1. Canadian Trade Policy

2. Development of Canadian Trade Policy
During the past 150 years, trade restrictions (most often in the form of protective tariffs) have generally decreased globally, with a few notable exceptions
The US has greatly influenced the evolution of Canada’s national trade policy
Not surprising given its historic role as our country’s major trading partner

3. Fluctuations in Tariff Rates: Highlights
Reciprocity Treaty
In 1854, the British and US governments signed the Reciprocity Treaty
Established a free trade relationship between what was then called British North America and the US
By 1866, this reciprocal agreement had fallen victim to political and economic pressures
It was canceled, and trade tariffs rose sharply prior to and immediately after Confederation in 1867

4. Fluctuations in Tariff Rates: Highlights
National Policy
In 1879, Canada’s first prime minister, Sir John A. Macdonald, succeeded in passing the National Policy into law
The main components of this policy were:
The imposition of high tariffs on imported manufactured goods to help develop and protect domestic industries
The building of a transcontinental railroad (Canadian Pacific) to open the west for settlement and to promote a strong east-west trading pattern within Canada
The promotion of Prairie settlement through the provision of free land to settlers

5. Fluctuations in Tariff Rates: Highlights
This “tariff wall” persuaded many US manufacturers to open branch plants on the Canadian side of the border
Could continue selling in Canadian markets without facing tariffs
Tariff rates peaked around 1890, after which the prevailing trend was to slowly reduce trade tariffs
This liberalizing trend was primarily driven by the general economic prosperity of the times and lasted into the 1930s

6. Fluctuations in Tariff Rates: Highlights
Great Depression and Second World War
During the Great Depression of the 1930s, Canada attempted to combat rising domestic unemployment by raising protective tariffs
Governments in most industrialized nations increased tariffs
Partially to stimulate domestic employment
Partially to retaliate against restrictions imposed on their products in foreign markets
In the end, this general decline in world trade hurt the economics of all industrialized nations

7. Fluctuations in Tariff Rates: Highlights
By 1939, the economic crisis of the Great Depression had been effectively addressed
In most industrialized nations, Canada included, tariff rates had been once again reduced to promote higher levels of world trade
With the outbreak of the Second World War in 1939, world trade was once again adversely affected
Canadian tariff rates were quickly increased during the early 1940s

8. Fluctuations in Tariff Rates: Highlights
General Agreement on Tariffs and Trade
Since the global failure of protectionist trade policies during the 1930s, the prevailing trend has been to liberalize trade though a general reduction in tariffs
In 1947, Canada, the US, and 21 other nations (representing well over 90% of the world’s trade) signed the General Agreement on Tariffs and Trade (GATT)
An international agreement designed to reduce trade barriers among member nations
Tariffs in member nations fell from an average of 40% in 1947 to an average of 5% in 1988, while the volume of international merchandise trade increased 20X

9. Fluctuations in Tariff Rates: Highlights
The 132-member World Trade Organization (WTO) institutionalized, strengthened, expanded, and ultimately replaced the GATT in 1995
Since then, 12 more members have joined
Average tariffs continued to fall

10. Major International Trade Agreements: GATT/WTO
Multilateral trade negotiations involve simultaneous agreements among a number of nations
Bilateral negotiations produce agreements between two nations
When a nation acts alone, in matters that also involve other nations, the nation is said to be taking a unilateral action

11. Major International Trade Agreements: GATT/WTO
The most inclusive, sustained, and successful multilateral negotiations to promote global trade were the 8 rounds of GATT meetings that eventually culminated with the establishment of the international institution known as the World Trade Organization (WTO) on Jan 1, 1995

12. Major International Trade Agreements: GATT/WTO
Like the GATT of 1947, the WTO Agreement operates according to the following 4 essential principles:
Trade must be conducted on the basis of non-discrimination. No member can give special trading advantages or deny equal treatment to another member
Once imported products are admitted into a domestic market, they can’t be treated differently than similar domestic products, such as being subjected to more onerous internal taxes
Where it is given to domestic industry, protection should be extended through clear and quantifiable customs tariffs instead of through fees and charges
Any country wishing to join the WTO must submit a listing of all presently negotiated tariff levels with member countries and all non-tariff trade restrictions. Thereafter, only reductions can be negotiated

13. Major International Trade Agreements: GATT/WTO
The WTO’s institutional commitment is to liberalize world trade further through multilateral negotiations
Where member nations find themselves in dispute over existing trade practices, the WTO Dispute Settlement Body has the sole authority to:
Establish expert panels to consider each argument
Render a ruling
Review appeals to the ruling
Monitor implementation of the ruling
Authorize retaliation when a member nation doesn’t comply

14. Regional Trade Agreements
Given the increased number of nations participating in recent WTO talks, the negotiation process has become far more complex
Some observers believe that the new trend may be toward more specialized regional trade agreements, such as the Free Trade Agreement between Canada, Mexico, and the US
These regional agreements, negotiated outside the WTO, are called trading blocs
The WTO recognizes these agreements as complements (rather than alternatives) in the pursuit of more open trade
There are presently 3 types of trading blocs
Free trade areas
Customs unions
Common markets

15. Regional Trade Agreements
Within a free trade area, trade between member nations is conducted without tariffs
Members are allowed to impose separate tariffs on imports from non-member nations
The North American Free Trade Agreement (NAFTA), which came into effect in 1994, established a free trade area that includes the nations of Canada, Mexico, and the US

16. Regional Trade Agreements
A customs union represents a stronger degree of regional integration
Includes not only free trade among its members, but also a common set of trade restrictions imposed on the rest of the world
However, restrictions on the movement of capital and workers among member nations remain in force
The 12-member Caribbean Community and Common Market (CARI-COM) is an example of a customs union

17. Regional Trade Agreements
A common market is the strongest form of regional integration
Common market agreements include:
Free trade of goods and services within the bloc
Free movement of capital and labour within the bloc
Imposition of a common set of trade restrictions on non-members
The European Union (EU) is the largest and most powerful common market
In population and productive capacity, the EU rivals the economy of the US

18. Regional Trade Agreements
On Jan 1, 1999, the EU took regional integration a bold step further
Introduced a common currency for 11 of its member nations
The currency, the euro, has been doing well in foreign money markets since its introduction

19. The Road to NAFTA Auto Pact, 1965
Before 1965, a 15% tariff was imposed on American cars imported into Canada
To avoid the tariff, US auto makers opened branch plants in Canada
Given the relatively small size of the domestic market, Canadian plants were unable to benefit from economies of scale
As a result, production as less efficient, car prices were significantly higher, and Canadian auto workers earned less than their American counterparts

20. The Road to NAFTA
The Canada-US Automotive Products Agreement (or Auto Pact) was signed in 1965
Established free trade in automotive vehicles and parts between the two nations
This integration and rationalization of the auto industry increased efficiency in both nations, protected jobs, increased wages of Canadian auto workers, and reduced the relative price of automobiles

21. The Road to NAFTA Free Trade Agreement (FTA), 1989
After the recession of 1982…
The rising tide of protectionism in the US threatened to restrict Canadian exports from its major market
Americans were also growing disenchanted with the Auto Pact, which appeared to have shifted in Canada's favour by the mid-1980s
In order to improve access to US markets, the Canadian government negotiated a free trade agreement with the US

22. The Road to NAFTA
The Free Trade Agreement (FTA), which came into effect on Jan 1, 1989, had such provisions as:
Phasing out of tariffs and most trade barriers within 10 years
Freer trade in services
A binding mechanism to settle trade disputes
Retention of the Auto Pact provisions
Elimination of restrictions on the import of used cars into Canada
No export subsidies permitted on trade between Canada and the US
Elimination of restrictions on energy imports and exports
Easing the restrictions on US investment in Canada (except in cultural industries such as the media) so that takeovers of Canadian firms with assets less than $150 million are no longer subject to Canadian government approval

23. The Road to NAFTA
As a benefit of this agreement, trade between the partners has increased significantly, but there has been costs
Workers in some formerly protected industries lost their jobs
Trade theory suggests that, in the long term, jobs lost in declining industries should be replaced by expanded employment opportunities in competitive export industries
However, with the global recession of the 1990s and the high unemployment rates that persisted during the recovery that followed, the hardships imposed on displaced Canadian workers and their families can’t be taken lightly
Critics argue that an important second cost of free trade is Canada's increased dependence on the US economy and increased US ownership and control of Canadian industry

24. The Road to NAFTA North American Free Trade Agreement (NAFTA), 1994
Signed into effect on Jan 1, 1994, NAFTA established a free trade area with 360 million people and a combined economic output of US$6 trillion
This compares favourably in scale to the 326 million people and US$5 trillion output of the European Union
For all intents and purposes, this agreement extends most of the provisions of the FTA to include Mexico
Although Mexico has never been one of Canada’s major trading partners, imports from Mexico doubled from 1990 to 1996
Unfortunately exports to Mexico remained unchanged
This was much more favourable for the US, since Mexico is its 3rd largest trading partner, after Canada and Japan

25. The Road to NAFTA
Advocates of NAFTA are quick to point out that the Canadian economy could ill afford to stay outside a trade area projected to include most of the Americas by the time it’s complete
Critics of the NAFTA point to the potential loss of jobs that may occur if businesses relocate to Mexico to take advantage of lower wages and of lower worker safety and environmental standards
In both Canada and Mexico, the potential for loss of control in cultural industries and the potential for increased US ownership in general continue to raise concern