Free Trade

Subsequently, the US and Mexico announced their intention to pursue a trade and investment liberalization arrangement, so Canada asked to be a party to the negotiations. As a result the North American Free Trade Agreement (NAFTA) was signed and came into effect on 1 January 1994, creating a huge free trade zone of about 370 million people. It extended and superceded the Canada-US Agreement after which it was modelled.

A free trade area as defined by the GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) is "a group of two or more customs territories in which duties and other restrictive regulations of commerce ... are eliminated on substantially all the trade between the constituent territories in products originating in such territories." NAFTA, although technically a free trade area, has certain attributes not unlike a customs union - where the member nations maintain the same duties and regulations regarding non-member third countries - or even a common market - which allows for the free flow of factors of production (labour and capital) among the member nations. Examples of such attributes are the pressure for Canada and Mexico to conform to US tariff levels, and the detailed rules of origin requiring high North American content for a wide range of consumer goods. The liberalization of services trade, including financial services and capital flows generally, enhanced international freedom of movement for service and business persons and many professionals, and resource-sharing arrangements (particularly between Canada and the US) all suggest a common market in the making too.

Traditionally, free trade negotiations have focussed upon the elimination of tariffs and quantitative restrictions on merchandise trade. But for Canadians exporting to, or desiring to export to, the US, tariffs were not the main concern as even prior to the free trade agreement 80% of Canadian shipments already entered tariff free and less than 10% of exports faced US tariffs in excess of 5%. Many of these were clothing, textiles, footwear and some petrochemicals. Some commodities, of course, continued to face such high tariffs that they were not sold to the US at all.

More important for Canada than the removal of the remaining US tariffs was the objective of obtaining secure and stable access to US markets, without constantly having to fight US countervail, antidumping or other safeguard actions; and to get agreement on what Canadian government assistance to industry would be free from countervail. Canada also wanted US government procurement to be opened up to Canadian firms, and an effective and binding dispute settlement mechanism that did not rest entirely on decisions made in the US.

The US in turn wanted all trade in services and intellectual property included in the agreement; unhindered access for investment in Canadian industries, particularly the energy sector, without Canadian federal government surveillance or restrictions; and limits on government policies generally which might reduce US exports.

It was the expectation of many Canadians that more secure access to the US market would stimulate a range of efficiency-improving measures by Canadian manufacturers and thereby narrow the productivity gap between US and Canadian firms. Although new economies of scale have undoubtedly been achieved through the rationalization of Canadian manufacturing, and new technology has been adopted in Canada at a fast pace, the productivity gap with the US of about 25% has not been narrowed. It remains much as it was before free trade was instituted.

The liberalization process has nevertheless greatly expanded Canadian exports to the US. Between 1990 and 1995 such shipments grew 12% annually, nearly twice the rate of growth of Canadian exports to the rest of the world. The greatest gains were in those industries where US tariffs were reduced the most. Exports of nonresource products have grown twice as fast as resource-based commodities, particularly the technologically intensive products such as office equipment, telecommunications products, precision instruments and a variety of other equipment and machinery. Some resource-based products such as fine papers and chemicals grew quite rapidly too. The result has been that Canadian dependence upon the US as a market for exports has increased from 74.5% in 1988 to 82% in 1996. In addition, the Canadian share of the US import market has increased over this period.

For service industries the removal of some nontariff barriers and the general stimulus of the free trade deal to Canadian firms to have a more export-oriented perspective has resulted in Canadian service exports to the US growing rapidly too, particularly financial services, consulting, communications and advertising.

Adding Mexico to the Canada-US agreement has not been of great significance for Canadian exporters as yet, since less than one-half of 1% of Canadian foreign sales are to Mexico. The positive implications for the service industries, particularly financial services, are likely to be of more importance for the forseeable future.

Canadian imports from the US have grown rapidly too, both in high-technology products and a number of labour-intensive industries such as furniture, clothing, processed foods and various household items. The result has been that Canadian dependence upon the US as a source of supply - which had remained at about 69% of imports for several decades - increased to 76% by 1996.

Imports from Mexico are somewhat more important for Canada than are exports to that nation at this time. They amount to about 2.5% of total imports, but are concentrated in relatively few sectors such as automotive parts, electrical machinery and equipment and some foodstuffs. It is still too early to be able to say with much assurance what the longer run effects of the NAFTA will be on such trade.

Canada was not successful in getting all government procurement liberalized. About 90% of US government procurement is still not open to Canadian firms. On the other hand, although the US did not initially get intellectual property included in the Canada-US agreement, during the negotiations to bring Mexico into the deal intellectual property was included.

No real progress was made in defining what were acceptable subsidies or in removing the applicability of antidumping and countervailing duty laws. The two nations had agreed to do more on these issues, but nothing came of this in the context of the free trade agreement. However, in the Uruguay Round of GATT negotiations stricter rules were developed on dumping, and permissible and nonpermissible subsidies were defined.

A dispute settlement mechanism was established so that binational panels review US and Canadian findings of dumping or subsidy to ensure that each nations laws are administered correctly. This has worked fairly effectively except in some cases such as with SOFTWOOD LUMBER and durham wheat where the US has found ways of circumventing the free trade rules to limit Canadian exports. (Unlike in Canada where the free trade agreement effectively takes precedence over other Canadian laws, in the US other legislation takes precedence over the free trade deal.)

Canadian rules on foreign direct investment were liberalized so that few restraints remain on US firms wishing to establish themselves in Canada. Thus, since the agreement, thousands more Canadian firms have been taken over by US investors, and much Canadian direct investment has gone into the US, so that in this way too the degree of integration of the economies has increased.

A concern of some Canadians was whether a comprehensive free trade arrangement with the US, which has a number of the characteristics of a common market, would over time erode Canadian economic and political sovereignty irreversibly. Many would argue that this has not happened in that Canada has continued to protect its cultural industries (as provided for in the agreement), and pursue an independent foreign policy in relation to nations such as Cuba. Others would submit, however, that even though as a consequence of the free trade agreement, the Uruguay Round, and the trends in the world generally, Canada has become much more globalized in its orientation, it nevertheless has increased its actual concentration of trade and investment with the US. They would add, too, that just as it took the original European Common Market over 30 years to move from being a limited customs union to something now approaching complete economic and political integration under the leadership of Germany, so, over time, Canada could end up in a similar relationship with the US - which has a far more dominant role in North America than Germany has had in Europe.

In the meantime, however, Canada is attempting to broaden its free trade relationships. The first of these is the bilateral free trade agreement which has been struck with Chile in 1996 and which is scheduled to come into effect in 1997. Essentially, the model of the NAFTA has been used for the Canada-Chile relationship. (The US is not involved at this point.) Again, Canada negotiated a free trade arrangement with Israel in 1996 as well (something the US has had since 1985). However, both of these agreements have mostly symbolic significance at this stage, for Canada's trade with each of these nations is only about 1/7th of 1% of the nation's total trade.

See also BALANCE OF PAYMENTS; EXPORTS; IMPORTS; INTERNATIONAL TRADE; WORLD TRADE ORGANIZATION.

Author BRUCE W. WILKINSON

Links to Other Sites
Commission for Environmental Cooperation
An international organization created by Canada, Mexico and the United States under the North American Agreement on Environmental Cooperation (NAAEC). The CEC was established to address regional environmental concerns, help prevent potential trade and environmental conflicts, and to promote the effective enforcement of environmental law.

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Canada Treaty Information
This searchable online database provides the full text copies of international treaties in which Canada is a signatory. From the Treaty Section of the Department of Foreign Affairs and International Trade.

A Trading Nation Canadian: Trade Policy from Colonialism to Globalization
Extensive online excerpts from Michael Hart's book, a survey of the history and political economy of Canadian trade policy. From Google Books.