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Canada’s Trading Revolution

Like those of my generation living in Western Canada, I remember only too well the grim coupling of the Great Depression and the great Prairie drought, both of which began in 1929, when I was 18 years of age, struggling to make a living and get an education.

Those disastrous events made an indelible impression on me and on my contemporaries. World War II ended the Depression and, at its conclusion, opened the way to a reconstruction of Canadian society designed to avoid another depression, to promote economic development, and to provide a social security net to protect the aged, the unemployed and the sick from the poverty, the privations and the humiliations they had suffered before the War.

In the midst of the War, I was asked to take a wartime job in the Department of Finance and had the privilege of being at the centre of economic policy making, during the War and in the post-war period of reconstruction.

I preface this lecture with a description of the beginnings of my personal involvement in public affairs for two reasons. First, although O.D. Skelton had died before I arrived in Ottawa to take that wartime job, I became very much aware of his legacy. Dr. Skelton was appointed by Liberal Prime Minister Mackenzie King as the Under Secretary of State for External Affairs. Mr. King was his own Foreign Minister, so, effectively, Dr. Skelton was the top civil servant in Ottawa. He used his position to recruit talented individuals to join him and to establish firmly the tradition of competence, impartiality and political neutrality in the senior ranks of the public service of Canada of which, for the best of reasons, he is regarded as the founder. Among his most significant recruits was Clifford Clark, a former colleague at Queen’s University, whom he persuaded the Conservative Prime Minister R.B. Bennett to appoint as Deputy Minister of Finance. It was Clifford Clark who asked me to take that wartime job in his Department in 1942 as a result of which I came to work with many of the individuals that Dr. Skelton had attracted to Ottawa, like Lester B. Pearson, in whose Ministry I served many years later.

Recently, I was asked by the Prime Minister to give some advice to the newly sworn ministers of his government. “The first thing you do”, I advised them, “is get to know your Deputy Minister who will be your most reliable supporter. He or she wants you to succeed because if you succeed your Deputy will succeed. If you fail your Deputy has to clean up the mess.” I think O.D. Skelton would have approved.

The second reason for going back to the great Depression and the great drought is that it is an excellent point of time from which to begin this lecture which is billed as “Ethics and International Trade”. I offered that title when I was asked what I was going to talk about before I had written a word. I shall deal with ethical questions affecting trade, but as you will discover, they are not as central as the title suggests.

I am the first O.D. Skelton Memorial lecturer who has been a politician and a Minister of the Crown. This, and my present poorly paid position as a personal advisor to the Prime Minister, requires me to say that mine is a personal, rather than an official, perspective on trade policy, past and present.

So I begin by reminding you of the attitude toward international trade prevailing during the Dirty Thirties among politicians and the general public, not only in Canada, but everywhere in the advanced countries. The onset of the Depression, the resulting surge in unemployment and business failures, led governments to resort to protectionism by imposing additional restrictions on imports. Here in Canada, Prime Minister Bennett boasted about blasting his way into foreign markets by raising tariffs. The United States enacted the infamous Smoot-Hawley tariffs, the highest level of protection in the history of that country, counterpart of American isolationist philosophy then prevailing. Although the Depression was less severe in Britain and European countries, their governments bowed to popular demands by imposing new barriers to imports.

In retrospect, it is evident that the protectionist measures designed to alleviate the effects of the Depression had the opposite effect; they prolonged it. To some extent, this adverse effect was recognized before the outbreak of the war. The exchange of trade preferences in 1932 among the countries of the British Empire, while discriminatory, did mark a small break in the pattern of rising protectionism. R.B. Bennett opened negotiations with the United States and Mackenzie King completed them when he returned to office in 1935, for a series of tariff reductions with the United States which were extended to all countries with which Canada had most-favoured-nation trade agreements. Before the war broke out in 1939, the average level of tariff protection around Canada was between 25 and 30 per cent, amongst the highest of any Western country, particularly with respect to manufactured goods, and comparable to the United States. Canadians were still, before the war, enamoured with John A. Macdonald’s National Policy.

The post-war financial reformers, including some distinguished Canadians like Louis Rasminsky, met in Bretton Woods in 1944 to restore confidence in currencies and to provide funds for investment in underdeveloped countries, leading to the formation of the International Monetary Fund and the World Bank. The reformers on the trade side, including Dana Wilgress and John Deutsch, met a few years later in Havana and Geneva to promote the formation of an international trade organization designed to restore order in trade relations disrupted by the war, and to provide a framework for negotiations among member countries to lower trade barriers.

The United States rejected the concept of an international trade organization. So the Canadian delegation had to settle for a General Agreement on Tariffs and Trade, which turned out to be one of the most effective, as well as the least bureaucratic, post-war instruments of economic reform.

The GATT became the instrument by which the governments of the advanced countries of the free world (as they were then called) traded concessions and dismantled step by step the barriers to trade they had erected in the bad old days of the 1930’s.

In a series of seven rounds of negotiations over nearly five decades among the member countries, tariffs were steadily eliminated and reduced. When the reductions of the last round – the Uruguay Round – are completed, the average level of most-favoured-nation tariffs imposed by the United States, by the European Community and by Canada, will be of the order of 2 or 3 per cent. Very few individual tariffs will be above 5 per cent. Exceptions occur because some quantitative restrictions will be replaced by tariffs, unfortunately at very high levels. And, of course, some quantitative restrictions remain in effect, particularly around the European Union, which are important to Canada.

From the outset, Canada has been a leading supporter of the GATT. This is a multilateral forum. The members, which increased in number, year by year, are countries with which we do business and want to do more. One of the principal reasons we entered into a trade agreement with Japan in 1954, for example, was to sponsor that country as a member of the GATT to bring it within the multilateral rules. The principle of mostfavoured- nation treatment – in other words, the principle of non-discrimination – conforms to Canada’s outlook on the world: we want as much freedom as possible.

Although this is so, Canada didn’t always participate in the GATT negotiations on the same basis as other industrialized countries. For example, in the sixth round of tariff cuts – the Kennedy Round – when I was Minister of Trade and Commerce, we did not agree to across-the-board percentage cuts in our tariffs. We argued that because of the nature of our trade – the high proportion of foodstuffs and raw materials in our exports and of manufactured goods in our imports – other countries gained much more valuable access to our market for manufactured goods than we gained from an equal percentage cut in the already low tariffs on foodstuffs and raw materials in countries to which we exported. We insisted on equivalence of benefits – which meant our tariffs on manufactured goods remained relatively high. At the time it was good politics. The government got credit for clever bargaining. However, one result was that it left our costs stubbornly high. Consequently, we have had more difficulty in adjusting both to the CanadaUnited States Free Trade Agreement and to the globalization of markets.

Multilateralism was, and is, a persistent strand of Canadian trade policy, although it was breached by entering into a free trade agreement with the United States. That is why we continue to participate in the GATT negotiations; that is why we support the formation of a world trade organization. And that is why we support NAFTA and its enlargement; the more members in NAFTA, the less isolated we feel in our relationship with the United States.

The second persistent strand of Canadian trade policy is our preoccupation with Canada-United States relations which goes back to the beginnings of our confederation. I shall not attempt an historical review, since 1867. An account of some more recent events in which I was involved will illustrate the nature of that relationship.

Some of you may remember Prime Minister John Diefenbaker’s press conference on returning from a trip to the United Kingdom in 1957 when he proposed that we should divert 15 per cent of our imports from the United States to the United Kingdom. I remember the occasion very well indeed because I was at the time Deputy Minister of Trade and Commerce and prepared a memorandum to my Minister pointing to the difficulties and the dangers of any such proposal. Notwithstanding the warnings of its advisers, the Diefenbaker government defended this idea of trade diversion at a meeting of the so-called Joint Cabinet Committee – in Washington in 1957. Donald Fleming, the Minister of Finance, spoke about not wanting to have all our eggs in one basket. John Foster Dulles retorted that the reason Canada sold so much to the United States was because Americans paid cash and that Canada wouldn’t be able to sell much to Europe if it hadn’t been for the Marshall Plan. Pretty tough stuff.

The British achieve the government, of course, liked the idea and suggested that one way to diversion of imports was to enter into a Canada-United Kingdom free trade agreement. The Canadian government pretended that no such proposal had been made. Later I learned that the British government was disappointed that nothing happened because at that time they were being thwarted by General de Gaulle of France in their effort to get into the European Community.

As a statistical fact, Canada was more dependent on trade with the United States at the end of the Diefenbaker regime that it had been at the beginning.

When the Pearson government took office in 1963, one of the early developments was the negotiation of the automotive agreement with the United States. Curiously, the idea came from the American side, who put it forward as an alternative to a proposal by Canada to promote exports of automobiles and automobile parts to the United States by duty withdrawal. The Americans said that this would look like subsidization of exports and would incur countervail; instead, why not have free trade between manufacturers? And so it came about, with excellent results for our export trade and for the companies concerned, particularly those located in Canada, all of whom were American owned. It wasn’t real free trade, of course, since consumers still had to pay duty on imports of automobiles from the United States. But it achieved its purpose.

The autopact worked so well that in the late 1970’s and early 1980’s efforts were made to find other industries that offered the same possibilities of a sectoral approach to free trade; but the search was in vain. It proved impossible to find any other industry with the special characteristics of the automotive industry, like complete American ownership.

Until the 1970’s, there was a so-called “special relationship”, never well defined, between Canada and the United States in economic affairs. It was founded on the principle that our economies were so intertwined that the United States could not improve its balance of payments at the expense of Canada. Any attempt to do so would have an adverse reaction on United States exports to Canada and on the financial return on American investments in Canada. I used this argument on several occasions to persuade the American authorities to modify the application of United States policies so as to exempt Canada.

In 1971, the U.S. Secretary of the Treasury, despite our protest, decided to treat Canada like other countries by imposing a tax on imports from Canada for balance of payments reasons. The special relationship came to an end. The Trudeau government undertook a fundamental review of our policy towards the United States, from which emerged a document signed by me as Secretary of State for External Affairs which became known as the Third Option paper. It rejected a continuation of the pragmatic policies then being followed; it rejected a free trade agreement with the United States; (there were no supporters for this option from any of the ministers or their deputies) and recommended as a Third Option that “Canada can pursue a comprehensive, long-term strategy to develop and strengthen the Canadian economy and other aspects of its national life and in the process to reduce the present Canadian vulnerability”.

Since I signed the paper, I may not be an impartial judge of its effect, but for what it’s worth this is my assessment. The publication of the paper did have the effect of confirming support for cultural institutions like the CBC and the Canada Council on the Arts, which helped to define Canadian identity. It led to an effort to diversify trade, particularly to do more business with Europe, and to the establishment of formal relations between Canada and the European Community. It did not, however, bring about any significant change in the direction of our trade, which became even more concentrated on the United States. The Third Option implied an internal restructuring of the Canadian economy to reduce our dependence on the United States. This wasn’t attempted and probably was too difficult to achieve given the overlapping jurisdictions of the federal and provincial governments.

Now I come to the decision by the Mulroney government to enter into a free trade agreement with the United States. I was out of politics at that time, so I speak as an observer without inside information. What surprised me and many others was the timing of the decision. In the election campaign of 1984, there had been no effort to persuade the electorate to support free trade with the United States. In other words, the government had no public mandate to embark on such a revolutionary course of action. The re-election of the government in 1989 implied retroactive approval, although it is doubtful that a majority of Canadian voters were in favour.

It was certainly consistent with Prime Minister Mulroney’s general attitude to the United States, and particularly to the President. He wanted closer relations. A free trade agreement also held out the hope of an end to the uncertainty about future United States trade policy and its effect on Canada. This hope has not been fully realized. I don’t think it is necessary to tell this audience about some of the difficulties that have been encountered. The Mulroney government must have been encouraged to go ahead by the conversion of Donald Macdonald, former prominent Liberal minister and colleague of mine whose Royal Commission report advocated a free trade agreement with the United States, and by a similar conversion on the part of Simon Reisman, a former Deputy Minister of Finance, who along, with Gordon Ritchie, became the chief negotiators of the agreement.

I spoke out against the agreement not because I was opposed to free trade; after all, I had spent most of my public life fighting protectionists and zealous economic nationalists. I preached the gospel of freer trade. I was one of the strongest supporters of the GATT. I had led a delegation to Latin America. As C.D. Howe’s Deputy Minister I opened trading relationships with the Soviet Union. Later, as Foreign Minister, I negotiated the establishment of diplomatic relations with the People’s Republic of China.

Here in Calgary, I should add that I helped to lay the foundations for what is now one of Canada’s main exports to the United States, natural gas, by working with C.D. Howe to gain parliamentary approval for the Trans-Canada Pipeline, and later, as Commissioner of the Northern Pipeline Agency, by supporting the pre-build of the Alaska Natural Gas Transportation System (ANGTS). Having in mind that my main activity as Commissioner of the NPA was to facilitate the movement of natural gas to the United States, it is a bit ironic that the reason I was replaced was my public opposition to the FTA.

The reason for my opposition to the FTA is this: Geography tends to favour trade between Canada and the United States in both directions and subjects Canadians to a heavy barrage of political and cultural influences. To maintain our identity we have always had to lean against these Americanizing influences. That being so, I think it is unwise for Canada to give better treatment to trade with our powerful neighbour, the United States, than to trade with other countries. In other words, I believe that, for Canada to retain its identity and as much freedom of action as possible, multilateralism is superior to regionalism or continentalism. My views did not prevail. My efforts, such as they are, are today directed to encouraging the extension of our trade horizons and to harnessing the free trade movement so that it becomes a vehicle for the restoration of non-discrimination as the governing principle of international trade policy.

Before drawing your attention to some things that can and should be done to achieve this goal, I would like to complete the list of what I consider to be the persistent strands of Canadian trade policy. First is our support for the principle of multilateralism, the second, our preoccupation with Canada-United States relations.

Third is our belief in the importance of trade, not only as a means of increasing our earnings as Canadians and as a nation, but as a means of promoting international understanding.

During the Second World War commercial considerations took second place to national security. Imports were limited to essentials, exports directed to our allies and denied to our enemies. The moral choices coincided with our strategic interests. When the hot war ended, and was followed by the divisions of the Cold War, new and complicated moral and ethical as well as material issues emerged in the debate about trade policy.

Central to the debate was the incompatibility of the Communist system of government that prevailed in the East Bloc countries led by the Soviet Union with the democratic market economies of the West, and the fear of Communist aggression. For some 10 years, the atmosphere of the Cold War was frigid.

In 1955, Lester Pearson, our Secretary of State for External Affairs, was invited to visit the Soviet Union and he asked me to go with him. It was the first sign of warmer weather. Pearson didn’t want his visit to be a photo opportunity. He wanted to do something tangible to promote detente, so he took advantage of the occasion to propose the negotiation of a trade agreement, which entered into force early in 1956, as one result of which the Soviet Union became a major wheat market for Canada.

I recall this event because it illustrates Canada’s general approach over the years to trade. As I have said, Canadian governments have looked upon the encouragement of trade as a useful means of promoting political understanding with our trading partners. They have been sceptical about trade embargoes as a punishment or as a means of bringing pressure to bear on governments of other countries to change their ethical behaviour, although such things have from time to time been advocated in Parliament. (We did, of course, impose restrictions on the flow of strategic goods to the East Bloc during the Cold War, in company with the NATO allies.)

Canada has never acted alone to apply trade sanctions. There have been occasions, however, when we joined international efforts with a moral purpose. One of the targets was South Africa as part of the pressure on the government of that country to abandon apartheid. There were always some doubts among impartial observers about the efficacy of the sanctions – I shared these doubts – but since they were supported by the anti-apartheid groups within South Africa as a symbol of the international condemnation of apartheid, they remained in place until the regime suddenly collapsed.

When Castro overthrew the Batista government in Cuba, the United States broke relations with the new regime and imposed an embargo on trade. Canada did not follow suit. Although we did take measures to prevent Canada from being used to circumvent the American embargo, we thought it was important to maintain ordinary channels of communication between governments through diplomatic contacts, and with ordinary Cubans through trade and tourism. If the United States had followed similar policies I venture to say that by this time Fidel Castro would not be a problem.

As for the Chinese revolution, Canada and the United States continued for several years to recognize the Republic of China government, even though its effective authority was limited to the Island of Taiwan. The United States government imposed an embargo on trade with the mainland – Canada, on the other hand, regarded the whole of China as being covered by the trade agreement that existed before the Civil War and continued to accord most-favoured-nation treatment. It was partly because of our continuing trade relations with China, especially the growing market for Canadian wheat, that the Trudeau government took the initiative of entering into negotiations to transfer our recognition from the Republic of China government in Taiwan to the People’s Republic of China government in Beijing. Seldom is Canada in a position to give international leadership. This time we did so. Many countries immediately followed our example, using the Canadian formula about Taiwan. Years later, the United States government did so too.

There was very little disagreement in any quarter about the appropriateness of these political and trade decisions – until Tienanmen Square. I had been in China in 1985 and had been impressed and encouraged by the changes that had occurred since my first visit in 1972. Not only was there an improvement in living conditions, there was also a new openness in personal conversations and discussions. Needless to say, I was appalled and bitterly disappointed by the bloody suppression of dissidents in Tienanmen Square.

My shock and disappointment did not lead me, however, to conclude that Canada should change its trade policy towards China. It is through trade and travel that democracy and the rule of law are being spread throughout the world, particularly in places where, until now, enterprise has been suffocated by authoritarian and arbitrary bureaucracy. This is as true of China as of anywhere else. As the vast Chinese economy expands through trade arid foreign investment, as it is expanding today, it becomes increasingly difficult to control from the centre by authoritarian methods and by the suppression of human rights. Greater freedom becomes a necessity.

Tremendous progress has been made since the end of the War in reducing and eliminating barriers to trade that so discouraged and distorted the world economy. Truly there has been a trading revolution. It is no longer an exaggeration to refer to the globalization of markets.

The most rapidly growing economies and markets are in the Asia-Pacific region. It was Japan and Hong Kong that originally led the way. Taiwan, South Korea and countries of South East Asia followed and massive investments are now being made in China, particularly in the provinces in proximity to Hong Kong.

Although not as spectacular, Latin America, which for so long seemed to be mired in a backwater, has returned to democracy and is beginning to move into the mainstream of development. Nowhere is there a better example of the link between trade and the extension of democracy.

It is encouraging too that our government has responded so vigorously to the new opportunities by organizing large and impressive trade expeditions to both areas, led by the Prime Minister, including hundreds of business representatives. As a former Minister and Deputy Minister of Trade and Commerce and Secretary of State for External Affairs, I have more than an ordinary interest in these developments. In my days in office, there was a clear distinction between foreign policy and trade policy. Foreign policy revolved around the great issues of war and peace. Now that the Berlin Wall is down and the Soviet Union is gone, trade policy has moved to the centre of the agenda of what is now the Department of Foreign Affairs and International Trade. To an increasing extent, relations between countries are defined by their economic relations. The European Union is a case in point. It began as a free trade area, became a customs union and now is acquiring some of the attributes of a political entity.

The trade expedition to Latin America had two purposes: to expand trade and to expand the NAFTA into an Americas Free Trade Area, by adding Chile to the free trade area and encouraging other Latin America countries to follow the same course. The long-run objective is the creation of a great free trade zone including most of the countries of the Americas, although there are no obstacles in the NAFTA to the addition of countries from other continents. Meanwhile, the European Union is increasing its membership. Three countries – Austria, Finland and Sweden – joined a few weeks ago and several other countries, including former republics of the Soviet Union, are seeking membership.

So here we have the spectacle of two geographical groupings of countries – which are increasing in numbers – engaged in eliminating trade barriers between their members but maintaining significant barriers against the rest of the world, including the other free trade grouping. I wonder whether those who approved the exemption from the GATT non-discrimination rule, permitting free trade areas, foresaw what is now taking place. I doubt it. If they had, I think they might have advocated a different set of rules.

In terms of the overall objective of the GATT, which is to reduce or eliminate trade barriers, it is curious that these two geographical groupings, which include all except one of the members of the Group of 7 – Japan – are making successful efforts to extend the scope of their regional free trade areas, but show few signs of wanting to establish free trade between them. It is true that the Uruguay Round lowered tariff barriers, and the GATT now covers agriculture products and services. This is helpful; it also means, of course, that there would be fewer adjustments to make as a result of removing, or redrawing, the barriers around the members of the two free trade groupings.

In my early days in politics, Lester Pearson advocated a North Atlantic Free Trade Area, to unite the economies of the Western world. He saw the advantage for Canada of belonging to a free trade area that embraced our major trading partners – the United States and Western Europe – and our major allies in NATO.

At the beginning of last December, Prime Minister Chrétien revived the idea in a speech in France. Apart from the advantages for Canada, a free trade area of this scope would give a new impetus to world economic cooperation, which is urgently needed; our international institutions are not adequate to the demands that are being placed on them by the trading and investment revolutions being played out before us.

It would be a signal, in particular, of the continued partnership of Western Europe and North America in world affairs, which my generation took for granted for so many years.

The problems involved in constructing a free trade agreement of which the European Union and NAFTA can be part are formidable, both technically and politically. But one shouldn’t be deterred. It is common experience, at least it has been my experience, that not all problems need to be settled at the outset. Some can be allowed to mature and often, when neglected, disappear. The essential decision is to embark upon the exercise; that decision brings constructive factors into play, which would otherwise be dormant.

Canada is in a unique position to take this initiative. Historically, this country enjoyed a reputation as a bridge across the Atlantic in relations between Britain and the United States. A generation ago, as I have said, Prime Minister Pearson advocated a North Atlantic Free Trade Area. Canada’s two major trading partners are the United States and the countries of the European Union. We already have a contractual link with Europe. Canada has the advantage that it also looks westward across the Pacific and took the lead several years ago in developing relations with Japan and China and is a member of SEATO and APEC. This is important because, in advocating a free trade agreement between the European Union and an Americas Free Trade Area, Canada would be drawing attention to the possibility of extending this proposed free trade area in the Atlantic region to include countries in the Asia-Pacific region that wish to join and can meet the requirements of membership – a global approach to free trade, an idea whose time has come.

Perhaps I should repeat what I said at the outset, in case anyone thinks otherwise, that these are my views and not necessarily the views of the Government. By opening the subject, Mr. Chretien has stimulated me and I hope others to think in new ways about future possibilities.

This lecture is coming to an end. But history is not coming to an end. The international trading revolution that has taken place during the 50 years or so that I have been involved in government has not yet had its full effect on the lives of men and women and on the economic development of the countries they inhabit. Things are moving in the right direction from a Canadian point of view and from a global point of view. Technological innovations are spreading more rapidly than before and so is investment capital. The world economy is expanding, and so is democracy. But progress for some individuals and businesses involves disruption for others. A major task facing democratic governments everywhere, and certainly in Canada, is to ensure that the unfortunate are not forgotten and that they, as well as the fortunate, benefit from the new wealth created by the trading revolution and the innovations and investments that accompany it.