT, which included limiting state subsidies, reducing state regulation of international investment, liberalizing trade in services, and protecting intellectual property.[1]

The November 1988 election was fought almost entirely on free trade. Mulroney promised that the FTA would bring jobs and prosperity for all Canadians in all regions. He denied jobs would be lost, yet he promised “massive adjustment programs." He claimed the FTA would strengthen government's capacity to maintain and improve social programs. But at the same time he sold it as a strictly commercial agreement which had nothing to do with social programs.

In fact, the agreement went far beyond the textbook definition of free trade. It was a sweeping economic integration pact covering labor mobility, capital mobility, resource management, services and standards -- as ambitious as Europe 1992.

Both major opposition parties, the Liberals and the New Democrats, opposed the deal, yet they failed to join forces. Grassroots resistance galvanized in the Pro-Canada Network, a broad coalition of farm and labor groups, women's groups, nationalists, environmentalists, church and social activists, and most of the cultural community.

The Conservatives had important allies in two key regions, Alberta and Quebec. Both provincial leaders, decentralists by orientation, saw the FTA as a way to limit federal intervention in the management of their energy resources. Alberta was especially bitter about federal oil and gas policy in the early 1980s, which obliged the province to sell oil to the rest of Canada below the world market price, and which limited exports when they conflicted with the goal of national energy security. In Quebec, the opposition independence party, Parti Québécois, supported the FTA as a way to weaken the federation and facilitate the province's escape from Canada.

The split within the opposition proved decisive. The Conservatives won the election with a comfortable majority in Parliament, even though they got only 43% of the popular vote and won a majority of seats only in Quebec and Alberta. The FTA went into effect on January 1, 1989, and Brian Mulroney, who four years earlier had announced to the New York Economic Club that Canada was "open for business," returned to New York to receive an award as the Americas Society's "Man of the Year."

In evaluating the effects of free trade, one must situate the FTA within the overall Conservative policy agenda. The different components act upon and reinforce one another and their effect is cumulative. Moreover, FTA effects ripple through a complex economic and social structure.

The FTA was supposed to encourage restructuring on the basis of comparative advantage. Firms would become more efficient; output and income would increase. Workers would move from lower value-added jobs to higher ones. These expectations were based on four related assumptions, all at odds with reality: that Canada would enjoy secure access to the U.S. market; that full employment in both economies already existed; that capital is relatively immobile beyond national borders; and that trade takes place between independent firms on an arm's length basis.

In the first place, the FTA did not secure access to the U.S. market. Major barriers remained in such areas as steel (informal quotas), lumber (a 15% export tax), clothing (limitations on products with third-country fabrics), and sugar-based products (quotas). Furthermore, Canada did not gain exemption from U.S. trade laws. On the contrary, the FTA actually legitimized U.S. law, whether or not it contravened GATT law (article 1902. 1) and permitted the United States to change its laws at will (article 1902.2).

The FTA provided for negotiations to reach a common regime on subsidies/ countervail and predatory pricing/anti-dumping by 1996. Many believe that these negotiations will never be concluded, since the U.S. Congress is loathe to surrender its power to regulate trade. Moreover the U.S. implementing legislation (section 409) provides new weapons for harassing Canadian exporters suspected of using unfair subsidies. In the last two years the number of trade actions against Canadian exporters has actually increased; clothing, auto parts, meat, potato and lumber exporters have all reported increased border delays and reinspections.[2]

Of the 16 cases that have come before the binational dispute-resolution panels created by the FTA, Canada has not claimed a single victory. East Coast lobster fishermen are still prohibited from selling "undersized" northern lobsters in the U.S. market. Exporters of pork products have not had their heavy countervail tariffs removed, and Canadian steel exporters have lost a number of appeals to remove countervail and anti-dumping duties. In fact, exasperated steel executives have begun to criticize in public the inadequacies of a dispute mechanism which allows a heavily subsidized U.S. industry to keep out Canadian products.

Some U.S. experts are warning that Canada will not be exempt from new protectionist legislation. Elliot Richardson told a meeting of the Canada-U.S. Business Association that the FTA would not protect Canada from proposed legislation restricting foreign investment. Even though this violates the accord, as Richardson points out, the U.S. implementing legislation states that U.S. law shall override the FTA in the case of a conflict. Canadian law is subordinate to the FTA.

Secondly, the assumption of full employment does not hold. Despite the fact that the FTA was sold as a source of "jobs, jobs, jobs," in P.M. Mulroney's words, the neoclassical model on which benefits were calculated assumes full employment as the starting point. Unemployment has not fallen below 7% since the 1982 recession. Two years of free trade have seen the overall rate of job creation drop dramatically. If the previous five-year average had continued, the economy should have created an additional 650,000 new jobs. Although it can not be attributed exclusively to the FTA, the actual figure was 50,000.[3]

The manufacturing work force, which had been more or less stable throughout the 1980s, shrunk by 11% last year or 180,000 jobs.[4] The Canadian Manufacturers Association predicts that half of these jobs will not return. The Ontario Ministry of Labor found that 55% of layoffs in the last two years were due to plant closures. This contrasts with the height of the 1982 recession when less than one quarter of layoffs resulted from closures.[5]

The service sector picked up only part of the slack in terms of job creation. And most of these were low-paying, low-skill jobs, often temporary or part-time. Officially, unemployment is now over 10%; when workers who have dropped out of the job market are accounted for, the rate is around 15%.[6]

Thirdly, the first year of free trade set off a record wave of national and foreign takeovers of Canadian corporations, worth $27.7 billion, 40% higher than the previous year's total which was itself a record.[7] Takeovers subsided in 1990, but experts are predicting a second wave as the economy emerges from the recession. Forty percent of these (by value) involved foreign-controlled companies.

Statistics Canada, a government agency, reported that during 1988-1989, 460 Canadian-controlled companies, including major high technology firms (with combined assets of $21 billion), were taken over by foreign, primarily U.S., owners. During the same period only 136 foreign-controlled companies, with assets of $2.6 billion, were taken over by Canadian-controlled companies. As a result, foreign control of the economy jumped a full percentage point, reversing a 14-year downward trend.[8]

More recently, Investment Canada reported that in the two years leading up to April 1990, there were a record 1,403 foreign corporate takeovers of Canadian-based companies. The combined value of these takeovers was $30.5 billion. More than 90% of foreign corporate activity in Canada is in the form of takeovers, not new investment.[9]

The promised corporate restructuring has been a one-sided affair: Record numbers of mergers, takeovers, closures, downsizing and rationalizations have destroyed thousands of jobs; free trade has not delivered an equal number of higher value-added jobs.

Lastly, a large part of Canada's manufacturing sector is made up of U.S.-owned branch plant subsidiaries, which produce exclusively for the Canadian market. In Ontario, where they are concentrated, they represent about one third of manufacturing value-added, not including the auto industry where production has been rationalized under the Auto Pact. The FTA made it easier for branch plants to move. Rather than convert to export platforms, they have in large numbers shifted production to the southern United States and Mexico. All they left behind in Canada were warehouses and sales offices.[10]

About 80% of manufacturing trade is intra-firm, that is, transactions within a transnational corporation. The FTA makes it easier to organize production, locate investments, source inputs, and determine prices, in accordance with corporate rather than social priorities. Troublesome government regulations, such as Canadian content requirements, are no longer a concern.

Medium-size Canadian firms, which before free trade had threatened to move south to get behind U.S. barriers, were now supposed to stay in Canada. Instead, the last two years have seen an exodus of Canadian firms across the border.[11] The testimony of a Quebec furniture manufacturer before a parliamentary committee explains why: "...lower interest rates, something around five or six percent [sicl compared to thirteen to fourteen percent in Canada....In some states we were offered for every new job created up to $2,000....Social benefit rates are much lower than in Canada....What's more we can hire people at $4.50 an hour....A number of states also have right-to-work legislation."[12]

Another part of the answer is illustrated in the experience of CCL Industries, a company which manufactures cans and other packaging products. The U.S. transnationals which it supplied have shifted their purchasing operations south. The company survived only by moving 70% of its assets outside Canada, the reverse of the situation before free trade.

The case for free trade also rested on a critical assumption about the dollar exchange rate. If Canadian cost structures shifted out of line in the newly integrated market, the Canadian dollar, it was argued, would fall relative to the U.S. dollar. If Canadian corporate taxes or wages were higher, this would be reflected in higher-priced Canadian products. The falling Canadian dollar would cause the price of U.S. imports to rise, thereby offsetting the initial competitive disadvantage of higher taxes and wages.

This was the safety valve that was supposed to offset the "harmonization" that critics warned against. Harmonization is the euphemism for the pressure that Canadian businesses would exert to achieve a "level playing field" in which all "unfair" cost disadvantages would be removed. Like carbon monoxide, imperceptible but destructive, this pressure at the bargaining table and at the policy level would force down wages, benefits, labor and environmental standards, taxes and social programs.

Instead of falling as the barriers came down, the Canadian dollar began to rise rapidly almost from the day the trade deal was signed. For the last two years the dollar has been 20% higher than it was during the negotiations. The main factor has been the extraordinarily and inexplicably high interest rate policy of the central bank. Considerable circumstantial evidence suggests a backroom deal with the United States may be responsible.[13]

The government's high interest/exchange rate policy is deliberately and dramatically increasing the pace of harmonization and restructuring, and ravaging the Canadian economy in the process. Besides record plant closures and foreign takeovers, in 1990 bankruptcies jumped 45% from 1988.[14]..Canada's trade balance with the United States (goods and services) has shifted from an average annual $5.3 billion surplus during 1984-1988, to an annual deficit of $1.5 billion in the first two years of free trade.[15]

As for harmonization, the following example illustrates how it works at the bargaining table. Nabisco is a major employer in Canada. It was an enthusiastic supporter of the FTA; so much so that it was the second largest single contributor to the 1988 Conservative campaign. Shortly after the election the president of NabiscoCanada told a business conference that companies should use free trade "to mobilize employees to cut costs." He added, "Nothing clears the mind so much as the specter of being hung in the morning."

In early January 1991, a Nabisco plant in Niagara Falls forced its 259 workers out on strike by demanding wide-ranging contract concessions it claimed were necessary to compete under free trade. Several weeks later Nabisco announced that it was closing a nearby food processing plant. Coincidence or intimidation? Two and a half months later, the strike continued.

Shortly after the FTA came into effect, a Canadian business report called it, "the most important event underpinning the establishment of a North American Accord (including Mexico)."[16] This was news to most Canadians. During the debate, critics pointed out that maquiladoras would be a U.S. "back door" which would aggravate the harmful effects of free trade. And there were several highly publicized cases of companies moving plants to Mexico (one involving a company owned by a key trade advisor to the prime minister). But the idea of a continental free trade accord was not taken seriously by most Canadians.

However, the momentum was there for those who could see it. In a major policy reversal, Canada became a member of the Organization of American States (OAS) in the fall of 1989. In October of that year the Canadian Embassy co-sponsored a conference in EI Paso, called Region North America. In December, the U.S. ambassador to Canada, Edward Ney, told a Canadian-U.S. Business Council luncheon that Canada should consider adding Mexico to the FTA. Although Trade Minister Crosbie publicly rejected this advice, there were clear signs that diplomatic wheels were moving into high gear.

In mid-March 1990 Prime Minister Mulroney led a delegation of powerful businessmen to Mexico, where he signed a framework trade agreement. Several weeks later the Wall Street Journal reported that the United States and Mexico were about to enter into free trade negotiations. While not confirming this report, President Salinas spoke of the so-called free trade benefits to Canada, namely that "it has created more than 250,000 jobs." Bush and Salinas officially announced their intentions on June 11. Three months later, on September 25, Canadian Trade Minister John Crosbie announced Canada's intention to seek full participation in the negotiations.

NAFTA is about enhancing the ability and entrenching the "rights" of transnational corporations to move at will throughout the North American economy. Such a continental restructuring will increase the pull of the deregulated maquiladora zone which already tugs on Canadian manufacturing, exacerbating "harmonization" as well as the production and employment shifts described earlier.

On the surface, NAFTA would appear to have only minimal effects. Canada exports $0.4 billion dollars worth of goods to Mexico and imports $1.7 billion worth of Mexican goods -- compared to the $150 billion in Canadian-U.S. trade. Almost all Mexican manufacture exports to Canada are by U.S. and Japanese transnational maquiladoras. The biggest item, auto parts, already enters duty free under the terms of the Auto Pact. However, much of the maquiladora production enters the United States stamped "Made in USA,” and gets lost in the forest of the U.S. production system. What portion of Mexican content eventually finds its way into the Canadian market is impossible to determine.

More important is the fact that Mexico and Canada are competitors in the U.S. market. Under the FTA, U.S. transnationals have accelerated the shift of Canadian production bases to maquiladoras. Under NAFTA the pathway will become an expressway.

While maquiladoras grew by approximately 75,000 workers in 1990, the Canadian manufacturing sector shrunk by 180,000. According to a survey by the Canadian Labour Congress, 45 companies, which collectively shed some 15,000 jobs in Canada in 1989-1990, were active in the maquiladora zone.[17]

Much is made of the necessity of having a low wage area to compete with Europe and Japan, as the world economy forms regional blocs. Free-trade proponents claim that lower-wage, labor-intensive jobs will shift to Mexico, while Canadian (and U.S.) workers will get new high-wage, high-productivity jobs. No empirical evidence supports this claim. According to business guru and Claremont University professor Peter Drucker, "It takes three years at most for a maquiladora to attain the labor productivity of a well-run U.S. or Japanese plant even turning out highly sophisticated products."[18] Drucker sees a good case for shifting production to maquiladoras where direct labor costs rarely exceed 15% of total costs. The case is even more compelling because maquiladoras are accessible to efficient U.S. transportation corridors. The U.S.- Mexico border region is the same distance from the main U.S. auto-assembly plants as the Canadian based auto-parts industry. Large segments of Canadian manufacturing are vulnerable to flight to Mexico: auto parts, electronics, plastics, glass, furniture, chemicals and textiles, and the bulk of the clothing sector.

The 100 workers at the Electrowire Inc. plant in Owen Sound, Ontario, have experienced the chill of the level playing field. During their last contract negotiations, the company, a U.S. subsidiary which makes electrical harnesses for the automotive industry, told the union to accept what amounted to a three-year wage freeze or it would close and move to Mexico. To back up its threat the company produced a letter from a company that helps firms relocate to the maquiladora zone. It vaunted the advantages of "cooperative workers that follow your instructions" and "hourly costs including bonuses, space and utilities from $2.95 to $4.50 compared with a Canadian average of $12 which does not include these extras." The workers accepted the company's demands. But how long will they survive under free trade?

What would happen to automobiles, Canada's key manufacturing sector, under NAFTA? Employing 152,000, it accounts for one third of all exports to the United States. The industry estimates that each new job created in this sector creates five spinoff jobs. It is the largest customer for a number of key industries: steel, textiles, glass, plastics and rubber.

Most of Canada-U.S. auto trade is governed by the terms of the 1965 Auto Pact, a successful example of government involvement in managing trade. The Auto Pact is a production sharing arrangement which has facilitated a more efficient industry while safeguarding minimum production and employment levels in Canada. The Big Three auto makers are required to maintain at least 60% Canadian content (value added) in their Canadian-made cars, and for every car they sell in Canada they must produce one in Canada.

The FTA drastically weakened the Auto Pact and prevented extending production-sharing arrangements of this kind to other sectors. Most important, it removed the enforcement mechanism -- the tariff imposed on companies who fail to meet the content requirements. What remains is a much weaker "stick" which allows companies that exceed Auto Pact requirements to import that amount duty-free from third countries. Most of these third-country imports are from Mexico. Under NAFTA, this last remaining enforcement mechanism will fall and the "market" alone will reign.

The Mexican auto industry is growing rapidly. The main auto assemblers, U.S., European and Japanese, are making new investments at a time when there is excess capacity and flat demand in North America. The Big Three have already closed plants and laid off thousands in Canada. Employment in the auto sector has shrunk by 16,000 in the last two years. Canadian Auto Workers union reports show that 42 of its plants employing 4,400 workers have closed.[19]

Canadian-owned auto parts firms are now reluctantly beginning to move to Mexico. They are worried that if Canada is not in on the NAFTA negotiations they may not get the same access as their U.S. competitors to Mexico or the same access as U.S. business to the growing Mexican assembly operations.

The food processing industry, Canada's largest manufacturing employer (230,000), has been shaped by policies of national food security and the principle of supply management in which marketing boards use tariffs and quotas to balance national supply and demand and provide stable incomes to farmers. As in the auto sector, the FTA has weakened Canadian food production by removing or weakening the main enforcement mechanisms -- tariffs and quotas. For example, a large food processing company in Canada can source its inputs in the southern United States (and under NAFTA in Mexico). Or it can close its Canadian operation, as many have already, and export back into Canada without restrictions. The industry has lost 30,000 workers in the last two years.[20]

The Canadian clothing industry employs 120,000, 80% of whom are women concentrated in labor-intensive activities such as sewing. The average hourly wage in Toronto is about $8.17; in the maquiladora zone it is 47 cents. The industry has been suffering under the FTA, in part because it did not get the same access to the U.S. market as competitors got to the Canadian market, and in part because its competitors have access to cheap maquiladora labor. Twenty-four thousand jobs have been lost so far. Under NAFTA, as the 25% tariff comes down, Canadian companies will also be able to contract out to maquiladora firms.

This story can be repeated for other sectors. Whether or not Mexico is included, under free trade Canadians have to compete directly with maquiladoras in the U.S. market. The issue is the exit of Canadian jobs and investment. While NAFTA may ensure Canadian business equal access and improve its chances for survival, it can only hasten the outflow of capital, jobs, and income.

Many Canadian critics of the FTA would like to see Canada take its chances with GATT, despite its many flaws. GATT rules are more effective against the abuse of power by larger nations. The costs to a large nation of breaking the rules are greater since other large nations may retaliate. In a regional setting where one player is overwhelmingly dominant, the dominant player can break the rules with relatively little cost; the small partners must scrupulously follow the rules or face costly retaliation.

Secondly, there are many possibilities for bilateral or trilateral sectoral agreements. For example, Mexico and Canada signed an energy agreement in 1980 to enhance oil exploration and promote conservation. There could also be a trilateral arrangement on the auto industry with production safeguards and adjustment and compensation provisions, to ensure the equitable distribution of benefits to all three partners.

Tags: NAFTA, free trade, Canada, development, opposition

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