15.4 - Trade Policies Early Canadian Trade Policy

The National Policy In 1879, Canada’s first prime minister, Sir John A.

MacDonald instituted a wide-ranging tariff policy based on the infant industry argument for trade protection

This was done to prevent low-priced American competition

Due to this policy, American manufacturers chose to “jump the tariff wall” by setting up branch plants in Canada, which allowed them to continue to sell in Canadian markets

Early Canadian Trade Policy cont’d

The Great Depression When output and employment are falling, domestic

producers see trade barriers as a way of maintaining their sales despite shrinking markets

This made foreign countries retaliate by placing trade barriers on their own exports

All countries were made worse off by this decline in world trade

Now, countries know, that even in an economic downturn, it’s not a good idea to put up trade barriers with other countries, because it will make everyone worse off

General Agreement on Tariffs & Trade

In 1947, Canada was one of 22 nations that signed the General Agreement on Tariffs and Trade (GATT)

In 1995, GATT was replaced by the World Trade Organization (WTO) Through negotiations, both tariff and non-tariff barriers

have been gradually reduced Average tariffs in the 1930s were above 50% and have

since then fallen to below 5%

General Agreement on Tariffs & Trade cont’d

The rapid expansion of manufacturing in emerging economies is one of the reasons Canada’s natural resource suppliers had a boom in prices (in mid-2000s)

Countries like China and India are gaining comparative advantage in the production of many manufactured goods and services

Results for the world as a whole are good, but there will be painful adjustments in the short-run in established economies like Canada

Recent Trading Blocs A trading bloc is a relatively small group of

countries involved in a trade agreement 3 types:

Free trade area Customs union Common market

Free Trade Area Trade within a free trade area is tariff-free Examples include NAFTA (North American Free Trade

Agreement) Among Canada, USA & Mexico

Largest trading bloc in the world is the free trade established in 2010 between China and the ten-nation Association of South-East Asian Nations

Customs Union A group of countries that have agreed to charge the

same import duties as each other and usually to allow free trade between themselves.

Common Market

A group of countries imposing no duties on trade with one another and a common tariff on trade with other countries. Best example is the European union (EU), formerly

known as the European Economic Community (EEC) ECC was first formed in 1956 by six countries

The Auto Pact The Auto Pact of 1965 was an example of free trade in

the area of autos and auto parts The pact was beneficial for the 3 companies involved:

GM, Ford and Chrysler They wanted at least 50% of the car sales in North America This allowed their costs/prices to fall, employment to rise,

and the Canadian economy to rise as a whole In 2000, Japan and EU challenged the Auto Pact which led

to the World Trade Organization (WTO) decision telling Canada that the Auto Pact broke International Trade Rules

Auto Pact is no longer in effect, but it was an example of how a free trade area can be limited to a particular sector

2 of the 3 Big companies actually had to be saved from bankruptcy in 2008-09 recession

The Free Trade Agreement Canada-US Free Trade Agreement (FTA) –

includes trade in virtually all products between 2 countries Signed by Canada and the United States in 1988 http://

www.cbc.ca/archives/categories/economy-business/trade-agreements/canada-us-free-trade-agreement/free-trade-agreement-signed.html

Prime Minister Brian Mulroney’s Progressive Conservative government negotiated the treaty to increase economic growth by obtaining secure, stable market access to Canada’s largest trading partner

The Free Trade Agreement cont’d

PROS: Benefits occurs when you have increased

specialization Reduces the risk of American protectionist measures

against Canadian exports

CONS: Loss of political sovereignty for Canada Loss of Canadian jobs – branch plants close in

Canada so American companies can centralize their production and take advantage of increasing returns to scale

Effects of the FTA Both countries experience expanding trade flows Canada exported mostly in manufacturing industries

Office, telecommunications equipment, paper Canada’s imports grew in merchandise industries

Processed food, clothing, furniture Short-term adjustment costs: workers who lost jobs

in formerly protected industries were now getting jobs in expanding export industries

The North American Free Trade Agreement

NAFTA came into effect on January 1, 1994, creating the largest free trade region in the world

Generates economic growth and helps raise the standard of living for the people of all three member countries

By strengthening the rules and procedures governing trade and investment, the NAFTA has proved to be a solid foundation for building Canada’s prosperity and has set a valuable example of the benefits of trade liberalization for the rest of the world

Critics say there is a problem of including a country with a low GDP (Mexico) with 2 wealthier countries (Canada and US) EX. Companies may move to Mexico to take advantage of

cheaper labour Mexico also has a lax enforcement of labour and

environmental standards To counteract this, two-side

agreements to NAFTA were instated Two NAFTA members can

set penalties on the third member if that country does not enforce its labour and environmental laws

The North American Free Trade Agreement cont’d