How it Works

September 25, 2007

THE FREE TRADE AGREEMENT IS A COMPLEX legal document. The following provides a sample of how the FTA has worked in three areas: key provisions, side deals attached to the FTA, and indirect effects which rein- force or hinder other laws and policies. Key provisions: Articles 407, 408, and 409 limit the ability of governments to manage natural resources. Articles 902, 903, and 904 reproduce these limitations for energy resources. The provisions state that Canada can reduce oil and gas supplies to the United States only in equivalent proportion to domestic cutbacks. A 10% decline in produc- tion, for example, would result in a 10% decline in both availability in Canada and exports to the United States. Since Canadian gas exports are a small proportion of U.S. gas consumption, the proportional rule places the brunt of any shortage on Canada. Ninety percent of recent natural gas discoveries in the Arctic have already been contracted to U.S. markets. In event of national shortage, or for conservation purposes, Canada is now powerless to curtail these supplies. Under tariff item 22.01, water has for the first time been defined as a commercially tradeable good. This opens the door to the possibility of massive water diversion from Canadian rivers to the United States: a boon for the "own- ers" of Canada's water resources, a bane for national devel- opment. A British Columbia law which required domestic proc- essing of all fish caught off the B.C. coast was successfully challenged by the United States under GATT. Canada was still permitted to impose export taxes on unprocessed fish to achieve the same effect. However, article 408 of the FTA prohibits export taxes. This has weakened the bargaining power of fisheries workers; jobs and processing capacity in this major industry are moving south. Article 2010 on public sector ownership permits govern- ments to designate a "monopoly," but other provisions (notably articles 1605 and 2011) prevent them from actually creating one. Canada's national health care system would have been impossible to put into place if these provisions had existed. The Ontario government's plans to establish public auto insurance will conflict with them and will likely cause a federal-provincial jurisdictional battle. (Article 103 re- quires the federal government to ensure provincial compli- ance with the FTA.) The FTA greatly weakens the government's capacity to maintain food security and domestic processing, by remov- ing key enforcement mechanisms: tariffs (article 401) and quotas (article 706). Canadian milk products (ice cream and yogurt, for example) have suffered greatly from the removal of tariffs. The government moved to transfer them to the import control list (i.e., to impose quotas), but the United States protested successfully at GATT that this was contrary to GATT's Article XI. U.S. dairy products are protected by a GATT waiver. Canadian policies to ensure domestic production by for- eign firms have been undercut by the FTA. The most signifi- cant one to go is the Auto Pact, an arrangement governing much of Canada's auto trade which provided safeguards ensuring minimum production levels in Canada. The main enforcement mechanisms for these safeguards, tariffs, are gone (article 401). Japanese and European car makers, which account for 40% of the market, are prevented from joining the Auto Pact (article 1002). Article 1603 prevents produc- tion-sharing agreements generally. Canada had pursued a series of policies to guarantee Canadian control of strategic sectors of the economy. The FTA's article 1602.2 prohibits the imposition of any Cana- dian equity participation as a condition of establishment or takeover of a business by a U.S. corporation. Article 1602.1 prevents practically all forms of differential treatment to- ward U.S. investors. This provision is extended to service companies in Article 1402.2. The latter opens the door, for example, to U.S. for-profit health care firms, contradicting one of the fundamental principles of national health care. Non-discrimination against U.S. corporations also applies to new government subsidies or taxation measures. Canada had regulated foreign companies to ensure "net benefit" to Canada. Although a few remnants of this power appear to remain, they have been effectively undercut in most sectors by various articles in chapter 16 of the FTA. The Canadian economy has an extremely high level of foreign ownership (50% by sales), and experience has shown that without regulation, foreign-owned firms do not necessarily provide "net benefits" to Canada. Side Deals: A dispute over Canada's 15% tax on all Canadian softwood exports to the United States was settled in favor of U.S. lumber interests as a condition for Senate Finance Committee fast-track approval for FTA negotia- tions. It is now entrenched in Article 2009. The Canadian industry estimates that the loss of this tax, as well as the rise in the Canadian dollar, have cost up to 100,000 jobs. The original U.S. communique announcing the FTA negotiations in October 1987 cited an agreement to extend longer monopoly patent protection to U.S. pharmaceutical companies. Under Canadian protest it was quickly with- drawn. Nevertheless, parallel to the FTA negotiations, the Canadian government approved separate legislation on compulsory drug licensing requirements which provided precisely such protection. Indirect Effects: The unpopular and regressive 7% Goods and Services Tax was imposed recently as a consequence of the FTA. It was intended to help Canadian exporters to compete, and to compensate for lost duty revenue. It is also a result of a narrowing of tax alternatives, especially with regard to corporate taxes, due to the greater mobility of capital under the FTA. Prior to the 1988 elections, Conservative politicians and most business leaders denied that free trade would lead to any "harmonization" of social programs and standards--cutting the benefits Canadians enjoy down to the U.S. level. How- ever, shortly after the election, a major business leader, Molson Breweries chief Mickey Cohen, admitted to the Financial Times of Canada that programs that put Canadian business at a disadvantage would have to be changed. "If we're going to compete, we have to look more like the guys we're competing with...." Others were quick to take his lead, reversing their earlier denials with shameless indecency. Some say bluntly that dismantling social programs and standards is necessary to compete under free trade; others point to the need to be globally competitive or to reduce the public debt. The Conservative federal government has been more than willing to comply; some provincial governments have resisted. Unemployment insurance, for example, one of the most important income support programs in Canada, has been cut back severely by tightening eligibility requirements, reduc- ing the amount and duration of benefits, and eliminating government financial participation in the scheme. A special benefit to East Coast fishermen was removed in response to claims by New England fishermen that it was an unfair subsidy. The goal of these changes was to introduce greater "flexibility" into the work force and make it more like the U.S. system: to level the playing field. Before the changes, four of five unemployed Canadians qualified for unemploy- ment insurance. Although figures are not yet available, it is now certainly closer to the one in three who qualify in the United States.

Tags: free trade, Canada, GATT, business, effects

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