No, Canada? : While Trade Agreement Has Defects, Its Ills Are Wildly Inflated

<i> Robert J. Samuelson writes about economic issues from Washington. </i>

The Canadians are about to hold an election. Listening to the rhetoric, you’d think the United States was poised to annex the place. Somehow the Americans are going to dismantle Canada’s health and welfare system, obliterate its culture and steal much of its oil and gas reserves. None of this will happen. Many Americans don’t know there’s an election Monday.

Superficially, the central issue is the U.S.-Canada Free Trade Agreement. But what the election is really about is economic nationalism. Being close to the United States benefits Canada; the Canadians can sell to the vast U.S. market and share U.S. technology. But it’s precisely this interdependence that fans fears that less tangible aspects of Canadian life--everything from social programs to a national literature--are threatened.

Canada’s population (26 million) is slightly less than California’s. Little wonder that many Canadians fear being overwhelmed by Uncle Sam. They see the United States as a colossus that is both marvelously productive and vaguely menacing. If Canadian anxieties are exaggerated, they’re understandable. Many Americans are rattled by a Japanese presence here that is far smaller than the U.S. presence in Canada.

The fear is that growth of global trade and finance robs countries of their distinctiveness and sovereignty. That’s the basic charge against the free-trade agreement. Negotiated by the Conservative government of Prime Minister Brian Mulroney, it’s opposed by the Liberals and National Democrats. It’s been approved by the United States and would take effect in 1989 if Mulroney wins. He was once the favorite, but Liberal leader John Turner’s attacks on the agreement have made the election too close to call.


The truth is that the agreement’s economic effects--for good or ill--are wildly inflated. It would phase out all remaining tariffs between the two countries over 10 years. Some industries in both countries would benefit. For example, Canadian tariffs against U.S. furniture (14%) remain high. But for most industries, the impact would be modest. Past trade negotiations have already eliminated 65% of the Canadian tariffs and 80% of the American.

Likewise, scuttling the agreement (as Turner has pledged) wouldn’t suddenly end Canada’s economic dependence on the United States. Consider:

--Canada exports 24% of its gross national product, a rate four times that of the United States. Three-quarters of Canadian exports go to the U.S. market. As for imports (23% of GNP), about 70% are American. In 1987 Canada ran a $12-billion trade surplus with the United States.

--Canada is tightly tied to the U.S. business cycle. The harsh 1981-82 American recession triggered an even sharper slump in Canada. In 1982 Canada’s GNP dropped 3.3%; the U.S. decline was 2.5%.


--There’s already plenty of foreign investment in Canada; three-quarters of it is by American firms. Some industries are highly integrated between the two countries. U.S. automakers have 35 plants in Canada, employing 85,000 workers. More than 2 million cars and trucks are shipped across the border annually.

The logic of uniting the two countries economically is that the efficiencies of serving a mass market raise living standards. The logic works, especially for Canadians. In 1986 Canadian living standards (measured as output per person) were 93% of the U.S. level, according to the Organisation for Economic Cooperation and Development. By contrast, German living standards were 74% of the U.S. level and Japanese 71%.

The free-trade agreement has defects, but scrapping it would be a big mistake. Mulroney asked for the agreement and if it is dropped, U.S.-Canadian relations would suffer. Negotiations on other issues (from acid rain to future trade disputes) would be tougher. Rejection would also hurt Canada’s economy. Foreign and Canadian companies would regard Canada as a less attractive location for new investment to serve the North American market.

And for what? The basic premise of the opponents’ argument is false; greater economic integration with the United States won’t end Canada’s political autonomy or devastate its culture.

Many of the specific criticisms of the agreement are absurd. It’s said, for example, that Canada’s popular national health-insurance system might be declared an illegal trade subsidy. Companies (the theory runs) have workers’ health-insurance costs subsidized by government. The theory is simply wrong. The agreement permits government programs or tax breaks that are widely available. What’s restricted are payments tied to exports or favoring export industries.

More generally, the idea that economic interdependence imposes cultural homogenization is a vast simplification. In most countries, regional differences flourish despite unified national markets. Massachusetts is not Mississippi. There are huge contrasts among Canada’s provinces. Likewise, national identities survive foreign trade. Politics can also express national preferences. Indeed, Canada’s welfare system has become more generous--and more unlike its U.S. counterpart--even as economic ties between the two countries have grown.

There’s a lesson for Americans in the Canadian debate. Of course, growing foreign commerce compromises a nation’s sense of self-sufficiency. Economic independence diminishes. But economics isn’t everything. Local politics and culture have great resilience. Americans should heed that lesson even if Canadians don’t.