Keywords International Trade

The key theme that ran through the first 50 years of Canadian-American economic relations was the issue of FREE TRADE. Historically, Canadians opposed to complete free trade have argued that it would entail the eventual loss of political SOVEREIGNTY, lead to greater integration in economic and industrial policy, and further constrain Canada's ability to adopt independent economic policies. Opponents of free trade have contended that even if the US agreed to free trade, the US Congress would use nontariff barriers to hinder any gains that may accrue to Canadians from such arrangements. Supporters argued that only through free trade, and the consequent unimpeded access to US markets, would Canadian manufacturers be able to become efficient producers with large enough sales volumes to support research and development (see INDUSTRIAL RESEARCH AND DEVELOPMENT; INDUSTRIAL STRATEGY). The debate was renewed as free-trade negotiations were assiduously undertaken by the Mulroney government in 1986-87.

In 1866 the US abrogated the Reciprocity Treaty of 1854 in angry response to British aid to the Confederate states. Although negotiations leading to the Treaty of WASHINGTON (1871) failed to restore RECIPROCITY or procure compensation for the damage resulting from FENIAN raids, they did result in US recognition of Canada as a nation in the North American continent. In the 1891 federal election, the Liberals campaigned on a platform of unrestricted free trade, losing by a narrow margin. For its part, the US rebuffed free-trade proposals from Canada and maintained protectionist or high-tariff policies.

Despite the mutual political suspicions, the 2 countries developed from 1875 to 1900 the linkages that determined the pattern for closer economic integration. Americans invested heavily in Canada, establishing "branch plants" and taking over many Canadian-owned enterprises (eg, in 1898 the giant Standard Oil company acquired Canada's largest oil company, Imperial Oil). Trade increased, and business and financial ties were quickly formed, reinforced by transportation, labour and other links. The high-tariff policies of the NATIONAL POLICY attracted enormous amounts of US capital and investment. In 1914, although 72% of nonresident investment in Canada was from the UK, the US supplied twice as much capital for direct investment in mining and manufacturing as the UK. Canadian unions, which burgeoned during this period, were closely affiliated with their US counterparts.

In 1911 President William Howard Taft's administration reversed decades of US protectionism when Taft and Prime Minister Wilfrid LAURIER reached an agreement providing for a limited free-trade pact covering tariffs on a significant list of manufactured products. Enabling legislation was passed by the US Congress but was blocked by the Conservative Opposition in Parliament. The Canadian general election of that year was fought largely on the free-trade issue, and Laurier's defeat was partly a result of fears that free trade was the first step to political annexation.

In both the US and Canada the INDUSTRIALIZATION that had begun in the mid-19th century expanded rapidly in the early 20th century. Hundreds of millions of US dollars poured into Canada to create more subsidiaries or branch plants or to take over ownership of promising Canadian companies to serve Canadian and British preferential markets in fast-developing new industries such as motor vehicles, electric appliances, chemicals, machinery and metal processing. With the GREAT DEPRESSION, however, Canadians were made aware of the vulnerable position in which they had been placed by excessive dependence upon the US economy. In 1930 the US Congress passed the Hawley-Smoot Tariff, which raised the duty on US imports to the highest levels in history. Canada responded with new high tariffs of its own, while Canadian Prime Minister R.B. BENNETT pledged to "blast a way" into the world markets and reduce Canadian dependence on the US economy. In 1932 his government hosted the Imperial Economic Conference in Ottawa to revise the system of tariffs within the British Commonwealth and Empire.

Trade relations improved following the passage in the US of the Reciprocal Trade Agreements Act in 1934; Canada and the US began negotiations to lower tariffs and increase trade. In 1935 PM Mackenzie KING concluded the Canada-US trade agreement that had been initiated by the Bennett government. A second and broader Canada-US trade agreement was signed in 1938, leading to further reductions in tariffs. Canadians and Americans collaborated intensively during WWII. In 1940 a meeting between Prime Minister King and President Roosevelt near Ogdensburg, New York, led to the creation of the PERMANENT JOINT BOARD ON DEFENCE (PJBD), which also provided the means for close economic and other relations between the 2 countries. Following US entry into the war, the PJBD organized a number of major American-financed activities in Canada, including the ALASKA HIGHWAY and the Canol project, which expanded oil production at Norman Wells, NWT.

Before the official US entry into the war, Canada dramatically expanded its industrial capacity, partly by purchasing vast amounts of machinery and equipment from the US. By early 1941 Canada's foreign exchange reserves of US dollars had plummeted to dangerously low levels and Canada turned to the US for help. King and Roosevelt negotiated the Hyde Park Agreement, which provided for significantly increased US purchases in Canada and allowed British use of US lend-lease funds for American war components imported by Canada for use in British military equipment. Both these measures increased Canadian holdings of US dollars to cover imports from the US.

The postwar demand for consumer goods, the vast influx of immigrants, and the need to convert a wartime industrial machine to civilian needs resulted in a sharp increase in Canadian imports of US consumer goods and industrial machinery. Canada's postwar exports, however, fell sharply. By 1947 Canada was importing twice as much as it was exporting to the US. Because Britain and Europe were devastated by the war and short of foreign exchange, Canada could not, as it had in the past, pay for its US trade deficit from a trade surplus with the rest of the world. By 1950, however, these problems had largely disappeared, and Canada was enjoying an investment boom.

In the Cold War atmosphere of the late 1940s and early 1950s, US corporations embarked on a massive program to locate and develop Canadian natural resources, from oil and gas to uranium and nonferrous metals such as copper and iron ore. This program of investment, along with parallel investment in other major industries, helped fuse the Canadian economy even more closely with that of the US. A large and increasing share of Canada's mining, oil and gas and manufacturing industries fell under US corporate ownership and control.

In an attempt to avoid a return to bilateral negotiations with the US, which exposed Canada to the possibility of having to make concessions in one area to obtain US concessions in another, Canadian leaders turned to multilateral arrangements, such as the General Agreement on Tariffs and Trade (GATT) in international economic relations, and the North Atlantic Treaty Organization see NATO) in military relations, believing they offered greater opportunity, through alliances with other countries, to curb the unilateral exercise of power by the US and to reduce the danger of direct Canada-US confrontation.

Nevertheless the process of continental integration continued, with Canada the supplier of raw materials and the US the supplier of industrial capacity and technology. For a number of years the Joint Ministerial Committee on Trade and Economic Affairs, composed of the principal economic Cabinet ministers for each country, met annually to deal with issues such as a US program for the disposal of surplus grains to developing countries, which undercut Canadian commercial grain sales, and the extraterritorial application of US law to US-owned subsidiaries in Canada, which barred exports by these subsidiaries to China, and later Cuba, and which infringed upon Canadian sovereignty.

In 1957 a new Conservative government under John DIEFENBAKER promised to reduce Canada's economic ties to the US. The Royal Commission on CANADA'S ECONOMIC PROSPECTS, which reported in 1957, warned that Canadians were losing control of their destiny, while other critics voiced concern that Canada's economy was being developed in a distorted manner as a resource supplier for the giant US industrial base.

Although in 1965 Canada and the US signed the Autopact agreement, which created, for manufacturers, a conditional free-trade zone for motor vehicle and motor vehicle parts production in Canada, many Canadians had begun to express a desire to reduce foreign ownership and influence in their economy. This desire led to disputes in tax and banking policy and even to diplomatic quarrels over the status of US magazines in Canada. In an attempt to halt the flow of US funds abroad, in 1963 the US government introduced a tax to discourage the outflow of funds, which sparked an immediate crisis in Canadian financial markets, since Canada was highly dependent on access to US capital markets. Canada negotiated an exemption, but only with the understanding that if Canadian borrowing in the US rose above traditional levels the exemption would be reviewed by the US. Canada also had to promise not to increase its foreign-exchange reserves through the proceeds of new US borrowings. Through these constraints, Canada's ability to conduct economic policy was narrowed.

In 1968 the US government imposed mandatory guidelines for American multinationals. US subsidiaries were ordered to increase the repatriation of profits from Canada, to carry out more investment in the US than in subsidiaries, and to increase exports for US plants instead of from subsidiaries in Canada or elsewhere. In 1971 President Nixon introduced a series of measures to protect the US balance of payments by imposing a 10% surcharge on those US imports subject to duty. Canada was able to negotiate exemptions to these policies, but the incidents revealed Canada's vulnerability to changes in US policies and led to Canadian efforts to develop a THIRD OPTION designed to increase Canada's economic ties with the rest of the world and to reduce its dependence on the US.

Harper and Obama
Canadian Prime Minister Stephen Harper and US President Barack Obama walk down the Hall of Honor towards a joint news conference on Parliament Hill in Ottawa on 19 Feb 2009. Canada was the new president's first international visit (photo by Charles Dharapak, courtesy CP Archives).

Energy Policy
ENERGY POLICY became an issue between Canada and the US during the 1970s. In the late 1960s and the early 1970s, Canada was anxious to increase oil and gas sales to the US, but oil sales were restricted by US import quotas. Canada also attempted unsuccessfully to persuade the US to build an oil pipeline from Alaska to the US through the Canadian North (see MACKENZIE VALLEY PIPELINE). Canadian interest in expanding oil and gas exports to the US had cooled by the mid-1970s, following the 1973-74 OPEC crisis and concern over the adequacy of Canadian oil and gas reserves to meet future Canadian needs.

During this period the US reacted angrily to increases in Canadian oil export prices to match world oil prices. Energy re-emerged as a source of conflict with Canada's implementation in 1980 of the National Energy Program. One of the NEP's major objectives was that the oil industry be 50% Canadian-controlled by 1990. In 1980 the oil and gas industry in Canada accounted for 30% of all nonfinancial industry profits in Canada, and roughly 70% of those profits accrued to foreign-controlled, mainly US, firms. To achieve the Canadianization target, Canada encouraged takeovers by Canadians of foreign-oil subsidiaries, altered the tax system so that government funding of risky oil exploration favoured Canadian companies, and amended land regulations to require 50% Canadian participation in frontier oil and gas fields.

The US vigorously protested these measures. A second NEP objective was to increase the Canadian share of engineering and other services, and of manufactured equipment used in the oil and gas industry projects. US multinationals had relied heavily on the same engineering and other suppliers as their US parents, so that Canadian industry had not benefited to the extent that it might have from oil and gas development. As a result of US objections, some of these provisions were relaxed.

The broader issue of foreign ownership also affected Canadian-American relations during the 1970s and early 1980s. As a result of widespread concerns in Canada over the regulation of massive US investment in the Canadian economy, the FOREIGN INVESTMENT REVIEW AGENCY (FIRA) was created and began screening new foreign investment plans in 1974. By the early 1980s the US had become a harsh critic of FIRA. The dispute was taken to GATT, which in 1983 concluded that, while FIRA was generally acceptable, it should be less vigorous in its efforts to persuade foreign investors to use Canadian goods and services.

Closer Economic Ties
While the issue of Canada-US FREE TRADE has been a recurring theme in Canadian history since Confederation, it had laid dormant since 1948, when the Canadian government negotiated, then retreated from a bilateral pact with the US. But in 1983, the government of Prime Minister Trudeau embarked on negotiation of sectoral free-trade arrangements with the US. With the election of the Conservatives and Prime Minister Mulroney in 1984, Canada sought closer economic ties with the US and in 1985 Mulroney asked the US to negotiate a comprehensive free-trade agreement.

In October 1987 the 2 countries announced they had an agreement, which was subsequently ratified by the US Congress and by the Canadian Parliament and, where relevant, the provincial governments. Under the proposed agreement, all tariffs between the 2 countries are to be eliminated over a 10-year period, starting 1 January 1989. In addition, a binational dispute settlement mechanism was established to review, on points of law, the application of countervail or other penalties of trade-remedy laws of national trade agencies against the other country. If the imposition of a penalty again is not in accordance with US trade law, for example, the binational body can require it be removed. The US could still unilaterally enact harsher trade remedy laws, but it must notify Canada and mention Canada by name in amendments to its trade laws. A Canada-US Trade Commission, headed by the trade ministries of the 2 countries, administers the proposed agreement.

In other provisions, Canada largely eliminates its restrictions on US takeovers of Canadian companies, except for those with assets of $150 million or more, and does not in future require US subsidiaries to sell shares to Canadians or force them to promote exports or use Canadian suppliers. US-owned companies now have to be treated in the same way as Canadian-owned companies. On energy, Canada shares oil and gas shortages with the US, and does not use its energy, including electricity, to create an advantage for Canadian industry or Canadian consumers through lower prices.

The agreement also covers services, including financial services. US banks and other financial institutions would have the same rights in Canada as Canadian financial institutions. Other features of the agreement include the elimination of tariffs and other barriers in agriculture and a 50% North American content rule for duty-free movement of non-North American motor vehicles between the 2 countries.

Ties That Bind and Divide
While Canadians and Americans share many fundamental values, there are wide differences in economic, cultural and social concerns and policies. The US, for example, champions the cause of free markets and free investment flows, but the Canadian concern is to preserve the capacities of an independent nation. Thus, Canadians are more willing to use government and CROWN CORPORATIONS to develop their own economy and industry to meet Canadian needs. It is hard, as former PM Trudeau once remarked, for a mouse to live next to an elephant.

From the Canadian perspective, it is critical that the US understands that Canada has legitimate interests and aspirations that are separate from those of the US. In the future, Canada-US economic relations will be tested by a wide array of issues. The US need for water may lead to pressures on Canada to supply that resource. Canadian desires for greater Canadian ownership and control of their own economy and US desires for international codes for the free flow of investment dollars and trade in services will continue to generate conflict. US deregulation and changes in technology will have major implications for Canadian airlines, telecommunications services and broadcasting. But there will also be areas of common interest, and the ties that bind will no doubt continue to be as compelling as those that divide.

Author DAVID CRANE

Links to Other Sites
Reciprocity Treaty, 1854
The complete text of the Reciprocity Treaty of 1854. A Library and Archives Canada website.

How Britain's Weakness Forced Canada Into the Arms of the United States
Read excerpts from "How Britain's Weakness Forced Canada Into the Arms of the United States: A Melodrama in Three Acts," by J. L. Granatstein. From Google.com.

William Lyon Mackenzie King Diary, 1893-1950
The entire text of William Lyon Mackenzie King's personal diary reveals his unique perspective on six decades of Canadian political and social history. Accompanied by teaching resources and informative essays about the diaries. From Library and Archives Canada.

Canadian Foundation for Economic Education
The Canadian Foundation for Economic Education produces resources, both teaching kits and student materials, on the economy, economics, and entrepreneurship in all formats — print, video, and CD-ROM in both official languages

Canado-american Treaties
This extensive website provides free access to the text of all bilateral treaties established between the United States of America and Canada from 1783 to 1997. From Foreign Affairs and International Trade Canada, the Library of International Relations (Chicago-Kent College of Law, Illinois Institute of Technology), and the LexUM (Centre de recherche en droit public, Faculté de droit, Université de Montréal.)

Walter Gordon and the Rise of Canadian Nationalism
Synopsis of Stephen Azzi's book "Walter Gordon and the Rise of Canadian Nationalism." From the website for McGill Queen's University Press.