In a period in which trade deals have been embraced as a sign of mutually shared values and prosperity, the impact of free trade on the Canadian economy has been anything but ‘freely’ produced.
Canada has, and continues to face the costs associated with the free trade deals. The biggest cost has been the loss of it’s economic sovereignty.
This series analyzes the ways free trade costs the Canadian economy. A review of free trade agreements such as the FTA, and NAFTA are provided.
Both agreements, and successive ones such as the Canada US Action Plan, have served to link the economies of Canada and the US.
The central pillar holding the entire economy together has been the global financial system and it is just one of several different engines driving Canada’s economic growth.
The financial system has brought with it many risks that leave the economy vulnerable to outside economic shocks.
A detailed analysis of the financial system is given in our 18 part series titled: Canada’s Path to Monetary Reform.
The other important engine for Canada’s economy is the trade system, which helps to facilitate the exchange of goods and services and serves to tie nations together through diplomacy.
To fully understand a nation, one must understand its trading behavior, partners, and processes for trade.
For decades, Canada has sold off its resources for “fire-sale” prices, presenting a number of costly problems.
There have been calls for trade reform in Canada so that it can receive fair value for its natural resources and commodities.
By implementing trade reform policies, the country would achieve greater financial flows, help reduce their national debt, assist the public with social programs, and facilitate adequate payments to the provinces.
This series gives a thorough overview, analysis, and recommendation for the Canadian economy in its attempts to seek trade reform.
To begin with, we provide an overview of how free trade costs Canada.
Loss of Canadian Sovereignty
The central problem with the current trade system is that Canada has been receiving less value for its resources from the various trade deals that have been signed.
The first of these trade deals is the Free Trade Agreement (FTA) signed by Prime Minister Brain Mulroney in 1988.
This deal set out several objectives in order to facilitate free trade between Canada and the U.S.
These objectives sought to;
- Eliminate trade barriers (i.e. tariffs) on goods and services
- Facilitate conditions of fair competition with-in the free trade area set out by the FTA
- Establish procedures for joint administration of the Agreement and resolve disputes
- Create a foundation for further cooperation to expand and enhance the benefits of the FTA
While the FTA had been successful in eliminating trade barriers between Canada and the U.S., it greatly reduced the inflows of wealth flowing into Canada.
The absence of tariffs on natural resources provided the U.S. with cheap access to lush reserves of oil, natural gas, coal, and fresh water all at Canada’s own expense.
This has left many critics of the FTA deal to speculate on who is really benefiting from the trade deals.
The following are trade-related problems that are rooted in the current free trade deals:
Canada US Trade Disputes
Reduction in Canadians quality of life and purchasing power
Loss of Canadian renewable and non-renewable resources
1.) Binding Clauses
Found within the details of the FTA deal is a clause which dictates that Canada must export a certain amount of its natural resources.
This has forced Canada to export over 60% of its oil and natural gas to the U.S.
The other trade deal was the North American Free Trade Agreement (NAFTA), signed in 1994.
This agreement weakened Canada’s economic sovereignty even further, over its own federal, provincial, and local regulations.
Details into both of these trade agreements, as well as their contracts, are covered in Binding Clauses and the Hidden Cost of Free Trade.
2.) Canada US Trade Disputes
The trade deals have also resulted in a number of trade disputes rocking Canada and US relations.
The first such dispute has been the long-running softwood lumber dispute.
This dispute has centered on the policy of stumpage and log export restrictions.
In Canada, stumpage charges are based on the amount of trees that are harvested and paid to the provincial governments since they own the majority of the land in their respective regions.
In contrast, the U.S. determines stumpage charges through open market auctions by private firms which are then paid to the private landowner.
3.) Reduction in Canadians quality of life and purchasing power
The trade deals have also left Canada with a human cost as well.
This cost has been “downloaded” onto the local level, where it is felt by ordinary Canadian citizens.
A specific example of this human cost is the Lumber IV dispute which resulted in the U.S. imposing a 27% tariff on Canadian exports, which served to marginalize Canadians since they had to pay for this increase.
The dispute also caused the lay-off of 15,000 workers in B.C. due to the imposition of U.S. tariffs.
Several of NAFTA’s provisions have also greatly hindered Canada’s economic sovereignty since they restrict the legislative powers of the provincial governments.
There have been quite a few cases demonstrating how foreign corporations have been able to undermine provincial governmental regulations, thus further weakening Canadian sovereignty.
These cases demonstrate the difficulties the provincial governments face when trying to introduce legislation to protect the public good and the environment.
The numerous trade deals have also undermined trade unions as well, in a trend that has been declining ever since the late 1980’s.
4.) Loss of Non-Renewable Resources
The numerous binding contracts have also had environmental and social implications for Canada’s non-renewable resources.
The expansion in the consumption of natural resources by the U.S. has, and will place greater pressure on the Canadian valuation of these resources in the future.
The following graph depicts the U.S. energy consumption on the list of non- renewable resources from 1965 to 2009.
As the above graph illustrates, the trend is clear; U.S. consumption of energy (especially non-renewable resources such as coal, natural gas, and oil) is increasing and Canada will have to continue to provide and supply the large majority of this energy.
Another problem facing Canada is an increase in the amount of bulk fresh water exports to the U.S.
Bulk water exports pose a significant problem for Canada since many U.S. states have already experienced water shortages in the past few decades and will continue to do so, creating a moral dilemma for provincial governments.
There is already a voluntary provincial ban on bulk water exports, and in recent years British Columbia, Ontario, Quebec, and Newfoundland have all considered licensing schemes for bulk water exports.
However, if these provinces were to lift the bulk water export ban, then it would be difficult to impose again due to the conditions on the binding contracts in the various trade agreements.
Thus far, the overview presented above demonstrate that the current trading system is in desperate need of reform.
This has led many leaders, academics, and civil society representatives to push for societal change through trade reform.
And despite the difficult position Canada is in, it has the leverage to demand fairer value for its resources since it houses a large reserve of precious resources.
Pt 2 examines the trading system and the various ideologies inherent in trade policy. These ideologies help to explain how trade works and why free trade is not actually “Free”.