Tough Calls on Trade Pacts Opened Doors for Canada

For international economic relationships and hemispheric free-trade agreements, Canada has become a pioneer and a model for other nations adapting to the modern, global economy.

More than a decade ago, Canada made a courageous decision to seek a free-trade agreement with the United States. The neighboring nations already had the largest trade relationship in the world because Canada bought more U.S. goods and services--$74 billion a year at that time--than Japan or any other country. And the U.S. was the main customer for Canadian exports of timber, metals and other natural resources--$84 billion worth.

But Canada felt vulnerable because actions Washington took in its frequent 1980s trade disputes with Tokyo ricocheted to hit Ottawa.

“We were the meat in the sandwich,” observes Kim Campbell, Canadian consul general in Los Angeles and a former prime minister.

So Canada, wanting more control over trade negotiations with its big customer, signed a free-trade agreement with the U.S. that took effect in 1989.

It was not an easy call. Many Canadians feared that the U.S. would wipe out Canada’s manufacturing jobs and leave Canada’s much smaller economy little more than work for miners and lumberjacks.

The result was far different. Canada-U.S. trade grew and diversified, helped by transfers of motor vehicles and parts through a prior agreement with Detroit car makers. The pact forced Canadian companies to restructure and focus their operations, but it also gave them opportunities to ship new goods and services to the U.S.

“Trade barriers limit possibilities; removing them opens things up,” says Campbell, 51. Still, her Conservative Party suffered for the changes it brought to Canada. Prime Minister Brian Mulroney, his popularity falling, resigned in 1993 and was replaced by Campbell, who served only five months before a new national election turned out the Conservatives.

To be sure, trade was not the only issue. Canada in the early 1990s was undergoing many changes. For decades the country of 30 million people had run large government deficits to support social programs, such as health benefits. In the 1990s, deficits had to be reduced to bring down Canadian inflation and interest rates and make its economy competitive.

Budget cuts eliminated deficits, but Canada’s transition was painful. Recession in the early ‘90s and the Asian crisis in 1997 held back Canadian growth. Still, Canada pushed forward, signing the broader North American Free Trade Agreement with the U.S. and Mexico that took effect in 1994.

NAFTA has helped Canada rebound to 4% economic growth, with notable expansion in employment. The country is now creating more than 500,000 jobs a year, adding 3.5% to its 15.6-million labor force.

How much of that results from expanded trade is a matter of debate. The Canadian government hails the doubling of U.S.-Canada trade--to $400 billion a year--for boosting the economy.

Economist John McCallum of the private Royal Bank of Canada concludes more modestly that trade has “made a bad situation better.”

In any event, Canada has changed. Business investment between Canadian and U.S. firms has grown substantially, as have Canada’s trade and investment with Mexico. Now “we are making new free-trade agreements with Chile and Israel,” Campbell says.

The message is simple: A decade ago, Canada saw that it had to change. And it did.