Canada Among Nations, 1990-91: After the Cold War 9780773573703

Table of contents :
Table of Contents
List of Figures and Tables
List of Contributors
Glossary
A
C
E
F
G
I
J
L
M
N
O
P
R
S
T
U
V
W
Preface
Introduction
1 After the Cold War
2 The Canadian Malaise and Its External Impact
Canada and the Americas
3 Canada and International Trade: Policies for the 1990s
4 Evolving Corporate Strategies: Adjusting to the FTA
5 Canada Discovers its Vocation as a Nation of the Americas
6 Canada and Latin America
Canada and Europe
7 Europe 1992 and the Canadian Response
8 A New Order in Europe: Evolving Security Systems
9 The Collapse of the Regional System in Eastern Europe Implications for Europe and North America
10 Canada and the Soviet Union
Canada and the Pacific
11 Japan — Rising Sun or Western Star
Canada and the Persian Gulf
12 Canada, the Gulf Crisis and Collective Security

Citation preview

Canada Among Nations 1990-91: After the Cold War

Fen Osler Hampson Christopher J. Maule, Editors

CARLETON UNIVERSITY PRESS

Canada Among Nations 1990-91

AFTER the

COLD WAR

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Canada Among Nations 1990-91

AFMTHE COLD WAR edited by Fen Osier Hampson and Christopher J. Maule

THE NORMAN PATERSON SCHOOL OF INTERNATIONAL AFFAIRS

CARLETON UNIVERSITY PRESS OTTAWA, CANADA 1991

©Carleton University Press Inc. 1991 ISBN 0-88629-144-5 (paperback) ISBN 0-88629-145-3 (casebound) Printed and bound in Canada Carleton Public Policy Series #7 Canadian Cataloguing in Publication Data The National Library of Canada has catalogued this publication as follows: Canada among nations

1984Annual. 1990-91 ed.: After the cold war. Each vol. also has a distinctive title. Produced by the Norman Paterson School of International Affairs of Carleton University. Includes bibliographical references. ISSN 0832-0683 1. Canada—Foreign relations--1945-Periodicals. 2. Canada-Politics and government-1984Periodicals. 3. Canada—Politics and government— 1980-1984-Periodicals. 1. Norman Paterson School of International Affairs. FC242.C345

327.71

C86-031285-2

Distributed by Oxford University Press Canada, 70 Wynford Drive, Don Mills, Ontario, Canada. M3C 1J9 (416)441-2941 Cover design: Aerographics Ottawa Acknowledgement Carleton University Press gratefully acknowledges the support extended to its publishing programme by the Canada Council and the Ontario Arts Council.

Table of Contents List of Figures and Tables List of Contributors Glossary Preface

vi vii ix xi

Introduction 1 After the Cold War Fen Osier Hampson and Christopher J. Maule

1

2 The Canadian Malaise and Its External Impact Gilles Paquet

25

Canada and the Americas 3 Canada and International Trade: Policies for the 1990s Lawrence L. Schembri

41

4 Evolving Corporate Strategies: Adjusting to the FTA Isaiah A. Litvak

65

5

Canada Discovers its Vocation as a Nation of the Americas Michael Hart

6

Canada and Latin America Maxwell A. Cameron

83 109

Canada and Europe 7 Europe 1992 and the Canadian Response Charles Pentland

125

8

145

A New Order in Europe: Evolving Security Systems John Halstead

9 The Collapse of the Regional System in Eastern Europe Implications for Europe and North America Carl McMillan v

167

10 Canada and the Soviet Union

191

Allan L. Kagedan

Canada and the Pacific 11 Japan — Rising Sun or Western Star

209

H. Edward English and Yoshitaka Okada

Canada and the Persian Gulf 12 Canada, the Gulf Crisis and Collective Security

241

Martin Rudner

List of Tables and Figures Exhibit 1.1 Selected Aspects of the Global Economy

6

Table 3.1

Public Spending on Education and Research & Development

59

Table 4.1

Intra-Industry Trade and Foreign Ownership, Selected Canadian Industries, 1966 and 1986

68

Table 11.1 Trade Patterns of Japan, the United States and Canada in the Pacific

217

Figure 12.1 Multinational Force Commitments to the Gulf Crisis

250

vi

CANADA AMONG NATIONS 1990-91 List of Contributors Maxwell A. Cameron is an assistant professor in The Norman Paterson School of International Affairs, Carleton University H. Edward English is a professor in the Department of Economics, Carleton University John Halstead is an adjunct professor in The Norman Paterson School of International Affairs, Carleton University and distinguished research professor, School of Foreign Service, Georgetown University. Fen Osier Hampson is an associate professor in The Norman Paterson School of International Affairs, Carleton University Michael Hart is director of economic and trade policy analysis in the Department of External Affairs and International Trade Canada, and visiting professor in The Norman Paterson School of International Affairs, Carleton University Allan L. Kagedan is a post-doctoral fellow in The Norman Paterson School of International Affairs, Carleton University Isaiah A. Litvak is a professor in the Faculty of Administrative Studies, York University Christopher J. Maule is a professor in the Department of Economics and director of The Norman Paterson School of International Affairs, Carleton University Carl McMillan is a professor in the Department of Economics, Carleton University Yoshitaka Okada is an associate professor in the Graduate School of International Relations, International University of Japan Gilles Paquet is a professor in the Faculty of Administration, Ottawa University Charles Pentland is a professor and head of Political Studies, Queen's University

vii

Martin Rudner is a professor and associate director of The Norman Paterson School of International Affairs, Carleton University Lawrence L. Schembri is an assistant professor in the Department of Economics, Carleton University

viii

GLOSSARY ACP APEC ASEAN AWACS CAP CCS S CENTO CER CFE CMEA COMECON CP CPSU CSCE CUBC EBRD EC ECSC EDC EEC EES EFTA EPC ESPRIT EURATOM EUREKA FARC FEMA FIRA FPL-FMLN FTA GATT GCC GDP GNP

African, Caribbean and Pacific Countries Asia-Pacific Economic Cooperation Association of South-East Asian Nations Airborne Warning and Control System Common Agricultural Policy Centre for Canadian-Soviet Studies (Canada) Central Treaty Organization Australia-New Zealand Closer Economic Relationship Agreement Conventional Armed Forces in Europe Council for Mutual Economic Assistance Council for Mutual Economic Assistance Communist Party Communist Party of the Soviet Union Conference for Security and Cooperation in Europe Canada-USSR Business Council (Canada-US SR) European Bank for Reconstruction and Development European Community European Coal and Steel Community Export Development Corporation (Canada) European Economic Community European Economic Space European Free Trade Association European Political Cooperation European Program for Research and Development in Information Technologies European Atomic Energy Community European research coordinating agency for civil aerospace research Fuerzas Armadas Revolucionarias de Colombia Foreign Extraterritorial Measures Act Foreign Investment Review Agency Fuerzas Populares de Liberacion-Frente Farabundo Marti para Liberacion Nacional Free Trade Agreement (Canada-USA) General Agreement on Tariffs and Trade Gulf Cooperation Council Gross Domestic Product Gross National product

ix

GST IASC ICC IMF FTAC I'l'I'O JETRO LDC LDP MCC MERCOSUR MFA MFN MTTI MNC NAFTA NATO NDP NIC NIE OAS ODA OECD PECC PLO PRI R &D SCEAJT SCONDVA SIJ SRC TRIMS TRIPS UAE UNO VER VLSI WHO WPM

Goods and Services Tax (Canada) International Arctic Science Committee International Circumpolar Conference International Monetary Fund International Trade Advisory Committee International Tropical Timber Organization Japan External Trade Organization (Japan) Less Developed Country Liberal Democratic Party (Japan) Microelectronics and Computer Technology Corporation (USA) Southern Cone Common Market Multifibre Agreement Most-favoured-nation Ministry of International Trade and Industry (Japan) Multinational Corporation North American Free Trade Association North Atlantic Treaty Organization New Democratic Party (Canada) Newly Industrializing Country Newly-Industrialized Economies Organization of American States Official Development Aid (or overseas development assistance) Organization for Economic Cooperation and Development Pacific Economic Cooperation Conference Palestine Liberation Organization Partido Revolucionario Institutional Research and Development Standing Committee on External Affairs and International Trade (Canada) Standing Committee on National Defence and Veterans Affairs (Canada) Structural Impediments Initiative (USA-Japan) Semiconductor Research Corporation (USA) Trade Related Investment Measures Trade Related Intellectual Property Issues United Arab Emirates Union Nacional Opositora Voluntary Export Restraint Very Large Integrated Circuit World Health Organization World Product Mandate X

PREFACE This is the seventh volume on Canada in international affairs produced by The Norman Paterson School of International Affairs at Carleton University. As in the past, the book is organized around the most recent calendar year and contains an analysis and assessment of Canadian foreign policies as well as the environment that constrains and shapes them. Our intention is to contribute to the continuing debate about appropriate policy choices for Canada. The theme of the 1990-91 edition is "After the Cold War." At the end of the Cold War Canada confronts a new world of opportunity and risk. When the volume was originally planned the Gulf War had not erupted; this event is, however, discussed as well as the major changes taking place in Europe, East and West, the U.S.S.R., the Americas and in the Asia-Pacific region. All these external events impinge on domestic constitutional issues following the failure of the Meech Lake accord. This year's volume attempts to assess their impact at a time of great domestic uncertainty. Financial support for this volume has been provided by The Norman Paterson School of International Affairs, the Social Sciences and Humanities Research Council of Canada and the Canadian Institute for International Peace and Security. The editors appreciate the willingness of the contributors to participate in an undertaking which itself posed the challenge of coping with the rapidity of change, and they are grateful for the guidance and assistance offered by the faculty and staff of The Norman Paterson School of International Affairs. We are particularly indebted to Brenda Sutherland for her tireless help and sound advice in producing the manuscript, and to Janet Doherty for her patience and efficiency in organizing the workshop which is an important part of the volume's preparation. This is the second volume of Canada Among Nations to appear under the auspices of Carleton University Press and we are pleased to be part of Carleton's series on public policy. Fen Osier Hampson Christopher J. Maule Ottawa, February 1991 xi

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1

AFTER THE COLD WAR

Fen Osier Hampson and Christopher J. Maule

"After the Cold War, what next?" might be the more appropriate title

for this year's volume of Canada Among Nations. The fading of the initial euphoria over the end of the Cold War — marked by the tearing down of the Berlin Wall and the unification of the two Germanics — was soon followed by a gathering of storm clouds. Hopes that the end of the Cold War would smooth the way to a more peaceful and benign international order were dashed by events in the Persian Gulf, by continuing economic and political turmoil in the newly minted democracies of Eastern Europe, and by a Soviet Union increasingly torn by the forces of ethnic and civil unrest unleashed by glasnost and perestroika. If the end of the Cold War has corked one genie it has released a whole set of new ones, including the rising tide of nationalism in the Soviet Union, Eastem Europe, and even Western democracies like Canada; the growing threat of nuclear, chemical, and biological weapons proliferation, coupled with increasing political instability in many regions of the Third World; the problems of industrial and economic decline in some of the advancedindustrial democracies; and an economic recession in North America which showed little prospect of improving in the first quarter of 1991. For Canada, these uncertainties abroad have combined with growing political fragmentation at home to undermine whatever pretensions Canada has to exercising leadership in a world that presents a paradox. It is apparently, at the same time multipolar and unipolar: multipolar in the sense that the great centres of world economic power now include Japan and an increasingly united Europe; unipolar in the sense that the only remaining military superpower after the Cold War is the United States.1 Although some commentators have argued in recent months that Canada

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Canada Among Nations 1990-1991

is in a stronger position to play a constructive role internationally, because the evolving global order is inherently more compatible with Canada's traditional commitment to "multilateralism," the domestic political consensus and cohesion necessary to sustain an activist Canadian foreign policy are becoming less and less evident. Moreover Canada is finding itself, more than ever before, buffeted by powerful forces in the global economy which pose major challenges to Canada's economic health and may tear the fabric of Canadian unity further apart Effective foreign policy responses to adjust to the new world order will depend upon domestic policy coherence which is now missing. Moreover, far from acquiring a new seat at the international table, Canada is in real danger of losing the places that it has worked so hard to secure because of its problems at home, and because continuing internal dissension is making its international partners nervous, "From middle powerto declining power" might be the more appropriate epithet to describe Canada's position after the Cold War. This prognosis may seem overly pessimistic. However, like fading Hollywood movie star Norma Desmond, portrayed by Gloria Swanson in Sunset Boulevard, Canadians are in danger of living in the past and making policies in the rear-view mirror instead of looking forward to new roles and challenges more befitting the status of what the late John Holmes called a "middle-aged power."2 This year's volume of Canada Among Nations marks the seventh in an annual series published by The Norman Paterson School of International Affairs at Carleton University. Like past volumes it is not intended to be a report card on Canadian foreign policy. Instead, the essays in this volume seek to provide a broad analytic perspective by focusing on issues rather than personalities, and by identifying the major challenges confronting Canadian foreign policy in the 1990s. We have not striven for a consensus among our contributors — to do so would be impossible. The contrasting perspectives and viewpoints offered in this volume mirror, in many ways, the debate in the public arena. However, by bringing these perspectives together into a single anthology we seek to provide a road map to readers eager to improve their understanding of the main points of contention and the key foreign policy choices that lie ahead.

After the Cold War

3

The volume is organized as follows. The lead essay by Gilles Paquet addresses the implications of Canada's internal constitutional crisis for its external relations. Larry Schembri, Al Litvak, and Michael Hart then look at the implications of the evolving North American free trade area for Canada's economic future, and at the way in which Canadian companies and foreign investors are responding to the challenges of globalization, rationalization of production, and technological innovation. Max Cameron explores Canada's newly developing relationship with Latin America. The next section examines the new Europe and the patterns of political and economic relations emerging from the ending of the Cold War. The chapters by Carl McMillan, John Halstead, Charles Pentland, and Allan Kagedan deal with European integration, the collapse of the Soviet-dominated Eastern bloc, and the implications for Canada of the evolving economic and security order in the new Europe. Ted English and Yoshitaka Okada assess, in their chapter, the opportunities and the challenges for Canadian foreign policy in the Pacific. Finally, Martin Rudner's chapter on the Persian Gulf examines Canada's role in this crisis and the implications of the war for international security. Several themes emerge from this volume and are reflected in the individual contributions. A key theme is the new regionalism in the world economy and the problems Canada's internal divisions and lack of competitiveness are having on our ability to respond to this trend. This theme is addressed in subsequent chapters on North America, Europe East and West, and the Asia-Pacific region. The backdrop for this regionalism is a series of interwoven issues that characterize the post-Cold War era, as seen from 1990-91. These include the changing nature of political systems, the challenges of increasing interdependence at different levels of government, and the sources of conflict in a changing international system. CHANGING POLITICAL SYSTEMS: INTEGRATION, DISINTEGRATION, AND MARKET REFORM The cross-cutting pressures of integration and disintegration, fragmentation and political renewal, pose major challenges to the traditional role played by nation states and by Canada, in particular. On the one hand countries are coming together to form larger groupings while elsewhere fragmentation is occurring. At the same time attempts are being made to convert centrally planned economies to market economies while old state

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institutions are being dismantled and new ones created in their place. States are confronting new demands and new challenges in a world in which, as John Lukacs notes, "The very sovereignty and cohesion of states, the authority and efficacy of governments are not what they were."3 Europe 1992 illustrates the willingness of countries to yield aspects of sovereignty in the expectation of sharing improved economic performance through closer trade, investment and financial relationships. In the process intra-community obstacles are being removed to the free movement of people, goods and capital. This move is sufficiently attractive to outsiders to make other countries, Turkey and those in the European Free Trade Association (EFTA) and Eastern Europe, anxious to become associated with the European Community in some way. Besides economic benefits, the hope is that the Community will reduce the historic political tensions that have plagued Europe. Other examples of coalescence include the Canada-U.S. Free Trade Agreement, negotiations towards a North American Free Trade Agreement with Mexico, Canada, and the United States, the Australia-New Zealand trade agreement, and the possible formation of a Yen block of Pacific and Asian countries led by Japan. These groupings can be viewed both as associations formed for the benefit of their members and as regional trading blocs in Asia, North America, and Europe which may become more prominent if multilateral trade talks are inconclusive. The world could become balkanized into three major trading regions ("the borderless world" of Kenichi Ohmae4), although the penetration of markets through foreign investment may mean that the negative economic fallout of balkanization is no longer as severe. For Canada, dependent as it is on the world economy for trade and investment and particularly vulnerable to U.S. actions, a key question is how it will relate to these emerging blocs or centres of economic power in the world economy. On the one hand, Canada finds itself increasingly drawn into the North American orbit as a result of free trade and historical economic dependencies. On the other hand, it can ill afford to ignore the important opportunities resulting from regional economic growth and integration in Europe and the Pacific. Each region, as we see from the essays in this volume, will continue to exert conflicting and contradictory pressures on the focus and direction of Canadian foreign economic policy; and it will require strong leadership from the federal government to ensure Canada remains competitive in the face of growing economic

After the Cold War

5

pressures from each of these regions and the more general trend towards globalization. If some economic and political walls are coming down, others are going up. The opposing trend toward national disintegration is exemplified in the cases of the Soviet Union, India, Yugoslavia, and Canada. The accelerated dissolution of the Soviet Union's empire (population 286 million) has been accompanied by the failure of socialist economic systems throughout Eastern Europe. Because all parts of the empire are contiguous — in which respect it differs from the former British, French, and Dutch empires — the separate units will remain as neighbours, and because of traditional ethnic rivalries they may end up in conflict with one another. Yugoslavia and Canada, each with populations of about 25 million, are much smaller cases of fragmentation, but also illustrate the divisive effects of nationalist and ethnic rivalries. Yugoslavia's break-up may come sooner than that of Canada or the Soviet Union, but Yugoslavia and Canada differ from the Soviet case in that Yugoslavia has had a mixed, socialist-capitalist economy, and there is no pressure to change Canada's market-oriented system (only to manage it better). Another major political change is taking place in Eastern Europe and the Soviet Union as they move towards reduced state ownership, restoration of private property rights, elimination of central planning, deregulation of markets, and the general promotion of freer markets as means of allocating resources. Discredited by the failure of centrally planned systems, the ideology of socialism has been replaced by support for liberalism. The liberal view pervades not only countries of the Second World, but also developing countries of the Third World such as Mexico, Chile, Argentina, Brazil, and even Africa, where state ownership of firms is on the decline. No such conversion is needed in many parts of Southeast and East Asia, where countries such as South Korea, Taiwan, Singapore, and Hong Kong (and more recently Thailand) have been leading examples of market-driven economies. One danger inherent in this change is that expectations will outpace what market-oriented reforms can realistically deliver. Markets are not entirely self-regulating and market adjustment is still an imperfect tool. The postwar period has been studied intensively in order to determine how to manage macroeconomic fiscal, monetary, and exchange rate policies for market economies, but clearly not all the answers are known, for recessions and inflation still occur with a fair degree of regularity.

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Canada Among Nations 1990-1991

There are also circumstances of market failure (cartels as well as social costs and benefits) that require corrective policies and various forms of government regulation. Markets certainly present problems, but their problems are considered to be less than those of centrally planned systems, both in economic and in political terms, and government failure often has worse consequences than market failure. The trouble is that efforts at market reform in Eastern Europe and in other parts of the world such as Latin America may be frustrated by inadequate understanding about the political institutions and legal structures necessary to sustain a free market economy. GLOBALIZATION OF MARKETS AND INTERDEPENDENCE: NEW CHALLENGES TO THE NATION-STATE

The international order is also being restructured by growing levels of social and economic interdependence between states. Much of this change now goes under the heading of "globalization." However, rising levels of interdependence throughout the world go well beyond markets to technology, communications, and the movement of peoples and ideas across national borders. Interdependence can thus be measured in economic, political and, to an increasing extent, in technological and sociocultural terms. Consider the characteristics of the global economy shown in Exhibit 1.1:5 EXHIBIT 1.1

GLOBAL ECONOMY

The average annual percent change in the volume of world trade has exceeded the change in world output measured by real gross domestic product since 1950. Trade in commercial services (transport, travel, tourism, banking, and insurance) has increased from less than $100 billion in 1978 to $600 billion in 1989 (both amounts in current U.S. dollars). Commercial services now account for 10 percent of total exports from Canada and 22 percent of exports from the United States. In seven rounds of General Agreement on Tariffs and Trade (GATT) negotiations the average tariff on manufactured goods in industrialized countries fell from 40 percent in 1940 to 5 percent in 1990.

After the Cold War Exports of goods and services as a percent of GDP rose in the G-7 (Canada, France, Germany, Italy, Japan, United Kingdom, United States) countries from 10 percent in 1960 to 17 percent in 1980, falling to 12 percent in 1988. For Canada, however, in this same period exports accounted for 17 percent of GDP in 1960,28 percent in 1980 and 26 percent in 1988. The world stock of direct foreign investment held abroad rose from U.S. $112.3 billion in 1967 to U.S. $1 trillion in 1987. Canada's share increased from 3.3 to 4.5 percent, Japan's from 1.3 to 7.5 percent, and the United States share declined from 50.4 to 31.5 percent. Global stock trading has mushroomed. For example, in 1989, Americans purchased $13.7 billion of foreign stocks, up over eight times from 1988. Overall, cross border equity investments involving the U.S. as an investor or recipient almost tripled from 1986 to $92.3 billion in 1989. The number of people on the move between countries is illustrated by the following: world tourism (arrivals at frontiers) totalled 338 million persons in 1985 with eight European countries, Canada and the United States accounting for 60 percent of the total; and an estimated 13 million refugees received asylum in 1987, nine million in the Middle East and South Africa alone. The growth of communications linkages is reflected in the capacity of transatlantic telephone cables. Nine cables will have been laid between 1956 and 1992. The first carried 48 lines at a cost of $557,000 per line and the last will carry 80,000 lines at a cost of $5,400 per line (both amounts in current U.S. dollars). Long-distance telephone calls outgoing from and incoming to the United States totalled 8.5 bn minutes or about 140 million hours — as though 16,000 people talked long distance continuously for a year.6

7

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Canada Among Nations 1990-1991

Growth of world production in the postwar period has been proportionately less than the growth of world trade and foreign investment. The volume of financial flows has increased markedly as a result of the ease with which transactions can be made using computerized communications systems. Investors and traders now have current information about conditions in all major financial and commodity markets, and can transmit and effect their orders instantaneously at any time of the day or night. Foreign investment and licensing agreements link firms in different markets and have been associated with the increase in intra-firm international trade as a proportion of world trade. Foreign aid is another means of linking countries. These increased flows of trade, aid, and investment make countries more interdependent than ever before but, at the same time, limit their ability to control their own domestic economic and political affairs. Countries are forced to collaborate on policy-making and relinquish some of their sovereignty. As a consequence, politicians can no longer fully receive credit for the good economic policies, nor entirely accept the blame for the bad economic ones — however much they try to do the former and their opponents the latter. Economic interdependence, however, is only one of the dimensions of change. People are more than ever before on the move as regular travellers (tourism and business), as migrants or as refugees. Tourism has become a major source of foreign earnings (a service export), not only for the developing world but also for the many developed countries. National immigration policies are also attempting to meter the quantity and characteristics of the flows of migrants (Canada is no exception in this regard). The combination of violence, poverty, and famine have much to do with the origin and number of refugees and these conditions are intensifying in much of the Third World. While trade in goods and services, foreign investment and the movement of people are measurable aspects of interdependence, they are also flows bearing with them ideas, knowledge, ideologies, tastes, styles, and cultures which have economic, political, and socio-cultural impacts. Conceived in this way, trade, investment and people are the carriers, while ideas, knowledge and tastes are the cargoes carried across borders which cause people in one place to be influenced by what is happening elsewhere. In fact, many observers ascribe to the information

After the Cold War

9

revolution and communications technology the demise of socialist economies and the collapse of communist rule in Eastern Europe. International interdependence, in all of its dimensions, is growing. Much of it stems from the revolutionary impacts of new technologies of communication — effects which are still being felt. These technologies present enormous opportunities for nations and businesses, but they also threaten to erode existing positions of strength and established hierarchies in the global political and economic order. Interdependence is a double-edged sword and we see two tendencies which are moving in opposite directions. On the one hand, there is a centralizing trend, as states cooperate more closely together and accept limitations on their sovereignty in order to create international mechanisms which are necessary to meet the demands of interdependence. On the other hand, there is a decentralizing trend, as states try to meet the demands of citizens, individually and in groups, which feel ignored or disadvantaged by the homogenizing effect of a fallen and far away bureaucracy. As Robert Reich argues, "Each nation's primary political task is to cope with the centrifugal forces of the global economy which are beginning to tear at the ties binding citizens together, bestowing ever greater wealth on the most skilled and insightful, while at the same time consigning the less skilled to a declining standard of living."7 These trends have had a particular impact on Canada. The definition of Canadian interests has been de-emphasized in deference to broader international interests, and de-emphasized again in deference to narrower individual and group interests. For a country as dependent upon the world economy as Canada, then, growing levels of interdependence may further undermine the autonomy of the state and exacerbate divisive tendencies within Confederation. As several essays in this volume show, cracks induced by external reverberations are already beginning to appear within the Canadian economy. INTERNATIONAL CONFLICT AND COLLECTIVE SECURITY If the international economic and social order is changing, so too are the security challenges which confront the world community. East-West relations have moved on to a new footing with the dismantling of the Berlin Wall, the demise of the Warsaw Pact, and the end of the postwar

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Canada Among Nations 1990-1991

division of Europe. However, the conflict in the Persian Gulf has quickly removed any delusions that the end of the Cold War will foster international harmony and peace. While the threat of a superpower war has certainly diminished, the threat of violence and armed conflict in the Third World remains high. Moreover, in certain regions of the world, such as the Middle East, the great powers have not readily relinquished their geopolitical and strategic interests. Although there has been a remarkable convergence of interests, appearances can be deceiving. U.S.Soviet divisions linger just below the surface and are reflected in Washington's unhappiness about Soviet mediation efforts at the twelfth hour, before the land war was initiated in the Persian Gulf, and Moscow's malaise about the flexing of American military muscles on the southern outskirts of the Soviet Union. Nonetheless, the end of the Cold War has witnessed the discovery of the concept of collective security.8 Collective security had lain moribund for years, paralysed by ideological divisions between the two superpowers and their inability to agree on the use of the instruments of collective security embodied in the United Nations Security Council. The successive resolutions of the Security Council condemning Iraq's invasion of Kuwait and calling for the use of sanctions and "to use all necessary means," including the use of force, testify to unprecedented levels of cooperation, not just between the two superpowers but also between many of the other permanent and non-permanent members of the Council. It will, however, be difficult to build a new world order around a United Nations framework of collective security. For one thing, most of today's conflicts arise in the form of regional and local wars between states and as acts of terrorism undertaken almost anywhere in the world. Moreover, of the 138 armed conflicts that have occurred since the end of the Second World War, all but one have been located in the Third World.9 Many of these conflicts do not involve overt aggression by one state against another but take instead the form of civil wars which have spilled across international borders, or longstanding historical disputes over territory (for example, the Indo-Pakistani conflict over Kashmir or the ArabIsraeli dispute); in such confrontations successive incursions and crises make it hard to identify a clear aggressor. The United Nations' instruments of collective security were set up, not to deal with these kinds of conflicts, but with instances of clear-cut aggression involving violations

After the Cold War

11

of well-established borders, after the manner of Hitler in the 1930s. Iraq's invasion of Kuwait is therefore not typical of today's conflicts because it involved unbridled aggression based on tenuous historical claims. Even so, the primary purpose of collective security — to deter aggression — failed and the task of repelling aggression had to be taken up by a coalition of member states. As Stanley Hoffmann notes, "The remarkably effective coalition put together by the [United States] in the Gulf crisis against a state whose resort to naked aggression is undeniable may not be easily reproduced in cases that are less clear-cut or in parts of the world that are less obviously vital to the security of most states."10 Collective security does not obviate the need for activities that have become the more traditional forms of UN involvement in international conflict: peacekeeping, mediation, and "good offices." The United Nations may well be asked to supply post-war peacekeeping and observer forces in the Gulf, in the Western Sahara, and in Cambodia, in addition to current commitments in Central America, Cyprus, the Golan Heights, and elsewhere. Chronic political instability in the Third World, created by worsening economic problems, runaway population growth, and recurrent ethnic and social conflict, will necessarily require the involvement of the United Nations and other international bodies in "statebuilding" as opposed to traditional peace-keeping activities. As UN involvement in the Namibian and Central American peace settlement processes has shown, traditional forms of peacekeeping have necessarily had to be complemented by state-building activities in the form of election monitoring, provision of civil police forces, aid, economic assistance, and refugee resettlement. The challenge for the United Nations will not be to find ways of invoking the collective security provisions of the Charter, but to adapt its machinery and resources to purposes which were unforeseen by its framers and to uses for which it was not designed. The lessons of the Gulf War for the UN and the future of collective security may, in this respect be both limited and short-lived. The international community will also have to grapple with the growing spread of technologies of mass destruction to the Third World. Today's combatants are assisted by the availability of arms suppliers who appear to have little difficulty and even fewer scruples in supplying both technologies and weaponry. The acquisition by Third World states of chemical, biological, and nuclear weaponry — as well as advanced delivery systems like long-range ballistic missiles — by Third World

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states presents a major challenge to international security and threatens to spread conflicts well beyond their immediate borders, as we have seen during the Gulf war from Iraq's SCUD missile attacks on Israel and Saudi Arabia. International terrorism may also be assisted by the availability of lethal conventional and non-conventional arms, such as chemical and biological weapons. As for terrorists, they are not held back by treaties, which can restrain signatory nations to some extent, and the perpetration of international terrorist acts cannot easily be controlled by individual states. The likelihood is that terrorism will increase, because of the ease of attacking targets and remaining undetected, enhanced by the vulnerability of modern technologies associated with transportation, communication, and industrial systems. If there is a case to be made for controlling the sale of sophisticated weaponry and military know-how to Third World states, there is a comparable need for international initiatives to combat terrorism. The security agencies of countries do communicate and Interpol does exist but more resources are required to strengthen international efforts to handle this problem. The changing nature of international conflict and the potential "new" role of international institutions, such as the United Nations, in the maintenance of international peace and security, presents new challenges as well as dilemmas for Canadian foreign policy. First, the change in the composition of Canada's own socio-cultural identity brought about by immigration means that many of the divisions in Third World regional conflicts are mirrored in the political debate and discussions at home. It also increases pressure on the government to become involved, while reducing the possibility of achieving a consensus as to what Canadian interests and foreign policy goals should be. Second, the reinvigoration of the UN's collective security role in the Gulf War has sat uneasily on a Canadian conscience grown accustomed to the more politically neutral occupation of peacekeeping. Some critics argued that Canada's participation in the multilateral allied operation in the Gulf would compromise Canada's ability to participate in any future UN peacekeeping operation in this particular conflict. However, they were wrong. Not only has Canada been asked to contribute forces to a new UN peacekeeping enterprise in the Gulf, but Canada is also likely

After the Cold War

13

to be called upon in the future to supply peacekeeping forces if and when the UN receives a request to provide them to places like the Western Sahara and Cambodia. Third, there is a need for countries like Canada, which are committed to the UN system, to look beyond traditional instruments of diplomacy to new mechanisms and institutions for coping with the domestic sources of instability in Third World regional conflicts, and to improved forms of crisis prevention as opposed to crisis management. An important aspect of UN contributions to peace-building will be the need to complement them with regionally-based initiatives and solutions.11 IMPLICATIONS FOR CANADA The Price of Disintegration at Home The world is in the process of reorganizing itself into a new series of socalled "hub and spoke" arrangements. Eastern Europe is breaking itself off from the Soviet Union and attaching itself to the Western European hub. By negotiating free trade agreements with their major trading partner, Canada and Mexico are becoming spokes of the U.S. hub. The countries of Southeast Asia have become spokes of the Japanese hub. The future of these hub-and-spoke arrangements remains to be seen. In several important respects, they are not new. Canada has always had a dependency relationship to the United States, but now the parts of Canada may become separate spokes if the central government becomes weaker or non-existent Much of the recent push towards economic integration, which is taking place throughout the world, has been motivated by a desire to take advantage of economies of scale and the opportunities realized by larger trading areas and common services. Within the North American market, Canada can choose a role as a country with a reasonably strong central government or as a fragmented nation where each province attempts to negotiate its own deal with other provinces and the United States. In the latter scenario, the United States will almost certainly be able to exploit cleavages between the provinces to its own advantage. Moreover, if Canada becomes fragmented it is likely to lose its international position as a G-7 country and the influence associated therewith. A divided Canada

14

Canada Among Nations 1990-1991

that speaks with many voices will have greater difficulty in making its presence felt internationally than a united Canada that speaks with one voice. The price of a break-up of Confederation may well be the loss of a seat at the table in important international economic and political fora, and with it diminished international stature, influence, and prestige. Fragmentation will almost certainly have direct consequences at home, in the absence of effective governmental response to global economic forces impacting upon the domestic economy. As Gilles Paquet argues in his chapter, the world economic order is changing dramatically with the growth of knowledge-based and time-based competition as key determinants of economic advantage, the rise of regional trading blocs, and cross-border alliances and partnerships. In this new environment governments must act quickly and decisively in order to meet new external challenges, especially if they have small, open, dependent, vulnerable economies like Canada. Unfortunately, Canada's decentralized federal structure has prevented an integrated, coherent response to these external economic pressures; instead, government policy, according to Paquet, has been marked by drift and indecision. In economic terms, Canada is fast becoming a relatively unattractive place for new investment either by Canadians or by foreigners. Canada is still attractive real estate for investors in the long run as Hong Kong residents have demonstrated but it is not necessarily a place to start new business. Moreover, because firms tend to construct floating factories, the ones that are located in Canada may find it relatively easy to move elsewhere if they find the Canadian political and economic climate not to their liking. These developments are coinciding with a recession which has led to a sharp economic downturn and could be quite severe. The United States has experienced a similar downturn; while the inflation rate and inventory-to-sale ratio in Canada are lower, the amount of outstanding consumer and public debt in Canada is higher relative to gross national product GNP and the proportion of debt to GNP is higher than it has been in all past postwar recessions. The exchange value of the dollar remains artificially high because of high interest rates in Canada, relative to those in the United States. Lower interest rates will help stimulate the economy and reduce the cost of debt financing but will increase inflationary pressure and make Canada a less attractive place to lend money, at least over the short term. Borrowing therefore, foreign as well as do-

After the Cold War

15

mestic, will be needed to help finance the federal and current account deficits unless strong economic growth both at home and abroad can alleviate this problem. Paquet underscores the interaction between domestic instability and the important changes taking place in Canada's external environment. He argues that the immobility of Canadian policy has substantially weakened Canada's competitive position internationally, and that the vulnerability of the Canadian economy to external shocks and disruptions will only be heightened by the Canada-U.S. Free Trade Agreement. Paquet therefore favours an internal strategy that he calls "managed trade," to provide support for certain selected industries and firms with a view to fostering competitiveness and promoting readjustment. In contrast, Larry Schembri favours policies of freer trade, both multilaterally and bilaterally, on the theoretical grounds that free trade will almost always increase the welfare of all of the countries that are involved. Schembri favours free trade because he believes it will promote efficiency and equity in the long run. Globalization of the forces of production is also a powerful antedote to protectionism. However, Schembri emphasizes that the commitment to free trade must be undertaken in the context of macroeconomic policies that provide stability for investors. New investment will not be attracted by conditions that lead to inflation and unemployment. This means that the burgeoning fiscal deficit presents a dual danger to the economy. It places a burden on taxpayers and requires high interest rates if foreign lenders are to keep their short-term investments in Canada. Schembri agrees with Paquet that Canada also has to be concerned with domestic trade problems caused by interprovincial barriers to trade. These barriers should be removed, because they prevent the efficient allocation of resources within Canada and hurt Canada's external competitiveness. Schembri also suggests that domestic policies should be directed towards the economy in ways that can have significant effects on the country's competitive position, including education and training policies, support for research and development, foreign investment and immigration, and policies directed toward the development, conservation, and renewal of natural resources. However, he does not favour government intervention which is targeted at specific industries, on the grounds that such policies tend to promote inefficiency, and that favoured indus-

16

Canada Among Nations 1990-1991

tries could be subject to countervailing measures and foreign charges of unfair trading practices. Al Litvak sees the adjustment of Canadian business to the CanadaU.S. Free Trade Agreement (FTA) as part of a more general process of adjustment to global trends and increasing globalization of markets. According to Litvak, the FTA is merely one measure in a series of changes taking place now and in the past. In addition to the FTA, high interest rates, an economic downturn, exchange rates and changing technology are causing a basic restructuring of Canada's manufacturing base in the direction of a continental rationalization of production. For Canadian affiliates of U.S. multinationals, Litvak argues, there is the added pressure of ultra-firm competition with other units in the corporation. Subsidiaries have become more focused and rationalized, with fewer product lines and fewer stages of production, although there is still considerable intra-corporate trade. Globalization of markets is also leading to greater head-office control in large multinational corporations. Litvak concludes that policymakers are rightly concerned about the adverse impact of a U.S.-Mexican free trade agreement on Canadian firms and the flight of Canadian manufacturers across the border.12 Canadian companies will find themselves at a distinct competitive disadvantage if U.S. firms enjoy free access to both Canadian and Mexican markets. With the FTA, plants are being transformed from "fixed" into "movable" assets, and corporations will relocate production processes in order to exploit cheaper inputs into production. Litvak concludes that Canada's high interest rates and overvalued dollar will only aggravate these problems for Canadian manufacturers. Choices Made: Canada and the Americas The ineluctable pressures of geography, politics, and economics are also tying Canada more closely into the American orbit than ever before. Canada's decision to enter into the FTA in 1988 was followed in 1990 by the decision to become a formal member of the Organization of American States (OAS). Later in 1990 the government announced that it would seek to join the discussions between the United States and Mexico on a three-way free trade agreement Canadian attitudes, not just towards the United States but towards the Americas as a whole, are undergoing an important transformation in the 1990s. As the title of Michael Hart's chapter indicates, Canada is in

After the Cold War

17

the process of discovering its "vocation as a nation of the Americas." This discovery comes as the United States is increasingly turning inwards, a process marked by the resurgence of unilateralism and protectionism, and Latin America is turning outwards, displaying what Hart sees as a rejection of dictatorships and corruption and an embrace of "pluralism, democracy, and open markets." Canadians are only just coming to grips with their identity and vocation as an "American nation," according to Hart, and this vocation does not sit easily with a nation accustomed to thinking of itself as more European than American. However, free trade, along with deregulation, privatization, fiscal parsimony, and tax reform will make Canada more competitive and Hart hopes provide the country, "with the necessary tools to take on the competitive challenge from outside." Max Cameron sounds a note of caution about Latin America's turn outwards in the 1990s, suggesting that the recent "embrace" of free markets and democracy in the region is more apparent than real and based on the myth that they all form part of the same virtuous circle. Political institutions in many Latin American countries are undergoing a crisis of legitimacy. According to Cameron, economic reform and democracy will be critically dependent on the consolidation of ihe political order and the development of social and legal institutions which make profit-seeking a socially beneficial activity. Canadians should therefore harbour no illusions about the prospects for political and economic stability in the region. Choices Ahead: Canada and the New Europe The recent turn in Canadian foreign and economic policy towards the Americas, coupled with a growing economic integration with the United States, does not mean that Canada can afford to ignore or downgrade its relations with the "new" Europe. Europe 1992, and the movement to full economic and monetary union within the European Community (EC), present in Charles Pentland's words, the "most far-reaching challenge to Canada arising from the post-war unification of Western Europe." Canada's response to 1992 is part of the "Going Global" postFTA strategy — a strategy that sees the toughening of Canadian economic competitiveness within the North American free trade area as a preparation for entry into other markets, including Europe. The key elements of the government's strategy towards Europe 1992, as they emerged over the past year, include the November 1990 Canada-EC Joint Decla-

18

Canada Among Nations 1990-1991

ration, the "European Challenge" campaign to provide Canadian business with information about 1992, establishment of a Task Force on Europe 1992 within the International Trade Advisory Committee (ITAC), development of a "European Trade Policy Strategy" centred in Brussels, promotion of joint ventures, technology transfers and so forth as part of the "European Trade and Investment Development Strategy," and expansion of formal political and official links within the 1976 "Framework Agreement" and 1988 arrangements for "political dialogue" with the EC. Many of these initiatives are still in the early stages of development. However, Penfland argues that their success will depend upon political will on both sides of the Atlantic; if that is lacking they will suffer the same fate as Canada's "Third Option" policy towards Europe in the early 1970s. Canada's constitutional crisis threatens to undermine its efforts to develop a coherent, forward-looking trade strategy towards Europe. The country may also have difficulty in making its voice heard in Brussels at a time when other major economic interests like the United States and Japan are demanding wider access to the Community. But the stake for Canada is not just competition for markets in Europe but competition with Europeans for markets in Canada. Canada's economic interests in the new Europe are closely linked with its security interests. Unfortunately, the important complementarity of economic interdependence with security interdependence has been too long neglected in Canadian foreign policy, as John Halstead reminds us in his chapter. The construction of a new security order in Europe is bound to affect Canadian interests, and Canada is well placed to promote those interests, being a member of two of the three institutions (the European Community, NATO, and the Conference on Security and Cooperation in Europe) around which the new order will take shape. Canada has called for an expanded role for the Conference on Security and Cooperation in Europe (CSCE), has supported a new direction for NATO, and has offered modest support for the reforms under way in Eastern Europe by becoming a founding shareholder in the new European Bank for Reconstruction and Development (EBRD), and by establishing a number of bilateral aid programs with Poland and Hungary. However, despite rhetorical affirmations of Canada's interests in Europe by senior government officials, Canadian defence policy appears to be headed in the direction of significant reductions, if not complete withdrawal, of

After the Cold War

19

Canada's military presence in Europe. If Canada is to be a partner in building the new order in Europe, it will have to maintain an ongoing commitment to European security and bring its defence policy into line with its foreign policy professions. Carl McMillan explores developments in Eastern Europe, focusing on the collapse of Comecon and the factors that are likely to affect Eastern Europe's integration with Western Europe. He reminds us that the situation is not without its ironies, inasmuch as the rise of economic blocs in Western Europe and elsewhere has been paralleled by the disintegration of the socialist regional system in Eastern Europe. From a Canadian standpoint Eastern Europe poses new business opportunities as well as dilemmas. In 1990, the Canadian government set up a Task Force on Central and Eastern Europe to coordinate its economic assistance to the region. Neither Canada nor the United States is a major source of credit to Eastern Europe, but both are important sources of food aid, technical assistance, and potential foreign direct investment. However, as the East European countries dismantle traditional state trading systems, there will be increased scope for initiatives at the private enterprise level, especially for smaller scale projects involving small and mediumsized firms. Over the longer run, Eastern Europe may also be in a position to compete in information-based services and agriculture. McMillan argues that if Canada is to take full advantage of the new opportunities in Eastern Europe it will have to devise a long-term strategy that will necessarily involve federal, provincial, and business and banking interests in a cooperative relationship. Canada's relations with the Soviet Union are far more problematic than its relations with Eastern Europe, as Allan Kagedan explains in his chapter. Although Canada-Soviet relations have advanced considerably in the past year and a half, they risk being undermined by continued ethnic and nationalist unrest in the Soviet Union, the uncertain achievements and legacy of glasnost and perestroika, and what now appears to be a movement to the right reflected in the growing power of the military and the Communist Party. Despite the establishment of the CanadaU.S.S.R. Business Council, the Export Development CorporationVneshekonombank agreement to provide financial credit for CanadaSoviet trade, and a variety of other recent joint initiatives, economic relations between the two countries will continue to be affected by the uncertain economic climate in the Soviet Union. One area, however, where

20

Canada Among Nations 1990-1991

linkages are developing and where the two countries share common interests is that of northern affairs. Both Canada and the Soviet Union are Arctic nations, and Soviet-Canadian collaboration on Arctic affairs, through a combination of bilateral and multilateral fora, has increased significantly in recent years. A number of important bilateral agreements on Arctic cooperation were signed during the Prime Minister's November 1989 trip to the Soviet Union. The founding in August 1990 of the International Arctic Science Committee (IASC), whose membership comprises the eight circumpolar nations, is an important multilateral initiative intended to promote greater levels of scientific cooperation in the region. Choices Ahead: Japan and the Pacific If the new Europe is pulling Canada eastwards across the Atlantic to its historical and cultural roots, and free trade is moving it southwards, the Pacific is tugging this country in yet another direction: westwards. As Edward English and Yoshitaka Okada note in their chapter, although Canada's role in the Pacific "is largely under the management of traders and investors," it has nonetheless come to represent a region which is more important to Canada for trade and investment than Europe is. English and Okada argue that Canada's near-term interests require a climate hospitable to foreign direct investment, and this includes investment from the Pacific. At the same time, Canada has a comparative advantage in equipment, engineering, and consulting services associated with the mineral, forest, transportation, and telecommunications sectors. The authors foresee new opportunities for joint ventures with countries like Japan, Korea, China, and the states of Southeast Asia in resource development, where capital and import needs are complementary, and in the science and technology of renewable resources. As the Pacific's third largest economic power, Canada is also well positioned to play its traditional middle-power, mediator role on trade issues, especially in U.S.-Japan relations. English and Okada note that many of the unresolved issues of the Uruguay round of multilateral trade negotiations (e.g. agricultural protectionism, non-tariff barriers in countervailing and anti-dumping policies, regulations affecting the service sector, etc.) will continue to be a major source of conflict and friction between the United States and Japan. Canada's trade-dependent economy and "tendency to view the issues from the middle ground" enable it to exercise leadership among the smaller and medium-sized Pacific nations,

After the Cold War

21

particularly on technology, trade and investment issues. To this end, Canada should actively work to keep multilateral interests at the forefront of such regional initiatives as the tripartite Pacific Economic Cooperation Conference (PECC) and the Asia Pacific Economic Co-operation (APEC) ministerial consultative group. Like other regions, Canada's ability to play this role successfully will be critically dependent on close business-government relations and a commitment of resources that may be difficult to sustain in the current domestic political climate. Dangerous Sideshow: Canada and the Gulf Crisis Ironically, the Gulf crisis has assumed a level of importance in Canadian politics and foreign policy disproportionate to Canada's historical ties with the region. Martin Rudner notes in his chapter on Canada and the Gulf crisis that Canada's relations with the Arab countries around the Gulf have been "less extensive than those of most other participants in the multinational coalition;" Canada has little dependence on the Gulf for oil or commercial markets, and its social and cultural contacts have been remote. Why then did Canada become so actively involved in the Gulf crisis, not only through its active support for successive UN resolutions condemning Iraq's invasion of Kuwait, but also in its decision to deploy Canadian naval and air forces to the region? Rudner explains that Canada's involvement represents "a logical extension" of its "longstanding commitment to peacekeeping," whereby "action in defence of collective security in the Gulf crisis was deemed important 'to safeguard the rule of law* and 'deter future aggressors.' " Rudner details the history of the crisis, beginning with the historical background to Saddam Hussein's invasion of Kuwait and concluding with the onset of military hostilities following Saddam Hussein's refusal to abide by the UN's deadline for unconditional withdrawal. He also discusses the domestic debate within Canada about Canadian military involvement in the crisis, and the reasons why partisan dissension and anti-war sentiments have emerged. Looking ahead, he argues that the main challenges for a postwar settlement will be the establishment of a regional security arrangement that will include a peaceful resolution of the Arab-Israeli conflict, arms control, and economic reconstruction. In these areas, Canada will have a modest but supporting role to play in rehabilitating Iraq's relations with its neighbours.

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Canada Among Nations 1990-1991

CONCLUSION In response to the question "what's old, what's new?" about the world after the Cold War, the song title "Everything old is new again!" immediately comes to mind. There are important elements of continuity as well as change in the evolving post-Cold War international order. To be sure, the disintegration of the Warsaw Pact and Comecon, the removal of communist governments in Eastern Europe, the unification of Germany, and the use of collective security in the Middle East are major new elements of this order. The emergence of regional trading blocs in North America, Europe, and the Pacific represents an important new trend in international political economy. Fragmentation pressures in Canada, Yugoslavia, and India, as well as resurgent nationalism and ethnic conflict in the Soviet Union, are acquiring growing momentum. Though not new, these forces are bubbling to the surface and threatening a major transformation of the international landscape which may be characterized by a break-up of multi-ethnic states and empires — just as in the 19th century. Moreover, instability in the Third World, along with increasing economic problems due to rising debt burdens, reduced exports to industrial countries and unstable energy prices, remain chronic if not worsening problems in international relations. The 1990s have thrown a bewildering array of new challenges on to the Canadian foreign policy agenda. Although the strengthening trend towards multilateralism is inherently compatible with Canada's longstanding interests in world order, Canada finds itself weakened after the Cold War by its own political legitimacy crisis. Having worked hard over the past forty-five years to secure an enviable position for itself internationally, Canada risks losing its international influence and prestige as a result of internal dissension and policy drift at home. Over the long run, Canada's loss of international influence will impose major costs on Canada and Canadians. Increasingly, decisions taken outside Canada's borders have direct impacts at home. If Canada is to deal with these external forces it will necessarily have to look outwards and vigorously assert its international presence. But it can only do this from a position of domestic strength and internal political cohesion. Globalization of markets and increasing levels of social and economic interdependence are creating new pressures requiring strong central government leadership and policy flexibility. Windows of opportunity abroad can open and close quickly. If it does not get its domestic

After the Cold War

23

house in order, Canada will miss these opportunities, its economic competitiveness will continue to decline, and the country will risk becoming a mere branch plant of the North American and world economy with increasing dependence on natural resource exports (hewers of wood, drawers of water). The essays in this volume lay emphasis on the critically important nexus between Canada's domestic position and international developments and trends; this is what Paquet calls the "echo box" effect. Unfortunately, Canada's debate about its political future has to a large extent taken place in a vacuum, with the country remaining oblivious to the dramatic forces reshaping the global political and economic environment and blissfully unaware of the implications of these external changes for Canada's economic health and future.13 Canadians — like citizens the world over — were mesmerized by the war in the Persian Gulf. But the Gulf crisis has obscured the more important challenges to world order posed by the imminent break-up of the Soviet Union, the difficulties of economic and political reconstruction in Eastern Europe, and the growing trend towards regional economic integration and the creation of world trading blocs.14 It will be important for Canadian foreign policy to address these challenges. This will require a reorientation of the terms of the domestic debate and a clear recognition of the foreign policy choices confronting the nation. It is our hope that the essays in this volume will shed some light on the global challenge that confronts us. NOTES

1

See Charles Krauthammer, "The Unipolar Movement," and William Pfaff, "Redefining Power," Foreign Affairs,Vol. 70, No. 1 1990/91: pp. 23-33 and 34-48.

2

John W. Holmes, Canada: A Middle-Aged Power Toronto: McClelland and Stewart, 1976.

3

John Lukacs, "The Short Century — It's Over," TheNewYorkTimes, February 19, 1991, p. E13.

4

Kenichi Ohmae, TrladPower: TkeComingShapeofGlobalCompetition (New York: The Free Press, 1985); and Kenichi Ohmae, "Managing a Borderless World," Harvard Business Review (May-June, 1989): pp. 152-61.

5

See "A Survey of World Trade," The Economist, September 22, 1990, pp. 7, 36. Robert Reich, "The Real Economy." The Atlantic, Feb. 1991, p. 36.

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Canada Among Nations 1990-1991

6

Keith Bradsher, " Telephone Services: A Growing Form of Foreign Aid," The New YorkTimes, October 21,1990, p. F5.

7

Robert Reich, "Globalization and the Nation-State," Review '90/Outlook '91 ( Ottawa: North-South Institute, 1991), p. 18.

8

For a discussion of the role of the United Nations and international institutions in the 1990s see Robert O. Keohane, "Multilateralism: an agenda for research," and Harold K. Jacobson, "The United Nations system in the nineties: opportunities and challenges," International Journal, Vol. 65, No. 4 (Autumn 1990): pp. 731-64 and 765-95.

9

Ruth Leger Sivard, World Military and Social Expenditures 1989, 13th edn. (Washington, D.C.:World Priorities Institute, 1989), p. 23.

I

°

Stanley Hoffmann, "The Price of War," TheNew YorkReview of Books, Vol. 38, Nos. 1 & 2 (January 17, 1991) p. 6.

II

See Fen Osier Hampson, "Building astablepeace: opportunities andlimits to security co-operation in Third World regional conflicts," International Journal, Vol. 65, No. 2 (Spring 1990) 454-89; and Bernard Wood, World Order and Double Standards: Peace and Security 1990-91 (Ottawa: Canadian Institute for International Peace and Security, December 1990).

12

The press has been filled with reports about the flight of Canadian manufacturers squeezed by high Canadian costs. See, for example, John Urquhart, "Canadian Firms, Fleeing the High Costs At Home, Relocate South of the Border," The Wall Street Journal, February 7,1991, p. A2.

13

There are, of course, some notable exceptions. See, for example, Sylvia Ostry, "Learning the real lessons from Europe," The Globe and Mail, February 7,1991, p. A15. David Stafford reaches a similar conclusion. See "Cracking the whip at anew world order," The Globe and Mail, February 5,1991, p. A15.

14

2

THE CANADIAN MALAISE AND ITS EXTERNAL IMPACT

Gilles Paquet "Our Canadianism, from the very moment of its real birth, is a baffling, illogical but compulsive athleticism - a fence-leaping which is also, and necessarily, a fence-keeping." Malcolm Ross

I n the world of 1990, political economies are like Klein bottles: the

domestic inside and the transnational outside are inextricably mingled: the international context shapes domestic institutions in fundamental ways, and the ethos and circumstances of national socio-economies impact on their standing in the world. Evidence of the international impact of the current Canadian domestic malaise is somewhat conjectural. Yet it deserves explicit analysis, for the international echo box may well generate a feedback to the national scene that could accentuate the internal malaise. The speculative nature of the exercise should not discourage such analyses. When public policy is being developed there is much danger in excluding all but knowledge that is beyond doubt. Explicit use of less certain knowledge is often the only way not to miss what may be the most important issues, and not to fail in designing maps likely to prove useful guides for the policy-maker.1 The following forebodings are alarming, but they should not be discarded as alarmist: if they turn out to be ill-founded, they will have at most triggered some additional vigilance, while if they are on target they may, by drawing attention now to important prospective problems, help to avoid a catastrophe later.

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Canada Among Nations 1990-1991

THE NEW DYNAMIC The world economic order and the rules of the political economy game changed dramatically over the last decade. The growth of knowledgebased and time-based competition as the determining sources of competitive advantage, the emergence of a new regionalism of trading blocks, and the development of intricate new networks of cross-border alliances, partnering and cooperation are a few of the major changes. This new context has created challenges for firms and governments.2 For countries like Canada, such transformations have at times proved baffling because of a certain unreadiness to react quickly, decisively and coherently to the external challenges they represent. Canada is a small, open, dependent and balkanized socio-economy, with a rather unillustrious record when it comes to developing an integrated political economic response to any external shock. The number of instances over the last decades when Canada was caught speaking with many cacophonous voices in international fora are a testimony to the difficulties, in a decentralized federation like ours, of arriving at a consensus on any action plan. These difficulties have been heightened in recent years by the considerable loosening of the ligatures pulling Canadian society together. The loosening of these ligatures — "those deep cultural ties which help people find their bearings in the world"3 — corresponds to what some might call the collapse of the Keynesian social consensus in most social democracies. It has eroded old solidarities and modified Canada's sociocultural supports in subtle but important ways. One of the consequences has been Canada' s shift toward neo-liberalism in the 1980s, which brought about a certain vacuum at the heart of the political economy: the public purpose has come to be seen as the sum of private purposes. Since no criteria or agreed procedures have been available to determine what end public intervention should serve, the public arena is now governed by warring private interests which are either paralyzed by conflicting tensions, or swayed by decisions appearing to a majority of citizens as increasingly arbitrary and capricious.4 As the economic web of relationships with the rest of the world depends to a great extent on the domestic socio-political nest within which it is elaborated, anything that loosens national ligatures is bound to affect Canada's image in world affairs, and to limit its ability to exercise

The Canadian Malaise and its External Impact

27

leadership abroad. This comes, unfortunately, at a time when there is general agreement that strategic cooperation and partnering are more necessary than ever, not only to construct effective policies on the domestic front, but also transnationally.5 The loosening of ligatures is a result of two sets of forces. First, the external pressure brought on national communities by accelerating change in the world political economy has had a disruptive effect on a socio-economy that was required to adjust very fast. Secondly, the Canadian decentralized polity has experienced a process of implosion after the demise, around 1980, of the "Westminster model" of parliamentary supremacy — "club government" a la Trudeau — in the face of internal pressures for accommodation within an increasingly heterogeneous and diverse society.6 Major epoch-making information revolutions have always preceded the emergence of new systems of societal technology: the writing revolution was a precondition for the development of irrigation farming and agricultural society and so was the printing revolution for the formation of industrial technology and the emergence of industrial society.7 The new information and telecommunications revolution, and the formation of networks of cognitive information, have been the precondition and basis of the new information socio-economy. This new socio-economy has led to a process of dematerialization of economic activity, and to a certain deterritorialization of the economic process, with a consequent drift towards a world in which non-market integration and non-tradable interdependencies have grown in importance.8 The old world economy was shaped to a much greater extent by the dictates of a geo-technical determinism, rooted in natural resource endowments and relative prices of labour or capital. The new information socio-economy is much more footloose: its structure and functioning is less dependent on geo-technical coordinates, and much more dependent on a wide range of fluid and policy-determined social and organizational factors that underpin the competitive advantage of modern economies.9 As a result, the new world economic order is balkanized into segments regulated by different sets of rules: the different patterns of government-business relations have played a central role in the shaping of this crazy quilt of economic systems, each one with its own set of rules

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Canada Among Nations 1990-1991

and the institutions it has created for itself to provide competitive advantage.10 These economic systems have not only crafted strategies for securing their own competitive advantage at home, but they have shown remarkable ingenuity in doing so beyond their borders.11 This has generated a new way of thinking about trade policy that may be generalizable to foreign policy in toto: the fundamental belief in free trade has been replaced by the conviction that in the real world of imperfect competition, astute strategic government policies can secure for a national economy a large* share of "rent" and important "external economies."12 This malleability of socio-economies has its negative side: they have become more vulnerable to moods, organizational drifts and policy decisions. Changes in the socio-cultural "underground" of national economies have translated into substantial changes in an economy's competitiveness and often in its foreign policy stance. The nature of trade and investment flows, and even the economy's standing in the world, have become more dependent on complex politico-economic strategies.13 "Competitiveness" is the term for a new concept which attempts to encompass a more broadly based measure of relative national performance and the full opportunities open to the nation, "a hybrid concept that has had to be invented to capture the richness of the performance concept most relevant in today's world."14 The erosion of the "club government" concept in the face of new challenges that call for a more encompassing accommodation of very diverse interests has meant that government has not been able to provide effective management of major state-led adjustments or complex negotiated adjustments.15 The doctrine of absolute federal power was already bankrupt by the time the National Energy Program showed its true colours, but no new governing philosophy has taken its place. As a result, Canada, like Britain, became in the 1980s an "unprincipled society," incapable of handling the new demands effectively because it had lost any sense of what is right.16 The result has been immobility and irresolution, while the critical challenges kept relentlessly imposing breaches of the many unwritten rules that had been the foundation of British-type social democracies. To cope with the new difficulties, the fumbling government of Trudeau's latter years perpetrated an epistemological coup; opposition to federal policies was branded as "immature" or "sabotage", and a sort of cogni-

The Canadian Malaise and its External Impact

29

tive despotism attempted to substitute a certain self-legitimating scientism in public policy, to replace the intellectual resources by which people grant or withold legitimation.17 This has left subsequent governments somewhat crippled: the Trudeau legacy was a society of individual rights, a litigious society in which the very notion of collective rights and obligations had been all but obliterated. There was, and there still is, no guiding philosophy for the process of negotiation that followed the demise of the "club government" era. The Meech Lake failure has been regarded by many as a sui generis phenomenon. It is much more reasonable to regard it as a result of the incapacity of the old politics to meet new demands in a society more fluid and diverse than most olher democratic and multicultural Western societies.18 Distrust has become the rule, and waning anomic private, provincial and interest group politics democracy (& la Schumpeter) has taken over the forum. Politics as mutual education in the Aristotelian tradition has all but disappeared. The legitimacy crisis has resulted in a crisis of governability. Demands by Quebec for a special status — based on its obvious "distinctness" — has triggered a flurry of demands for similar "privileges" by all sorts of interest groups. This has effectively stalled any possibility of meaningful negotiation between Quebec and the Federation about anything of substance. Meech, in that sense, revealed a profound malaise: the fundamental dynamic conservatism of a political system fighting to remain the same.19 The emotional content of the BdlangerCampeau Commission hearings in the fall of 1990 and the vitriolic reactions in the English-Canadian press to the Allaire report early in 1991 give a fair measure of the degree of anomie that has developed since the Meech Lake Accord failed. SCORPIONS IN A BOTTLE + THE FROG SYNDROME 1990 has been a period of growing awareness of the irreducible conflictive and adversarial systems operating in Canada. Pierre Vallieres referred to the coexistence of the two nationalisms in Canada (Que"becois and Canadian) as two scorpions in a bottle destined to destroy each other.20 This apt metaphor may be generalized to a large number of other cleavages in Canadian society: rifts between regions, provinces, ethnic groups, the federal and provincial governments, public and private sectors, labour and management, etc.21

30

Canada Among Nations 1990-1991

The critical nature of this phenomenon is not so much that Canadians have allowed these adversarial systems to develop, but that they appear not to recognize the gradual decay of the national consensus it has fostered, and the threat it poses both to the internal functioning of the country and to its international stature. This high degree of cognitive dissonance would appear to suggest that Canadians suffer from a syndrome associated with frogs. If a frog is "put in cold water it will not bestir itself if that water is heated up slowly and gradually, and will in the end let itself be boiled alive."22 This aptly describes Canadian attitudes and behavior: Canada is seemingly unaware that it is in the process of decaying as a nation. The failure of the Meech Lake Accord has revealed the extent to which the country has lost its capacity to react as a country, and has acquired a tolerance for diffraction and refusal of consensus that may well have placed it on an irreversible path to fragmentation. In any case, the tolerance for dissension is such that Canada's survival as a frontline nation is clearly threatened by a number of deficits which are discussed below. A Public Financial Deficit The lack of a sense of purpose has led the Canadian government to sponsor a new brand of "rentable federalism" by systematically incurring public financial deficits: federalism has appeared "rentable" for regional and sectional groups because of the $30 billion annually distributed to them, in excess of what was collected from them in the form of taxes. This endemic deficit has generated an important growth in the ratio of public debt to gross domestic product for Canada, and, to the extent that the public debt (the numerator) is growing at a rate gauged by the real rate of interest and the GDP (the denominator), which is not growing at all, the federal financial situation of the country can hardly be called sound. It is a situation which is all the more threatening in that a substantial portion of the public debt is held outside Canada, and that the maturity of this debt is very short. Any loss of confidence (warranted or not) on the part of foreigners would lead to a dramatic withdrawal of funds, and to a substantial drop in the value of the dollar. Such a sequence of events (leading to massive losses by foreigners who have made Cana-

The Canadian Malaise and its External Impact

31

dian-dollar denominated loans to Canada at a time when the value of the dollar was high, but would be reimbursed in depreciated dollars) would dry up further capital inflows for a long while. This is the way Argentina went. Yet the Canadian government is in a Catch-22 situation: any attempt it makes to deal effectively with the federal public debt problem by reducing the federal deficit is likely to aggravate the existing tensions between groups and regions in Canada to such an extent that the government has had to tread rather carefully. It appears incapable of solving its economic difficulties without exacerbating its political troubles; but increasing the present tensions within Canada can only further damage the country's political stability and have negative effects on Canada's competitiveness and its capacity to attract foreign investment. A Public Action Deficit The financial crisis is mainly an echo effect of the incapacity of the public sector to provide the requisite support which the Canadian private sector needs to be able to compete internationally. Its neo-liberal mind trap appears to prevent the government from envisaging a strategy of managed trade, even though such an approach is justified by theoretical and practical considerations.23 A strategy of this kind would build on a public sector/private sector partnership to provide the requisite security zones and socialization of risk for these enterprises. These are pre-conditions for the existence and competitive success of the enterprise, and bureaucratic and government actions are essential for providing such security zones.24 The extensive use of government/business complementarities by our trading partners has been a major handicap for Canadian firms, which have not been able to count on a proactive and coherent policy — either from the Canadian government or from the combined levels of government.25 This lack of coordinated policies accounts for much of the observed decline in Canadian competitiveness over the last decade. It shows in a variety of ways: from the unsatisfactory degree of socialization of risk by the government in the area of research and development expenditures, to serious shortcomings in the education and training facilities necessary for the Canadian economy to compete.26

32

Canada Among Nations 1990-1991

A Public Legitimation Deficit The failure of the public sector to exercise meaningful control of public finances, and to complement the role of the private sector in designing Canada's international competitiveness, has led to a growing loss of trust in the government as it searched experimentally for a new governing philosophy. Whatever the merits of any particular piecemeal reform put forward by the Mulroney government, its string of failures, and its seeming incapacity to explain and legitimize its interventions, have left the government extremely vulnerable to criticism. It has, in fact, lost legitimacy. The actual point of no return may have been passed unnoticed in the events that surrounded the failure of the Meech Lake accord, but historians will probably define it as the day on which the Prime Minister made his unfortunate remark about "rolling the dice" in the moments preceding the Meech failure. Innocuous in itself, this remark acted like a revelation for a large number of Canadians in that it showed the vacuum at the core of the political economy. The consequence of this loss of legitimacy is that, whatever heroic stand the government might adopt and defend, it is now unlikely to be believed. This legitimation deficit and the withering of the mass loyalty needed by government to motivate the population for concerted action, could render Canada's plight similar to that of a stalled omnibus. IMPACT ON TRADE, INVESTMENT AND CANADA'S STANDING IN THE WORLD In a world where not only trade and investment flows, but also the stature of a country in the international forum, are very much shaped by policy decisions, the immobility of Canadian policy has already considerably weakened Canada's competitive position. Trade The Canada-U.S. Free Trade Agreement (FTA) represents a fundamental decision to impose external pressures on Canadian firms through increased competition from U.S. enterprises, instead of using an internal strategy of managed trade to provide selective support for certain firms or industries and thereby shape Canada's trade flows. This approach has triggered some healthy pre-emptive adjustments in a number of sectors.

The Canadian Malaise and its External Impact

33

The merger activity in the beer industry is often quoted as an example of such efficiency-enhancing reactions to the prospect of U.S. competition. But in a Canadian economy that is highly concentrated and highly oligopolized, at a time when economies of scale are losing their importance, and lean production is becoming the new model,27 it would be unwise to assume that such external pressure will be a sufficient condition for the prosperity of Canadian trade. This is especially clear when one analyzes the macroeconomic policy scene. The present Canadian malaise has contributed much to the present macroeconomic environment, which is exactly the reverse of what it should be. As a minimum, four important accompaniments to freer trade might well be mentioned even by economists who have a healthy disrespect for industrial strategies: a low dollar to facilitate the penetration of the U.S. market by Canadian firms, low interest rates to stimulate competitiveness-enhancing capital investment, acceleration of Canadian technology development, and adjustment programs to offset job losses ascribable to freer trade and to provide training for the Canadian labour force.28 We have at present a high dollar, high interest rates, and no action on the other fronts, despite subtle but clear hints from the de Grandpre" Commission report that action was warranted.29 As a result, the adjustment to freer trade has not only been very painful for Canadian firms, but also, in many cases, structurally destructive (see Chapter 4). At an historic moment when trade barriers are being lowered and industrial restructuring is essential, the comparative handicap of Canadian firms, together with the lack of the minimal effective state intervention which is needed on the trade policy front, has considerably damaged Canada's capacity to export. The U.S. recession, and the stagflation due to the increase in oil prices resulting from the Persian Gulf crisis, have turned a decaying situation into a catastrophe. The sharp increase in Canadian unit labour costs, as compared with those of the United States, had already substantially heightened the threat to Canada's competitive position. This latter factor was itself an echo effect of the adversarial system of industrial relations in Canada. Much of the shift from a current account surplus of some $3 billion in 1983 to a deficit of some $20 billion in 1989 has to be ascribed to macroeconomic dysfunctions generated by the extraordinarily poor coordination of macroeconomic policies all through that period.30 But the

34

Canada Among Nations 1990-1991

deepening Canadian malaise has prevented any cohesive and strong countermove and has most certainly exacerbated an already precarious situation. Investment The planned reduction of tariffs between Canada and the United States should lessen the incentive for U.S. firms to settle in Canada, and the increasingly high relative unit labour cost in the 1980s has already led not only foreign, but also Canadian firms, to transfer production out of Canada. Foreign financial investment in Canada over the last few years has remained important because of the relatively high real rates of interest in Canada, but this sort of capital flow has very short maturity, is very volatile and is the more likely to disappear quickly, as the Canadian malaise deepens and the financial situation deteriorates. This is true in the longer run, even though the Persian Gulf war has undoubtedly led some financial capital to take temporary refuge in Canada. It has already become more costly for solid Canadian firms to borrow in the U.S. capital market, as can be seen from the fact that Hydro-Quebec 30-year bonds denominated in U.S. dollars have had to promise a rate of close to 9.5 percent in the early part of 1991. As for foreign direct investment, it has been discouraged by the current unsettled, post-Meech situation. The hardening of positions between Quebec and the rest of Canada in 1990 has made it very unlikely that Canada can be preserved as it is. It is still unclear what the new arrangement will be, but it would appear that any form of "hemi-demi-semi separatism," a term used by Eugene Forsey, or related constitutional compromises likely to be proposed by Quebec, will be rejected by the rest of Canada. Indeed, the reactions in the EnglishCanadian press to the Allaire report early in 1991 have been so intemperate and vehement that we are bound to see diminishing foreign direct investment in the months to come despite the undying optimism of Investment Canada.31 Natural resources are undeniably Canada's greatest strength, but there is no coherent government policy which would serve to guide the development of downstream processing capacity. Consequently, despite the ongoing uncertainties, foreign investment by Asian, European and American companies that have downstream processing capacity will undoubtedly result in the takeovers of Canadian resource companies, as

The Canadian Malaise and its External Impact

35

it already has in the last two years. But the purpose of such ventures is mainly to take advantage of raw materials, and is likely to remove from Canada much potential value-added processing.32 The same type of takeover activities are noticeable in other sectors. The takeover of Connaught BioSciences (a Canadian firm, the second largest manufacturer of vaccines in the world, selling in 90 countries and controlling 30 percent of the U.S. market for vaccines) with $175 million in cash by a foreign firm was deplored even by ardent conservatives.33 This case illustrates the consequences of the weakness of will that has characterized pan-Canadian policy-making. Some have conjectured that if Connaught had been located in Montreal, the Quebec government would not have allowed the takeover by Merrieux, because, in Quebec, there is still a strong view that the nationality of a firm is a matter of some consequence when one is interested in maximizing value-added processing. This is a view shared by many in Quebec and elsewhere;34 however, it is a view that would appear to have been discarded by the Canadian government.35 The Canadian view may be not so much a reasoned conclusion as a result of its bizarre perspective on globalization, and a rationalization of its incapacity to exercise the leadership needed for the delineation of a clear policy on foreign ownership in the present circumstances. Standing In The World The combination of a weakening competitive performance, a seemingly uncontrolled public debt/GDP ratio, an intensifying internal crisis resulting from less of consensus and legitimacy, and, above all, the evident lack of political leadership amount to an unconscious conspiracy to transform Canada's image in the world. The dual crises around Meech and at Oka, and their aftermaths, may have shown the world a Canada much different from the image that Lester Pearson, Pierre Trudeau and Brian Mulroney — in his first period of political power — had crafted. Canada's leadership has already suffered within the OECD and the Group of Seven countries (G-7), but also in other international fora, and in its relationships with many countries that regard Canada as a model society. As its economic and socio-political foundations crumble, Canada's indecisiveness has inspired many hasty leaps in the area of foreign policy. Many interpret in this manner the position taken by Canada in the

36

Canada Among Nations 1990-1991

Persian Gulf crisis, and the hurried decision to enter into negotiations with Mexico to broaden the Canada-U.S. agreement (see Chapter 5). More important, perhaps, is the hesitation in the rest of the world, in the period during which the negotiated fragmentation of Canada will proceed. However peaceful and serene the philosophical disquisitions may have appeared in the early stages of the discussions about the secession of Quebec, there has been some hardening of the language used by the various participants in Canada over the last few months of 1990. Moreover, the ways in which the fragmentation may proceed is bound to generate at least temporary changes in the rules of the democratic game as we have come to know it. This may produce some unease in other countries. For instance, in a recent pamphlet, Pierre Bourgault entertains the possibility of a temporary "conscription" of the media during the transition period after Quebec's separation.36 The possibility of some domino effect leading to the subsequent secession of Ontario if Quebec becomes independent has also been entertained. Such speculation not only increases uncertainty, but is bound to paralyze Canadian action in international fora even more during the forseeable future. The secession of Quebec would probably first threaten Canada's presence in many forums where it is for the moment only a fringe member, and in the G-7 and the World Economic Summit, and it would tarnish its reputation as "the land where complex problems are always resolved through complex solutions."37 The present malaise has already led to some discounting of Canada's standing. While some regard this as a rather unimportant penalty in a world already quite turbulent, others have emphasized that to the extent that Canada may find it more difficult to take part in alliances, partnerings, and networks or less likely to sway decisions in its favour in international circles, this loss of standing may translate into a further deterioration of the internal situation. CONCLUSION Canada has for a long time benefited from being unimportant on the world stage. By an astute policy of semi-adjustment to the conditions of its geotechnical and socio-political environments, it has been able to scheme virtuously and to develop policies that have allowed the country to shape its trade, its foreign investment, and its international status relatively well. Through the whole period from the National Policy in the late 19th cen-

The Canadian Malaise and its External Impact

37

tury to the deliberate effort to attract foreign investment in the late 1940s and early 1950s, and to the design of the Auto Pact in the 1960s, Canada was fairly successful in designing mixes of policies that helped it to increase its share of world resources and engender prosperity. This tradition has been based on a strong leadership, exercised in circumstances that were not always favorable, and on a capacity to act decisively despite some important internal tensions within the country. Leaders could lead because a basic minimal consensus existed. More recently, the challenges posed by the broader context have become sharper, and the internal tensions within Canada have been heightened. We have become a litigious society in a world where the ground is in constant motion. As a result, we have lost our footing and our bearings. It may be that our national love of consensus is not important on the world stage, and that the noise it makes, or might make, can on the occasion of the country's break up pass unnoticed. However, this increasing dissension is very likely to affect Canada's well-being through the echo box of the international political economy. We have suggested that it has already negatively affected the trade and investment flows and the standing of Canada on the world scene, and has generated the beginning of an implosion in the Canadian socio-economy. Some way may be found to effect a renaissance. Such a renaissance can only be based on the new reality of competitiveness, which depends a great deal on the development of new and more productive relationships between government and the private sector. This relationship requires that government play a strategic role on a number of fronts.38 In order for this renaissance to materialize, some fundamental agreement has to exist internally, along with some leadership. Some have argued that the state might be able to play its role better if it were not forced to represent as wide a range of perspectives as the Canadian government does. Some observers have even suggested that Quebec might be better prepared than Canada to meet the challenges of globalization.39 The same logic would suggest that maybe four separate political entities Quebec, Ontario, Western Canada and the Atlantic Provinces might overall fare better in this strategic role than Canada as a whole. If one can discount completely the important costs attached to the period of national disintegration, the argument may well stand, and indeed, this new incarnation of Canada may be the only possible form of renaissance.

38

Canada Among Nations 1990-1991

The present Canadian malaise is in any case causing a sufficient number of additional problems, in an already quite turbulent world, that pressure to resolve it in one way or another has become the main item on the agenda. If all intermediate "hemi-demi-semi separatisms" are out of the question, the only solution is a true multiple independence movement for Canada. The central question is whether the other parts of Canada want it. In the context of the referendum planned for next year in Quebec, 1992 may be more than a European benchmark, and may take on an entirely new meaning in Canada's debate about its national future. Canada's heightened vulnerability to changing economic forces, at a time when its political institutions are paralyzed, may well seal its constitutional fate. NOTES 1

E. F. Schumacher, A Guide for the Perplexed (New York: Harper and Row, 1977).

2

G. Paquet, "The Canadian Economy of the Year 2000: A Case for Managed Trade," in Perspective 2000, ed. K. Newton, T. Schweitzer and J. P. Voyer (Ottawa: The Economic Council of Canada, 1990), pp. 80-90; and " The Internationalization of Domestic Firms and Governments: Anamorphosis of a Palaver," Science and Public Policy, Vol. 17, No. 5 (October 1990) pp. 327-332. R. Dahrendorf, The Modern Social Conflict (New York: Weidenfeld and Nicolson, 1988). D. Marquand, The Unprincipled Society (London: Fontana Press, 1988).

3

4 5

Economic Council of Canada, Transitions for the 90s, 27th Annual Review (Ottawa: Canadian Government Publishing Centre, 1990).

6

D. Marquand, 1988. Y. Masuda, "Information Epochs and Human Society," World Future Society Bulletin, (Nov.-Dec. 1982).

7

8

G. Paquet, "The New Telecommunications: A Socio-Cultural Perspective," in Telecommunications: A StrategicPerspective, ed. M. F. Estabrooks and R. H. Lamarche (Moncton: The Canadian Institute for Research and Development, 1987), pp. 45-68.

9

G. Paquet, "Les mutations de notre 6conomie-monde: des revolutions sans miracles," fitudes Internationales, Vol. 14, No. 3, (1983) pp. 413-431.

10

P. Choate and J. Linger, 'Tailored Free Trade: Dealing with the World as It Is," Harvard Business Review, Vol. 66, No. 1, (Jan.-Feb. 1988) pp. 86-93.

11

P. Choate, "Political Advantage: Japan'sCampaign for America," Harvard Business Review, Vol. 68, No. 5 (Sept.-Oct. 1990) pp. 87-93.

12

P. R. Krugman, ed.. Strategic Trade Policy and the New International Economics, (Cambridge: The MIT Press, 1986).

The Canadian Malaise and its External Impact

39

13

A. O. Hirschman, National Power and the Structure of Foreign Trade, (Berkeley: The University of California Press, 1945); and T. J. Lowi, "Towards a Politics of Economics," in L. N. Lindberg et al., Stress and Contradiction inModern Capitalism, (Lexington, Mass.: D. C. Heath, 1975), pp. 115-124.

14

P. T. Jones and D. J. Teece," The Research Agenda on Competitiveness - A Research Agenda for the Nation's Business Schools," in Cooperation and Competition in the Global Economy, ed. A. Furino (Cambridge: Ballinger, 1988), pp. 101-114.

15

D. Marquand, 1988.

16

D. Marquand, 1988.

17

G. Paquet, "Federalism as Social Technology," in Options, ed. J. Evans (Toronto: The University of Toronto Press, 1977), pp. 281-302.

18

G. Paquet, "Multiculturalism as NaiionalPo]icy,"JournalofCulturalEconomics, Vol. 13, No. 1 (June 1989) pp. 17-34.

19

D. A. Schon, Beyond the Stable State, (London: Temple Smith, 1971).

20

P. Vallieres, Un Quebec impossible, (Montreal: Quebec/Amerique, 1977).

21

K. Valaskakis, Canada in the Nineties, (Ottawa: Gamma Institute, 1990).

22

C. Handy, The Age of Unreason, (London, Arrow, 1990).

23

G. Paquet, "The Canadian Economy...", 1990.

24

W. T. Estabrook, North American Patterns of Growth and Development, (Toronto: University of Toronto Press, 1990).

25

T. J. Courchene, "Zero Means Almost Nothing: Toward a Preferable Inflation and Macroeconomic Policy," Queen's Quarterly, Vol. 97, No. 4 (1990) pp. 543-561.

26

J. A. Boulet et al., Education etformation a /' heure de la competitivite Internationale, (Montreal: Association des economistes quebecois, 1990).

27

G.StalkandT.M.Hout,Ccwpeftng/igaJ/wmme,(New York: The Free Press, 1990).

28

R. I. G. McLean, "What is to be done?" The Idler, No. 30 (1990) pp. 18-23.

29

G. Paquet, "L"adaptation du marche du travail: pour une strategic a quatre volets," Gestion, Vol. 15, No. 2 (Mai 1990) pp. 33-40.

30

T. J. Courchene, 1990.

31

Investment Canada, The Business Implications of Globalization, (Ottawa: Investment Canada, 1990), Working Paper 1990-V.

32

R.I.G. McLean, 1990.

33

J. Gillies, Testimony before the Standing Committee on Industry, Science and Technology, Regional and Northern Development, (Ottawa: House of Commons), Feb. 15,1990.

34

L. Tyson, "They Are Not Us," The American Prospect, No. 4 (Winter 1991) pp. 37-49.

35

Investment Canada, 1990.

36

P. Bourgault, Maintenant oujamais!, (Montreal: Stanke, 1990).

40 37

38 39

Canada Among Nations 1990-1991 D. Latouche, "Quebec and Canada: Scenarios for the Future," Business in the Contemporary World, Vol. 3, No. 1 (Autumn 1990) pp. 58-70. C. Navarre, "L'etat-stratege," L'Analyste, No. 13 (1986) pp. 48-51. P. Pettigrew, "L'£tat dans l'€conomie mondiale," Le Devoir, 28 aout 1990.

3

CANADA AND INTERNATIONAL TRADE: POLICIES FOR THE 1990s

Lawrence L. Schembri

F

or most countries trade policy will be the dominant international economic policy issue of the 1990s, replacing macroeconomic policy coordination which was the premier issue of the 1980s. This shift in focus towards trade policy is very significant for Canada because the Canadian economy is heavily dependent on trade; approximately one quarter to one third of total domestic final expenditures and domestic production are imported and exported respectively. This policy shift is also extremely important for the rest of the world, especially for the lessdeveloped countries (LDCs), because international trade is the most effective means of achieving and sustaining substantial rates of economic growth. Throughout history, from Phoenicia to Venice to Hong Kong, countries that traded prospered — the evidence is irrefutable. Canada, as a leading trading nation, must take a strong, unequivocal and unambiguous position in favour of liberalizing international trade. Canada should push hard for the elimination of all barriers to trade. Not only is such a stance of vital importance for maintaining and improving the standard of living of Canadians, but it will also substantially raise living standards around the world. Moreover, an agreement that liberalizes trade will, in theory and in practice, almost always increase the welfare of all of the countries involved, especially smaller countries. Very large countries could conceivably lose, because by liberalizing trade they are relinquishing the use of their market power;1 nevertheless, the promotion of freer trade is the only trade policy stance that is defensible, on the grounds of economic efficiency and equity, and therefore, represents the only position that is tenable in the long run. Indeed, free trade is like the Golden Rule — it is deceptively simple yet its practice benefits everyone.2

42

Canada Among Nations 1990-1991

The following section considers the important issue of macroeconomic stability as a prerequisite for trade policy. The third section reviews and analyzes recent developments in trade policy and the fourth addresses the trade policy choices Canada should make in the 1990s. The final section presents some concluding remarks. MACROECONOMIC STABILITY: A PREREQUISITE Macroeconomic stability is a necessary condition for the expansion of trade through trade liberalization. The full benefits of freer trade will not be realized if the macroeconomic environment is unstable and uncertain, and is perceived to remain this way because of inappropriate, and therefore unsustainable, monetary or fiscal policies. Simply put, trade policy affects production and consumption decisions by altering relative prices. The benefits of trade liberalization result from: a more efficient allocation of productive resources (e.g., labour, capital and land) that occurs when relative prices are allowed to reflect their underlying relative costs, and an increase in the number of products available for consumption. While these effects, which are primarily static, and not dynamic, in nature are well known, the "dynamic" effects of trade liberalization are not — for example, the impacts on the rate of savings and investment, and on the rate of technical innovation. However, it is clear that unstable macroeconomic policy not only makes it more difficult to ascertain relative prices — which affects resource allocation—but it generates uncertainty — which causes firms to delay investment decisions, sometimes indefinitely. For example, if the United States were to reduce the tariff on a particular product, a Canadian firm would decide to produce additional output for export to the United States only if the firm believed that it could sell the product there in sufficient quantities (because the relative price of its product was less than that of its closest competitors) and also that it could cover the cost of its inputs (because the price per unit was at least equal to the unit cost). However, if monetary policy were highly inflationary, it would be more difficult to predict the future path of relative prices.3 Similarly, an increase in the sales tax to reduce the fiscal deficit would distort relative prices. In such an

Policies for the 1990s

43

environment the firm would probably not respond fully to the tariff reduction. Trade policy issues are often discussed independently of macroeconomic issues; this is a convenient separation for pedagogical reasons because, in theory, trade is caused by differences in "real" rather than "monetary" factors. Macroeconomic instability is simply assumed to disappear in the long run. In practice, however, this neat separation is not possible. Indeed many Latin American and African countries have been plagued by chronically unstable macroeconomic environments and as a result have realized only a relatively small portion of the potential benefits of international trade. In the first half of the 1980s, macroeconomic policy was the focus of attention among Western industrialized countries, as most of them were involved in a determined effort to significantly reduce inflation rates, which were in the double-digit range when the decade began. The tightening of monetary policy that was required to lower inflation brought in its wake a world-wide recession, the most severe since the Great Depression. This in turn created large fiscal deficits as tax revenues fell and transfer payments (e.g., unemployment insurance benefits rose). The U.S. deficit was the most conspicuous; it rose dramatically, due to a combination of income and corporate tax cuts and increases in defence-related expenditures. Unfortunately, because the timing and size of macroeconomic policy actions varied between countries — in particular, the United States on the one hand, and the European Economic Community (EEC) and Japan on the other— they generated substantial movements in exchange and interest rates and large current account imbalances. Furthermore, the effects of these actions were not limited to the major economies alone; they also severely aggravated the difficult debt problems faced by most LDCs as world interest rates rose and aggregate demand for their exports fell. As a result of this instability, the issue of coordinating monetary and fiscal policies within groups of countries, primarily those in the G-7 (Canada, the United States, Japan, West Germany, France, the United Kingdom, and Italy), dominated the agendas of summit meetings and other international economic policy conferences, and it also became the subject of an intense research effort. The basic outcome of the various

44

Canada Among Nations 1990-1991

efforts to finds ways of reducing global instability via international macroeconomic policy coordination can be succinctly summarized by the phrase "Keep Your Own House in Order." Given that setting the appropriate macroeconomic policy for a single country is already difficult enough, the task of coordinating these policies across a number of countries magnifies the degree of difficulty by at least the number of countries involved, thereby making the task next to impossible.4 Furthermore, in a world of mobile capital, international capital markets will discipline wayward countries that adopt unsustainable macroeconomic policies — fiscal deficits that are too large or monetary policy that is too inflationary — by "punishing" them. A risk premium may be incorporated into the interest rate at which residents of the wayward country can borrow in world markets, and/or investments in that country may be sold thus causing the exchange rate to fall. As a result, several countries, including Canada, the United States, France, the United Kingdom and Italy, have been forced to adopt lowinflation monetary policies and deficit-reducing fiscal policies. Not only was it becoming clear that their trading partners — in particular, Germany and Japan — were not prepared to permanently alter their domestic macroeconomic policies to accommodate these countries, but also, more importantly, the discipline of the market was making them bear the additional costs discussed previously. As a result, the global macroeconomic environment has become relatively more stable in recent years and the perceived need for international macroeconomic policy coordination has substantially diminished. Unfortunately Canada's present macroeconomic outlook is not as promising. For the last two years the Bank of Canada has been committed to a policy of attaining price stability within the medium term; this is the appropriate goal of a central bank because the price level is the only economic variable over which it has ultimate control in the long run. Although this policy is exactly what is needed to generate a stable macroeconomic environment, it has been frustrated to a large extent by fiscal mismanagement on the part of the federal and provincial governments, primarily Ontario. In particular, these governments have increased expenditures and tax rates substantially, yet have failed to make significant reductions in their fiscal deficits despite eight years of continuous economic expansion—from the third quarter of 1982 to the first quarter

Policies for the 1990s

45

of 1990, the longest in the postwar period. Because the Canadian longrun real interest rate (approximately 5-6 percent), which represents the real cost of servicing the national debt, exceeds the long-run rate of economic growth (approximately 2-3 percent), which represents the rate of increase of real tax revenue, these deficits cannot be sustained at their current levels; further cuts in expenditures and/or tax rate increases are required. Consequently, the fiscal situation has created uncertainty about the actions to be taken and thus has hindered the production and investment decisions of firms, thereby limiting the benefits Canada might earn from freer trade. TRADE POLICY IN THE 1980s: AN EMERGING ISSUE As concerns about macroeconomic policy coordination eased somewhat during the latter half of the 1980s, more attention was directed toward international trade policy. The underlying reasons for this were: first, that more and more countries, rich and poor alike (e.g., New Zealand and Mexico) came to realize the importance of international trade for improving the domestic standard of living and second, that most countries engaged in international trade became increasingly frustrated with the current state of the world trading system; and the expansion of their exports was being thwarted by trade barriers which were often new and more protectionist than existing barriers. Although the previous seven rounds of the General Agreement on Tariffs and Trade (GATT) had significantly reduced tariff barriers and generated a large increase in trade volumes, the world trading system now seemed to be slipping backward. For example, non-tariff barriers such as Voluntary Export Restraints (VERs) were becoming more common, even though they were not in the spirit of the GATT; the lack of a binding dispute settlement process within the GATT meant that trade disputes were typically being settled on a bilateral basis, leaving out interested third countries; and the GATT did not cover various types of commodities, such as agricultural products, services and intellectual property, which represented a substantial portion of world trade. The Role of the United States The United States played an important role in raising the degree of priority accorded to trade policy; it also had a hand in shaping the agenda, for better and for worse. On the positive side, the Reagan Administration

46

Canada Among Nations 1990-1991

promoted trade liberalization on two fronts: it instigated the Uruguay Round of GATT trade negotiations and it offered to begin negotiations on comprehensive bilateral trade liberalization agreements with its trading partners. The second approach was relatively novel for the postwar period; up to that point the United States preferred to negotiate freer trade at the multilateral level via the GATT. However, the new approach reflected its growing frustration with the lack of progress at the multilateral level. The motivation of the United States was primarily political— to set an example of the type of agreement that could be obtained and to provoke the fear among other countries that they might be left out of a movement towards freer trade. The first bilateral agreement to be reached was with Israel in 1985, and the next and much more comprehensive agreement with Canada came into force in 1989. Negotiations with Mexico are to begin very soon, with the objective of achieving at least a bilateral agreement, and possibly a trilateral one, depending on Canada's position in the talks. On the negative side, many high profile trade disputes occurred between the United States and its trading partners, primarily Japan and the EEC. Canada was also involved in disputes on softwood, lumber, steel, and unprocessed fish. In virtually all cases, the countries being confronted by the U.S. were running large bilateral trade balance surpluses, which were in fact caused to a large extent by huge U.S. fiscal deficits rather than by unfair trading practices on their part. In fairness to the Reagan Administration, most of the pressure to punish exporting countries came from the Congress, where organized special-interest groups have more leverage than at the executive level. However, the Administration yielded to the political pressure from Congress and adopted such measures as the following: i

ii iii

imposition of VERs and orderly market arrangements in situations in which foreign firms were "too" successful in penetrating the U.S. market, e.g. automobiles and motorcycles, imposition of VERs and duties in dumping cases, e.g. steel and semiconductors, application of countervailing duties on imports that were found to be subsidized, e.g. softwood lumber; and

Policies for the 1990s

47

iv

threats to retaliate with tariffs against countries denying fair access e.g., wheat to the EEC and manufactured goods to Japan.5 Ironically, most of the cost of these policies was borne by U.S. consumers. Unfortunately, some of the costs also were imposed on third countries such as Canada which were not party to the agreements. For example, the recent U.S. trade agreement with Japan, resulting from the Structural Impediments Initiative talks, provides easier access for American softwood products; Canada was not granted similar access. These unilateral trade actions, taken by the U.S. with regard to its trading partners, have come to be known as "managed" trade policy, because they involve bilateral negotiations rather than the application of GATT rules. Although not all of these actions are forbidden by the GATT, they serve to undermine the spirit and authority of the GATT by violating the principles of that agreement generally and, in particular, the principle of non-discrimination—that any concession made should be granted to all. The apparent success of the U.S. in obtaining concessions from its trading partners by such actions has prompted some authorities, including Thurow, to conclude that "the GATT is dead."6 It remains true, however, given that the United States has made a credible commitment to freer trade, and therefore it is doubtful that these policies represent its ultimate goal. A more likely scenario is one in which the United States sees the "stick" approach as the best means to convert the non-believers to free trade. Aside: Strategic Trade Policy By a strange twist of fate, at the time when members of the U.S. Congress were looking for reasons to justify their protectionist measures against U.S. trading partners, new developments in economic theory, centred on the incorporation of imperfect competition and increasing returns to scale into models of international trade, seemed to provide just the ammunition they needed. (Some may argue that it was not a twist of fate, but simply demand generating the supply of rationalizations — this issue is better left to the historians of economic thought). Although trade models incorporating these features had been in the literature for some time, they were reformulated in the late 1970s and early 1980s, by Krugman, Brander, Helpman, Ethier and Markusen, for the primary purpose of analyzing some of the characteristics of observed trade flows

48

Canada Among Nations 1990-1991

that could not be adequately explained by conventional trade theory.7 For example, approximately half of the trade among the industrialized countries is in goods from the same industry. This intra-industry trade cannot be explained completely by conventional trade models; such models predict that bilateral trade should consist of dissimilar goods, or in other words, should be of the inter-industry variety. Initially, trade policy was not the focus of these theoretical developments; however, subsequent work on the policy implications of these models developed in two directions. The first line of research involved building the assumptions of imperfect competition and increasing returns to scale into large-scale general equilibrium models of one or more economies, in order to consider the impact of changes in trade policy. The pioneering work in this area was done in Canada and is discussed in a subsequent section of the paper. The second direction of research, which has come to be known as "strategic" trade policy, began with the work of Brander and Spencer.8 It is important to note that "strategic" in this case means a trade policy that is designed for a specific industry or group of related industries, for the purpose of raising domestic welfare at the expense of the foreign country or countries. In greatly simplified terms, the basic result is that for imperfectly competitive industries the government can sometimes enhance domestic welfare by either imposing a tariff on imports or subsidizing exports. (The potential gains from subsidizing may be larger, depending on the extent of economies of scale in production). Although many of these strategic trade models are very sophisticated, in that they involve multi-stage games and different pricing behaviour, the basic condition for these results is the existence of market power in some form. That is, if the domestic industry possesses any monopoly or monopsony power, then the government can use, or more literally "abuse", this market power by applying tariffs or subsidies to shift economic rents excess profits from the foreign industry to the domestic one. This argument is not really all that new, since the existence of market power on the part of the domestic country forms the basis for the concept of an "optimal" tariff— see Note 1 — which has been around for at least half a century. The real novelty lies in the fact that it is applied at the industry level. The most damaging argument made against the optimal tariff is also valid for strategic trade policy: the gain in domestic welfare comes

Policies for the 1990s

49

primarily at the expense of the other trading country or countries, and because this policy produces an inefficient outcome, world welfare also declines. Consequently, this policy invites retaliation, which, if it occurs, makes everyone involved worse off. Therefore, as in any long-term commercial relationship, generating ill-will among trading partners is not a profitable or welfare-improving strategy. Not only does the world trading system operate to a large extent through the goodwill of trading nations, but it is also a fact that the economic well-being of our trading partners is vital to our own economic, not to mention, political interests. Furthermore, for strategic trade policy to increase domestic welfare the government must possess and intelligently employ very detailed and accurate information on cost and demand functions of the industry; the success of a strategic trade policy often turns on the shape of these curves. Not surprisingly, such information is virtually impossible to obtain. Moreover, empirical evidence indicates that most current examples of strategic trade policy (e.g., passenger aircraft and semiconductors) are not welfare-improving; both the domestic and the foreign country are made worse off.9 The rents shifted to the domestic country as a result of subsidizing domestic exports typically do not exceed the cost of raising the money for the subsidy either through higher taxes or deficit-financing, hi conclusion, strategic trade policy in this form has little merit and its benefits should as a general rule be discounted. Indeed, many of the originators of strategic trade policy, including Brander, argue that free trade is a better policy choice for an opposite view see Chapter 2.10 Not surprisingly (given that trade theorists were pioneers in the theory of rent-seeking), another wrinkle has been introduced, in the form of an attempt to resuscitate industry-specific trade policy and provide governments with an excuse to intervene. The "new" factor is the existence of positive externalities; this implies that the social benefit from having a firm or industry produce and perhaps export a certain product is greater than the private benefit, so that the government should provide an incentive to increase output to the social optimum. There are several problems with this argument. First, the optimal response to this externality is a production subsidy, not an import tariff or an export subsidy; this line of reasoning is similar to the standard response made to counter the infant-industry argument for a tariff. Second, it is not clear what these externalities are and how important they are. The externality most frequently discussed is the fact that the existence of a certain type of indus-

50

Canada Among Nations 1990-1991

try generates a trained labour force and/or the know-how to use a specific technology. Therefore, the argument continues that without this industry or firm the technology will be lost to another country. However, this loss only reduces domestic welfare if the exploitation of the technology by a domestic firm has been generating rents for domestic factors. Furthermore, it must be recognized that one country cannot produce all the "high-tech" goods; the range of such goods is already large and more and more are invented every day. Moreover, no country has a monopoly on innovators and entrepreneurs. As a consequence, public policy should aim at making it attractive for them to reside in the domestic country. Free trade in goods and services helps attain this objective because it equalizes wages across different countries and thus removes the incentive for talented individuals to relocate. Regional Trade Agreements Countries other than the United States also pursued bilateral/regional trade liberalization agreements during the 1980s. Although several agreements to liberalize trade were signed in various parts of the world, including the Caribbean, Southeast Asia and South America, the two most noteworthy arrangements were the European Economic Community and the Australia-New Zealand Closer Economic Relations (CER) Agreement. The European Economic Community continued to move towards political union by taking steps to obtain a single, borderless market in which all barriers to the movement of goods, services, and productive inputs would be eliminated by 1992. In addition, the EEC expanded in 1986 to include Greece, Portugal and Spain, and other countries such as Sweden and Austria have applied to join. On the other side of the world, Australia and New Zealand signed a comprehensive trade agreement in 1984 that eliminated all tariff and non-tariff barriers on traded commodities. The results from the agreement have been positive, especially for New Zealand, the smaller of the two countries, and negotiations are under way to broaden the scope of the agreement. Less Developed Countries: Changing Course For the LDCs the 1980s were a watershed in terms of trade policy. Many LDCs realized that policies geared more to expansion of interna-

Policies for the 1990s

51

tional trade than to encouraging the domestic production of import-competing products constitute the best strategy for attaining rapid economic development. One has only to compare the economic performance of many Latin American and African countries to that of the Newly Industrializing Countries (NICs) — South Korea, Hong Kong, Taiwan, Singapore— over the 1970s and 1980s to draw this conclusion. Also, the Debt Crisis, which forced many LDCs to attempt to expand trade in order to obtain hard currency, made these countries aware of the barriers that many of their exports, especially manufactured goods, face in the markets of the industrialized nations. In addition to becoming more outward looking,11 the LDCs have for the first time become active participants in the Uruguay Round of the GATT; in the past they have viewed the GATT with disdain as a "rich man's club." These countries now recognize that because of their lack of political and economic power, they would have difficulty in obtaining easy and comprehensive access for their exports in markets covered by regional trade arrangements. Furthermore, they cannot easily defend themselves against unilateral actions that often occur when an LDC has some success in exporting to the industrialized countries. Countries such as South Korea have become the target of trade restrictions that have a weak basis either in safeguard provisions in the GATT or in the unfair trade practice laws of the industrialized country, such as the "Super 301" provision in the U.S. Omnibus and Competitiveness Trade Act of 1988; the latter enactment unilaterally punishes countries that are judged to be unfair traders. Consequently, for most LDCs the best hope for trade liberalization is through a multilateral process like the GATT, in which all countries are treated equally and disputes can be settled on the basis of rules rather than by the exercise of political or economic power. The Canadian Perspective The most significant trade policy issue of the 1980s for Canada was the Free Trade Agreement (FTA) with the United States. The agreement breaks new ground in several directions and while the historical and political ramifications of the FTA for Canada are significant, its economic implications go far beyond Canada's borders. In particular, the scope of this agreement is broader than that of any other trade agreement, because it not only includes services and covers the temporary movement of labour but also includes a binding dispute settlement

52

Canada Among Nations 1990-1991

mechanism. Indeed this agreement is looked upon as an example of what could be accomplished in the current GATT round. A useful byproduct of this agreement is the research that went into estimating the effects of the agreement on the Canadian economy. The most significant contribution was by Harris with Cox;12 it incorporates the new developments in international trade theory on imperfect competition and increasing returns to scale into a computable general equilibrium framework. This work sparked a great deal of interest because it generated estimates of the long-run gains from free trade which were in the 8-10 percent range, significantly greater than the estimates obtained by using the standard assumptions of perfect competition and constant returns to scale. While there has been substantial debate about the assumptions of the model, especially with regard to the pricing policy of Canadian firms before the removal of the trade barriers and the degree of economies of scale, the gains are likely to be substantial even if the assumptions have to be revised. An important consideration, which was to a large extent overlooked in the debate on the size of the gains from the FTA, is that all of the estimates were based on an essentially static model. That is, the implementation of free trade is assumed not to have any effect on the structure of economy: the stock of capital, the types of goods produced, the production technology employed. Recent theoretical work by Baldwin, who looks at the effect of trade liberalization on capital accumulation, and Grossman and Helpman who focus on the rate of innovation, seems to indicate that these dynamic benefits will at least exceed the static gains.13 Another primary objective of the FTA is to shield Canadian exporters from the kind of trade harassment that the other trading partners of the United States have been forced to endure. In the 1980s Canada was forced to impose an export tax on softwood lumber otherwise the United States would have applied a countervailing duty because the U.S. Commerce Department decided that the Canadian softwood lumber industry was being subsidized. The U.S. industry argued that stumpage fees for trees cut on government lands were below fair market values. Canada also had to limit its exports of steel to the United States or face antidumping duties and/or possible retaliation. These disputes will in future be adjudicated by a binational commission established under the FTA.

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53

TRADE POLICY IN THE 1990s: WHERE SHOULD CANADA STAND? In the 1990s, expanding the volume of trade will be of critical importance for the maintenance of high rates of economic growth in the industrialized countries and the achievement of rapid economic development in the LDCs and the nations of the Eastern Bloc. In terms of Canadian government policy with respect to trade there should be essentially two policy objectives. The first, or "external," objective is to promote the worldwide liberalization of trade. The second, or "internal," objective is to create a domestic economic environment that allows domestic residents, both individuals and firms, to take full advantage of the opportunities created by freer trade. Canada should pursue trade liberalization at both the multilateral level via the GATT and at a bilateral/regional level. In this regard, the Canada-U.S. FTA could be expanded by either including more tradable commodities (e.g., beer and agricultural products) or more countries (e.g., Mexico and the Caribbean nations). Several commentators hold the misconception that the two approaches to negotiating freer trade are substitutes; however, as noted above, the approaches are likely to be complementary, for it may be easier to obtain a precedent-setting agreement by negotiating with a smaller set of countries.14 The more significant point is that, although a multilateral agreement is normally preferable to a bilateral or regional agreement of similar scope, any agreement always raises the welfare of the countries involved.15 In general, the improvement in welfare is roughly proportional to the number of participating countries. Therefore, Canada should take a strong position in favour of freer trade at any level. Although the formation of any free trade area or customs union will divert trade from non-members and lower their welfare, the amount of the trade diversion is in general not large. For example, in the case of the Canada-U.S. FTA, textiles are perhaps the only category in which trade diversion might occur. In this case, the amount of trade creation far exceeds the amount of diversion; consequently, world welfare increases. Krugman makes a slightly more sophisticated argument against bilateral/regional trade agreements;16 he maintains that an important motive for countries to enter into regional agreements and form trading

54

Canada Among Nations 1990-1991

blocs is to close ranks and acquire market power. The trading bloc can then raise the welfare of its member countries by increasing the external tariff, which in turn will lower the welfare of countries outside the bloc by diverting trade away from them. This perspective, which is consistent with the concept of a "Fortress Europe," is overly pessimistic. There is little evidence that countries become noticeably more protectionist in their attitude to the rest of the world after entering into a regional trade agreement. For example, if this argument were the whole story, the EEC would not have invited small countries like Portugal and Greece to join and would not have lowered trade barriers to countries in the European Free Trade Area. Multilateral Trade Policy The multilateral approach to trade liberalization is most desirable because it produces the largest welfare gains. Moreover, the world trading system governed by the GATT and guided by its basic principles, especially reciprocity and non-discrimination, is extremely important and should be fiercely defended against the dangerous spread of managed trade. Therefore, Canada should make every effort to protect the GATT by ensuring the success of the current round. The current Uruguay Round of the GATT began in 1986 and the key topics for negotiation are: 1 2

3 4

4

agriculture — especially export subsidies on grain and import quotas, textiles — primarily the status of the Multifibre Agreement (MFA) which restricts exports of textiles from the LDCs, safeguards against injury due to rapid import penetration (these are aimed chiefly at the LDCs), tropical products (e.g., horticultural products and spices) and natural resources (non-ferrous minerals, metals, forestry, fish products), tariffs, non-tariff barriers (especially government procurement and standards), standstill and rollback measures (and the need for surveillance),

Policies for the 1990s 5

6 7 8 9

55

a dispute settlement mechanism and process based on rules and binding, and formally establishing the G ATT as a legal international organization, "unfair" trade practices — subsidies/countervailing measures and dumping, services, trade-related investment measures (TRIMs), and trade-related intellectual property issues (TRIPs).

As an aside, the topics are listed in the approximate order of importance to LDCs. These items loosely reflect comparative advantage, because the LDCs are actively involved in this round and a significant level of bargaining brings together the LDCs and the industrialized countries in discussion of the topics to be settled. For example, the LDCs have tied agreements on agriculture, textiles and tropical products to those regarding services, TRIMs and TRIPs. International trade negotiations are often perceived as zero-sum games. Not only is this perception incorrect, but it can lead to serious errors in the evaluation of trade policy. To understand this point consider, for example, two countries, A and B, that are negotiating over the reduction of trade barriers. Country A agrees to remove a quota. It is not generally true that country A loses and country B gains; in fact, it is much more likely that both country A and B will gain — especially if the two countries are relatively small and have little market power — see Note 1. Therefore, the optimal unilateral policy for Canada, a relatively small country, is to remove all of its trade barriers, irrespective of the actions of its trading partners. Obviously, if these countries also remove their trade barriers then Canadian welfare will increase by a larger amount. In practice, most commentators implicitly use a mercantilist criterion when they consider Canada's priorities in the Uruguay Round. From this perspective Canada's priorities would be in the areas of: agriculture and natural resources because Canada has comparative advantage in these commodities, tariffs and non-tariff barriers because they hinder Canadian exports of manufactured goods, and services because Canada is a net exporter of certain kinds of services.

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Canada Among Nations 1990-1991

Unfair trade measures and a binding dispute settlement mechanism should be high priorities not only from a mercantilist viewpoint, but because the cost of engaging in international trade would be reduced if the criteria for unfair trade practices were clarified and a binding dispute settlement mechanism put in place.17 At the time of writing the final outcome of the Uruguay Round of negotiations is uncertain. Although this round has a very ambitious agenda, including many new topics, its success depends heavily on the outcome of the negotiations on agriculture. Not only is this a high priority with the United States, but it is critical for the LDCs as well. The EEC is the major stumbling block in the agricultural negotiations; it has balked at U.S. demands for sizable cuts to export subsidies for grain and to other agricultural support programs under its very protectionist Common Agricultural Program (CAP). EEC farmers, who are the primary beneficiaries of these programs, command excessive political power, given their relatively small share of the total population. As a direct result of the EEC's unwillingness to compromise on this issue, the GATT negotiations are suspended until the impasse can be resolved by the political leaders of the United States and the EEC. Unfortunately, Canada's position on the GATT negotiations on agricultural trade is blatantly inconsistent and hypocritical. By taking the position of being against export subsidies in grain, a product in which Canada has a comparative advantage and is a large net exporter, and concomitantly wanting to maintain import restrictions on dairy products and poultry, products which are governed by protectionist supply management programs, Canada has shown a lack of leadership and foresight18 This position not only tarnishes Canada's reputation as a broker between the interests of the industrialized countries and the LDCs, but destroys much of the country's credibility. Consequently, any position Canada takes on an issue will be discounted, regardless of its merit. For example, Canada has argued in favour of the creation of a World Trade Organization, a legal international organization with the mandate to supervise the world trading system. Unfortunately, this worthy proposal was immediately criticized as an attempt to divert attention from Canada's position on agriculture. As a final point, Canada should encourage the industrialized countries to take the steps necessary for the LDCs to be full participants in any

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agreement, and in particular, an agreement that liberalizes trade in services. In the past, the developed world has taken a hypocritical and extremely short-sighted position towards the LDCs. On the one hand, the developed countries have either given or lent the LDCs hundreds of billions of dollars for the purpose of economic development in the postwar period, and on the other hand, they have not allowed the LDCs easy access to the markets of the industrialized world. The two positions are mutually inconsistent The LDCs have changed direction on trade policy, and for the first time, have participated in the GATT round of negotiations; they should not come away empty-handed. Bilateral and Regional Trade Policy At the bilateral or regional level, Canada faces two immediate opportunities for further trade liberalization. The first opportunity involves the Canada-U.S. FTA; the pace of the tariff reductions already specified in the agreement should be increased where possible and the agreement extended into areas not already covered, such as agriculture, government procurement and transportation. The second opportunity concerns a possible trilateral deal with Mexico and the United States. Mexico and the United States have already agreed to begin negotiations to liberalize bilateral trade in 1990 and have invited Canada to join the talks. Although this issue is dealt with in more detail in Chapter 5, suffice it to say that Canada should be a full participant in these talks. Though the gains to Canada from such an agreement would be much less than those from the Canada-U.S. FTA, because existing and potential levels of trade flows with Mexico are unlikely to be very large, it is important to sustain the momentum for trade liberalization. A trilateral deal might encourage other countries in Central and Latin America to follow suit and the potential gains to Canada would increase. Moreover, any agreement with the Latin American countries would undoubtedly increase their rate of economic development; this is a long-standing objective of Canadian foreign policy which has not been attained by foreign aid. A trade agreement among countries that border on the Pacific Rim is a remote possibility because the immediate political and economic interests of the countries are very different. Nonetheless such an agreement should be pursued.

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Canada Among Nations 1990-1991

In summary, although the bilateral/regional approach to trade liberalization is not ideal, Canada and the other countries involved will gain from any agreement that promotes trade. Domestic Policies Domestic policies should be directed towards creating an economic environment that will allow Canada to realize all the benefits of freer trade. As discussed above, the goal of macroeconomic fiscal and monetary policy should be to create a stable macroeconomic environment. In general, any policy directed towards the domestic economy can have significant effects on a country's competitive position and comparative advantage, and therefore on its trade flows (volume and composition) in the medium to long terms, by affecting the endowment of productive resources (including physical capital, labour, productive land, natural resources, energy, and human and technological capital). Examples include education and training policies, support for research and development (R&D), foreign investment and immigration policies and policies directed towards the development, conservation, and renewal of natural resources. As a rule domestic policies should not favour one or a particular set of industries; they should be aimed at all industries. If not, the exports from a favoured industry might be subject to countervailing measures based on the argument that the industry was unfairly subsidized. Government policy in general should be used only in situations in which a market failure occurs or a positive externality exists. Well-known cases of market failure are those of students and start-up companies. Students typically need to borrow to finance their education, but capital markets will not usually provide sufficient funds because students cannot commit themselves to slavery if they default. Similarly, start-up companies also have difficulty borrowing because they lack collateral. Universal education is a case of a positive externality because the benefits to society as a whole are larger than the private benefits. Some debate exists as to whether this argument for government subsidization extends to university education as well as to primary and secondary education. It depends on whether the student can capture the benefits of the education through higher wages and on the extent of international labour mobility. The education question is extremely important as most prod-

Policies for the 1990s

TABLE 3.1 PUBLIC SPENDING ON EDUCATION AND RESEARCH & DEVELOPMENT Country (1)

Education (2) Primary

Australia Austria Belgium Canada Denmark Finland France Germany (West) Greece Iceland Ireland Italy Japan Netherlands New Zealand Norway Portugal Spain Sweden Switzerland Turkey United Kingdom United States Yugoslavia AVERAGE 1. 2. 3. Source:

18 23 12 21 28 23 16 16 10 N/A 15 N/A 18 17 16 23 17 N/A 29 27 5 17 20 16 18

Secondary

Post Secondary

22 37 31 25 31 29 26 27 15 N/A 25 N/A 23 22 15 38 25 N/A 38 31 22 28 29 23 27

55

50 38 41 39 40 30 37 36 N/A 73 N/A 118 82 56 36 60 N/A 40 52 61 85 39 41 53

Research & Development (3)

0.76 0.65 0.47 0.68 0.60 0.67 1.20 0.97 0.25 0.47 0.40 0.62 0.59 0.98 0.58 0.80 0.29 0.27 0.96 0.61 N/A 0.92 1.40 0.40 0.67

The countries are all OECD members The data for education are public expenditure on public education per student as a percentage of per capita Gross Domestic Product in 1986. The data for R&D are publicly-financed gross expenditures on R&D as a percentage of Gross Domestic Product in 1986. OECD, Education in OECD Countries 1986-87: Chart IX, p.38 and OECD, Main Science and Technology Indicators 1989: Tables 4 & 5, p. 16.

59

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Canada Among Nations 1990-1991

ucts that contain high added value, and therefore are products in which Canada would like to develop a comparative advantage, tend to be intensive in human capital. Another potential positive externality has to do with research and development. The externality arises from the fact that benefits from R&D may accrue not only to the firm that undertakes the work, but to other firms as well. Because of this "spillover" effect, the social return to R&D will be higher than the private return and the argument is that the government should subsidize R&D to obtain the socially optimal amount. This approach is plausible; however, the empirical evidence is fragile. Once again, products intensive in R&D are of interest from a trade perspective because the production and export of these products will create highwage employment. Statistics on public expenditures on education and R&D for OECD countries in 1986 are given in Table 3.1. These statistics must be interpreted with caution since data from different countries are never exactly comparable. They indicate that public spending on education in Canada is slightly above the OECD average for primary education, below average for secondary education and well below average for post-secondary education. It should be noted that these figures represent the cost of "inputs" to the education system rather than a measure of its final "output," i.e., the academic or vocational skills of the graduates. Statistics on output would be preferable because such data would also reflect the effectiveness or productivity of the education system. In terms of public support for R&D, Canada is at the OECD average, but once again these statistics measure inputs rather than outputs. Therefore, it is doubtful if one can look only at these inter-country comparisons of public expenditures on education and R&D and conclude that Canada should spend more; because the statistics do not measure output it is difficult to conduct a cost/benefit analysis and determine whether the expenditures raise domestic welfare.19 An important policy issue at the provincial level concerns interprovincial barriers to trade. These barriers should be removed, because they preclude an efficient allocation of productive resources within Canada, and therefore hurt Canada's external competitiveness. The best example of this is the beer industry, which is governed by archaic provincial laws requiring a company to produce beer in every province in

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which it sells beer. These rules have created a very inefficient industry with small beer plants in each province. In summary, government intervention, especially that which is directed at a specific industry, should be avoided. Education is perhaps the best case for some intervention. Provincial trade barriers should be removed. CONCLUSION With regard to trade policy and Canada's role in it, two points must be stressed. The first is that free trade, like universal suffrage, is desirable; it is the only position that maximizes world welfare and is logically and, in my view, morally correct, especially with respect to the LDCs. Furthermore, although the political will may be weak, the working of markets will force the governments to move in the direction of a free trade policy. Although Bhagwati is disturbed by recent U.S. trade policy actions and the advent of managed trade, he is encouraged by the movements toward freer trade at the bilateral and regional levels.20 He sees the globalization of production as a powerful force against protectionism. For example, if Texas Instruments were to produce electronic components in Japan and export them to the United States, it would be difficult to decide whether Texas Instruments should be treated as a Japanese or an American firm. In fact, the forces working for globalization are much broader than generated solely by production; the globalization of input supplies, consumption, and capital flows also works towards trade liberalization. For example, the pressure to liberalize imports of textiles and grapes into Canada came from apparel producers and wineries that could not compete because of the higher input costs. Similarly, consumers in Canada have been streaming across the U.S. border in growing numbers to buy groceries and other items; this increased the pressure on Canadian producers to compete despite the fact that import barriers on products like milk have not been reduced. Investors seeking portfolio diversification will invest in companies around the world, and therefore will have an interest in seeing these companies prosper through more liberalized trade. Moreover, as global competition increases, the costs of protection will grow as well. Countries that protect their industries are sentencing them to a slow death because these industries will never be able to compete, innovate, and grow. Therefore, while some may declare that the

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Canada Among Nations 1990-1991

large differences in the negotiating positions among countries and the potential failure of the Uruguay Round prove that the GATT is dead, and that managed trade is the only alternative, the GATT will in the end not fail because there is just too much at stake — free trade will win in the end. The second point is that Canada is in a unique position to champion free trade. Not only is Canada one of the richest countries in the world, as can be seen from its membership in the G-7 and the important positions it holds in many other international organizations, including the International Monetary Fund and the United Nations, but it is also highly regarded and respected by countries around the world, including many LDCs, for its policies on foreign aid, debt-forgiveness, disaster relief, peace keeping and refugee resettlement. Canada has earned the reputation of an honest broker between the interests of rich and poor nations; it must use this influential position to strongly promote any and all efforts to liberalize trade. NOTES 1

In theory, freer trade can potentially harm those countries that are large enough to have monopoly or monopsony power in world markets. If a country has sufficient market power it can use tariffs, for example, to reduce its demand for an import thereby lowering the world price of the import good. (This argument is the only one that can theoretically justify the use of a tariff; it is known as the "optimal tariff argument). For such a country, trade liberalization agreements reduce or eliminate its ability to use tariffs and other instruments of commercial policy to shift world prices in its favour; thus, freer trade could reduce its welfare. In practice, this impact of liberalized trade is rarely significant because few countries possess the necessary degree of market power over all of the goods covered by an agreement

2

For an eloquent defense of free trade refer to A. Krueger, "The Case for Free Trade" in An American Trade Strategy: Options for the 1990s, ed. R. Lawrence and C. Schultze (Washington: The Brookings Institution, 1990).

3

In countries that experience high rates of inflation, economic performance also may worsen because the return to productive labour may be so much less than the return to speculating on asset prices that workers would prefer to spend their time waiting in line at then" bank, or calling their broker, instead of actually working.

4

The difficulty in keeping domestic monetary policy on the right course was recently compared to try ing to steer a car in a driving rainstorm with faulty windshield wipers. See John Crow, Governor of the Bank of Canada, in J. Crow, The Work of Canadian Monetary Policy, The Eric J. Hanson Memorial Lecture (Ottawa: Bank of Canada, 1988).

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5

J. Bhagwati, Protectionism, (Cambridge MA: MIT Press, 1988) provides an excellentreview of the protectionist measures employed by the United States in the 1970s and 1980s.

6

L. Thurow, "Must We Manage Trade?", World Link, Vol. 11 No. 6 (June 1989) pp. 8-11. The new developments in trade theory are surveyed by E.Helpman, "Increasing Returns, Imperfect Markets and Trade Theory" in The Handbook of International Economics, Volume I, ed. by R. lones and P. Kenen (Amsterdam: North Holland, 1984), and aunified theoretical treatment is provided by E. Helpman and P. Krugman, Market Structure and Foreign Trade (Cambridge, MA: MTT Press, 1985).

7

8

J. Brander and B. Spencer, " Trade Warfare, Tariffs and Cartels", Journal of International Economics, Vol. 16 No. 2 (June 1984) pp. 227-42.

9

In cases in which the domestic country is made better off by strategic trade policy the gains are extremely small. The empirical evidence on strategic trade policy is surveyed by J. Richardson, "Empirical Research on Trade Liberalization with Imperfect Competition", OECD Studies, No. 12 (Spring 1989) pp. 7-50. A survey of the theoretical work in this area is provided by R. Harris, "The New Protectionism Revisited", Canadian Journal of Economics, Vol. 22 No. 4 (November 1989) pp. 751-78.

10

J. Brander, "Shaping Comparative Advantage: Trade Policy, Industrial Policy, and Economic Performance" in Shaping Comparative Advantage, ed. R. Lipsey and W. Dobson (Toronto: C.D. Howe Institute, 1987).

11

The term "outward looking" is usually interpreted to mean that the country has a balanced policy towards imports and exports. This is contrasted with "inward looking," which means that the policy stance is to encourage import substitution.

12

R. Harris with D. Cox, Trade, Industrial Policy and International Competition (Toronto: Ontario Economic Council, 1984). R. Baldwin, "On the Growth Effects of 1992", Economic Policy, Vol. 10 (Fall 1989) 1-34, and E. Helpman and G. Grossman, "Product Development and International Trade", Journal of Political Economy, Vol. 97 No. 6 (December 1989) pp. 1261 -83. M. Biggs and J. Whalley have debated the issue of the relationship between multilateral and bilateral/regional approaches to trade liberalization. See M. Biggs, "AnJjitemational Perspective", and J. Whalley, "Comments onBiggs", in Perspectives on a U.S.—Canadian Free Trade Agreement, ed. R. Stem, P. Trezise and J. Whalley (Washington: The Brookings Institution, 1987).

13

14

15

This result is derived in M. Kemp and H. Wan, "The Gains from Free Trade", International Economic Review, Vol. 13 No. 3 (October, 1972) pp. 509-22.

16

P. Krugman, "Is Bilateralism Bad?", Working Paper No. 2972 (Cambridge, MA: National Bureau of Economic Research, 1989).

17

For a thorough analysis of Canada's position in the GATT negotiations see M. Smith, Canada's Stake in the Uruguay Round and the GATT System (Ottawa: Institute for Research on Public Policy, 1988).

18

D. Mazanko wski, Minister of Agriculture and Deputy Prime Minister, recently stated that there is only "a small inconsistency" emphasis added in Canada's position on

64

Canada Among Nations 1990-1991 agricultural trade in the GATT negotiations. See "Canada at Odds with Trade Group," The Globe and Mail, October 24,1990, p. B3.

19

The inadequacy of simply using inter-country comparisons of spending on R&D to draw policy conclusions is discussed in J. Bernstein and L. Schembri "Industrial Adjustment in Canada: Causes and Effects", inCanadaAmongNations, ed. B. Tomlin and M. Molot (Toronto: Lorimer, 1987).

20

J. Bhagwati, Protectionism (Cambridge MA: MIT Press, 1988).

4

EVOLVING CORPORATE STRATEGIES: ADJUSTING TO THE FTA

Isaiah A. Litvak

Globalization of markets has forced multinational corporations (MNCs) to restructure their operations. This process commenced in the 1970s, intensified in the 1980s, and has become an ongoing reality for the 1990s. While the Canada-U.S. Free Trade Agreement (FTA) has helped promote the process, it is by no means a dominant element. Competition with Japan, the success of the "four tiger" countries in world markets, the overall reduction of trade barriers and the coming integration of Western Europe, have all combined to make this process irreversible. Multinationals are now pursuing globalization strategies, and are manufacturing, conducting research, purchasing supplies, servicing products, and raising capital in geographic regions which favour such activities in terms of cost effectiveness, efficiency and profitability. It was not until the mid 1980s that Canadian corporations began to react to the realities of globalization. These realities were intensified, brought home so to speak, by the ratification of the FTA. The focus of this paper is on the impact of the FTA on the operations and activities of Canadian subsidiaries of U.S. manufacturing MNCs. With a few notable exceptions, such as Northern Telecom and Moore, the majority of Canada's larger manufacturing companies are subsidiaries or affiliates of foreign, primarily American MNCs. A discussion of some of the probable consequences of the FTA for Canadian business demands that we focus on the adjustments taking place in the strategies and organizational structures of these "Canadian" firms as subsidiaries of U.S. MNCs.

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Canada Among Nations 1990-1991

Two years have elapsed since the passage of the FTA. This short period of time is insufficient to allow a judgement on the FTA impact on the strategies and activities of Canadian companies. It is also nearly impossible to isolate the FTA from other critical developments which have marked this period: for example, high interest rates, economic downturn, appreciating Canadian dollar, intensified global competition, etc. We may conclude, however, that many large Canadian companies commenced a program of restructuring and re-organization in response to intensified global competition in the mid-1980s, and to the anticipated FTA. Through the use of selected company vignettes, this chapter will highlight some of the more significant adjustments made by Canadian firms and partially triggered by the FTA. INTRA-INDUSTRY, INTRA-CORPORATE RATIONALIZATION Well before ratification of the Canada-U.S. Free Trade Agreement, many Canadian manufacturers were forced to implement cost reduction programs because of increasing international competition. Numerous U.S.controlled subsidiaries found it advantageous to narrow their product line and lengthen the production run, thus increasing scale and specialization in product and production. This strategy resulted in substantial increases in intra-industry trade, most of which was transacted on a intra-corporate basis. To be internationally competitive, the MNCs had to re-allocate their resources on a world-wide basis, seeking the most efficient and least costly sites for manufacturing, often in more specialized production facilities, and sub-contracting to the most efficient and least costly suppliers. For this and related reasons, the U.S.-controlled companies are more extensively involved in two-way trade than their Canadian-controlled counterparts because of their large international network of affiliates.1 The relationship between foreign investment and intra-corporate trade is a clear one in Canada. A government survey of 274 of the larger foreign-controlled firms in Canada states: 'The foreign-owned subsidiaries sold 76 percent of their total exports to their parents in 1981... there was slightly less reliance on parents and affiliates as suppliers in 1981 as close to 73 percent of total imports were from that source ...."2

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67

In some measure, the successive tariff cuts in the 1970s and 1980s led to the demise of certain "traditional branch plant" operations. Between 1970 and 1975, over 10 percent of U.S. affiliates in Canada were closed down, while the worldwide mortality rate for such firms was 6.5 percent. In the 1975-1982 period, Canadian subsidiary mortality increased sharply and about 30 percent of all U.S. subsidiaries in existence in 1975 had been closed down by the end of 1982.3 The authors of this finding did not view production rationalization as the key motive in the corporate divestment decision; nonetheless, its importance must not be underestimated. Plant shutdowns did not preclude the continued existence of the firm because of "... the ability of foreign firms to close plants as manufacturing entities but maintain them as distribution centres for imports brought in from the parent firm, or because rationalization of product lines is easier for industries dominated by foreign firms."4 During this period, Canadian governments actively promoted the world product mandate (WPM). Through a combination of government research and development grants, procurement preferences and other incentives, the policy makers tried to "persuade" foreign MNCs to grant their Canadian subsidiaries WPMs. The fundamental objective of this public policy was to increase the entrepreneurial scope of the subsidiaries, and improve their international competitiveness as major exporters of technology-based products. INCREASING CORPORATE INTEGRATION While Canadians debated the merit of entering into a free trade arrangement with the United States in the mid-1980s, the degree of commercial integration which already bound the two economies together was greater than that of other G-7 countries (Canada, France, Germany, Italy, Japan, United Kingdom, United States), including the European Community (EC) members. In 1986, for example, 78 percent of Canada's exports were to, and 69 percent of its imports were from, the United States. Within the EC, France, West Germany, Italy and the U.K. only shipped approximately half of their exports to other EC member countries. When the last of the GATT Tokyo Round of tariff cuts was completed in 1987, more than 80 percent of Canadian exports to the U.S. and 65 percent of U.S. exports to Canada became free of customs duty. Consequently, a key

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Canada Among Nations 1990-1991

benefit to be derived from a bilateral free trade agreement would be the reduction or elimination of non-tariff barriers between the two countries. Besides the automotive sector, there were large areas of the North American economy where substantial integrated trade was taking place, such as aircraft and parts, office machines, machinery, appliances, other electrical machinery, power generating machinery and telecommunications equipment. However, the exports by the subsidiaries to U.S. affiliates were mainly of unfinished goods destined for processing in the United States, while over one-half of their imports consisted of finished goods for resale at the wholesale stage.5 The changes in export orientation and import penetration of selected Canadian manufacturing industries during that period are shown in Table 4.1.

TABLE 4.1 INTRA-INDUSTRY TRADE AND FOREIGN OWNERSHIP, SELECTED CANADIAN INDUSTRIES, 1966 AND 1986 (PERCENT) IMPORT PENETRATION

Aircraft Automotive Electrical equipment Electronics Machinery Metal fabricating

EXPORT SHARE

1966

1986

1966 1986

40.5 43.6 23.1 53.2 64.2 11.6

74.5 90.9 34.3 83.4 73.3 22.8

47.7 33.4 7.5 38.1 33.1 2.7

FOREIGN OWNERSHIP

1981

75.7 91.1 16.4 70.7 49.2 20.2

Sources: Manufacturing Trade and Measures 1966-1984 (Ottawa: Department of Regional Industrial Expansion, 1985); Manufacturing Trade and Measures 1981-1986 (Ottawa: Department of Regional Industrial Expansion, 1987); Statistics Canada, Domestic and foreign control of manufacturing, mining, and logging establishments in Canada, 1981, Catalogue 31-401, (Ottawa: Statistics Canada 1985).

58 91 86 54 53 37

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69

The emergence of larger regional markets, relatively free from tariff barriers, gave U.S. corporate management added scope and incentive for realizing increased economies of scale — plant, product and firm. In response to regional market developments, U.S. MNCs have been rationalizing their global manufacturing and marketing operations and activities, not the least important of which are their North American plants, distribution facilities and sales offices on the other side of the border. A key element of global strategy is the targeting of plants in different countries for specialization, i.e. to manufacture one product line or one product item, or to be involved in certain stages of the production process. The output is exported to other affiliates for sale or for assembly and/or manufacture into finished products. Manufacturing-based U.S. MNCs that compete in mature, or in price-sensitive, industries have been among the most active proponents of this global strategy. As a result, many U.S.-controlled subsidiaries in Canada have become more specialized in the type of products manufactured. A number of key factors will condition the extent to which MNCs will rationalize their Canadian manufacturing base. They include the following: economies of scale (specifically the sensitivity of product unit costs to scale of manufacture, i.e. when bigger plants and/or longer production runs achieve lower unit costs); production costs as a percentage of total costs; labour rates; transportation costs; market size and trade barriers, both tariff and non-tariff; foreign exchange rate; and pubb'c policy towards business, particularly U.S.-controlled firms. Products manufactured by these MNCs include cars, trucks, aircraft engines, farm machinery, computers, xerographic copiers, electric motors and electronic consumer goods. CORPORATE RESTRUCTURING Between 1986 and 1989, there was an unprecedented level of CanadaU.S. cross-border merger and acquisition activity. More than 1,700 acquisitions by U.S. firms have been reported to Investment Canada since 1986.6 The estimates of Canadian investments in the U.S. are no less significant. The driving force promoting such domestic and cross-border mergers and acquisitions has been the competitive challenge posed by the globalization of goods, services and capital markets.

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Canada Among Nations 1990-1991

Corporate restructuring is essential to achieving efficiencies and reducing costs. Thus, companies have been streamlining their operations to "focus on doing what they can do best," i.e., concentrate on core businesses. The FTA has accelerated the pace of integration and rationalization between U.S. parent companies and their Canadian subsidiaries. North American corporate restructuring has had both a positive and a negative impact on jobs and investment opportunities in Canada. It is too soon to predict the probable effects of such company actions, and it would be naive to attribute corporate restructuring actions exclusively to the free trade agreement. But to dismiss the importance of the FTA as a factor in North American corporate restructuring would be equally naive. BUSINESS RESPONSE AND STRATEGIES Between 1986 and 1988, many U.S. MNCs appearing before U.S. legislative committees and government agencies argued that one potential result of a Canada-U.S. bilateral free trade agreement would be to further increase intra-industry trade. To be competitive in North America, their Canadian subsidiaries would have to narrow their product lines, specialize in larger-scale production of a more limited number of product items, and export a substantial portion of the output to the United States. As an example, in 1986 it was predicted that such a strategy would in all likelihood be implemented by the Outboard Marine Corporation (OMC), headquartered in the United States, with manufacturing plants located in Canada and the U.S. Outboard Marine Corporation OMC's Canadian plant assembled outboard motors and also manufactured components for motors. Under a bilateral free trade arrangement, tariffs would be eliminated, and the most rational manufacturing strategy for OMC would be to terminate the Canadian assembly operations and ship the motors directly from the U.S.-based plant facilities. As for the Canadian plant, it would be transformed into a large-scale manufacturer of components for the motors, exported on an intra-corporate basis to OMC's worldwide plant operations.7 The foregoing scenario made sense and was the expressed view of certain OMC executives in 1986. In November 1990, OMC reported that

Adjusting to the FT A

11

it no longer has a manufacturing plant in Canada. Between September 1989 and March 1990 all Canadian manufacturing was phased out. During 1990, OMC initiated a global restructuring strategy which resulted in the closure and mothballing of a total of ten outboard motor and boat manufacturing plants in the United States, Canada and Australia. The company consolidated manufacturing in its other plants and realigned some of its international facilities in order to reduce costs, increase operating efficiencies and take advantage of new marketing opportunities. OMC's Canadian manufacturing operations were transferred and distributed among OMC's plants in the United States and Europe. The Canadian subsidiary is now a sales and distribution organization, employing some 250 people, as compared with approximately 600 in 1986. Reasons offered for the plant shut-down included world overcapacity, excess capacity in other OMC plants and wage rate considerations. And, in the words of one company executive, "the FTA didn't help." As for Australia, OMC can more profitably build outboards for the Australian market in manufacturing facilities located in the U.S., Europe and Hong Kong. In sharp contrast, OMC's global marketing strategy has resulted in an expansion of the company's Canadian presence. An important element of OMC's marketing strategy is to strengthen market position through the acquisition of boat brands. According to one executive, "packaging our own engines with our boat brands remains a key element of our marketplace strategy: a strategy that supports both boat and engine sales." In 1990, OMC purchased ALTRA Marine Products, Inc., a major Canadian manufacturer of aluminum fishing, runabout and pontoon boats (Princecraft/Springbok brands). These boats are packaged with Johnson and Evinrude (OMC) outboard engines for sale in Canadian and northeastern U.S. markets. A similar acquisition strategy was pursued in Australia. The Australian boats are also matched with Johnson and Evinrude outboards for sale in Australia and other markets in the Pacific Rim.8 The OMC example illustrates the difficulties of isolating and estimating the impact of the FTA on the Canadian economy. Undoubtedly, the plant closure and acquisition actions were made easier because of the

72

Canada Among Nations 1990-1991

agreement. On the other hand, it is unlikely that OMC would have kept its Canadian plant running had the FTA not been ratified. Poor world market conditions, Canada's high-cost operating environment and the company's deteriorating financial performance made the status quo option an unlikely scenario. The ALTRA acquisition and its future growth potential is one benefit that can be partially attributed to the FTA. APPLIANCE MANUFACTURERS Canadian opponents of trade liberalization charged that the elimination of barriers could quite easily produce the shutdown of many branch plant operations. The critics included executives who managed U.S.-controlled subsidiaries in Canada. This was particularly true of the appliance industry. The three major competitors in the Canadian appliance industry were all controlled by U.S. parents — General Electric (GE), Whirlpool, and W.C.I. The Canadian subsidiaries had ready access to U.S. product designs and process technology, and imported a substantial portion of their component parts requirements from the U.S. and offshore. Furthermore, the U.S. parent plants were more efficient than their Canadian counterparts, partly because of their specialized, larger-scale facilities and partly because they could purchase inputs more cheaply. One significant outcome of a free trade arrangement was to be a major restructuring of production facilities in Canada, resulting in fewer, larger and more specialized plants and consequent plant shutdowns. These decisions would be taken by the parent companies, and since Canada had no distinctive competitive advantage in this industry, the bias towards specialization would favour the U.S. plants. Furthermore, There would be an enormous change in the culture and management of the three competitors in the industry. Specialization ... is very different from the world product mandate type, which is more prevalent in high growth industries. Under rationalization, the autonomy of the subsidiary is sharply reduced. All product design and development takes place in the parent. Coordination of production and marketing is no longer required in the subsidiary. Managerial and professional functions gravitate to the parent. The automotive industry

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stands as an eloquent example. And these things happen because rationalization requires them. It is in the structure. It is not primarily a question of parental domination by design.9 By 1990, the foregoing prediction has assumed material form. Whirlpool Corporation of Benton Harbor, Michigan, the world's largest manufacturer of major home appliances, bought out the minority shareholders of Inglis, in which the corporation already had a 71.6 percent ownership. By creating a wholly-owned subsidiary in Canada, it could now more easily integrate the Inglis manufacturing operations and distribution network into its North American appliance group operation. Whirlpool's corporate strategy for North America appears to be as follows: larger U.S. plants will manufacture high volume product lines for the North American market and the smaller Canadian plants will manufacture niche products for particular segments of the North American market. To achieve this goal, certain Canadian plants are being retooled and renovated, while others will be closed. The benchmark against which each plant decision was made is derived from the plant's cost competitiveness, not only in North America, but globally. What is equally important is that the Canadian subsidiary will now rely on Whirlpool's size, technology and global procurement capabilities to promote itself as "the appliance 'supplier' of choice in Canada."10 To allow sufficient time to restructure its North American operations, Whirlpool favours the phased-in tariff reductions over a 10-year period, rather than accelerated tariff reductions.1! As for the other two U.S.-controlled appliance manufacturers, WCI Canada phased out its Cambridge refrigerator manufacturing operation in February 1990 and relocated its upright freezer manufacturing operation to St. Cloud, Minnesota in July;12 GE, on the other hand sold off its Canadian appliance operations. GLOBAL SOURCING During the 1980s, global purchases or "sourcing" of inputs became a necessity, if business was to remain cost competitive. This sourcing strategy resulted in U.S. multinationals investing in the establishment of global management systems, capable of providing greater coordination

74

Canada Among Nations 1990-1991

from corporate head office, not only in sales and marketing, but in manufacturing and procurement as well. Implicit in the sourcing and logistics decisions was the need to determine the degree of vertical integration to be employed by the multinationals, that is, the length of the value-added chain and the geographical location and business arrangement best suited and most costeffective for adding value by stage of production. Canadian subsidiaries of U.S. multinationals, particularly in the high technology sector, became attractive targets for inclusion in U.S. corporate restructuring deliberations and actions. IBM

In 1987, a statistical overview of "Currently Rationalized Companies" was prepared by the then Federal Department of Regional Industrial Expansion. Eleven companies were singled out for special attention. The majority were U.S. subsidiaries and all were among the top performers in the information technologies industries in Canada. They included: Control Data, Digital Equipment, Hewlett-Packard, Honeywell, IBM, Motorola, NCR, and Xerox. With the exception of Control Data, the U.S. parent companies rank among the top U.S. multinational high technology companies. For example, in 1989, IBM realized more than half of its total revenue outside the United States. IBM Canada's contribution to global sales and assets is about three and a half percent. While not a major player in the IBM corporate world, IBM Canada's position in Canada is significant Measured by sales, it ranks as one of Canada's largest companies and leading exporters. Thirty-seven percent of IBM Canada's sales is generated in export markets, primarily to other IBM operations.13 Specialization is the key descriptive word for IBM's two manufacturing plants in Canada. The Bromont, Quebec, plant manufactures electronic components, of which virtually all are exported, primarily to the United States (upwards of 75 percent) and the remainder to Europe and Japan. The Toronto plant manufactures memory cards and power systems for the entire IBM product line, and a variety of electronic assemblies, the majority of which are exported to IBM U.S. plants where they become an integral part of final products. Since pursuing the "specialized manufacturing" strategy, IBM Canada Ltd.'s exports have risen from $43 million in 1968 to $1,586 million in 1989, a forty-fold

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jump in 21 years. In mote recent years, between 1985-1989, while IBM Canada's domestic revenue grew 3.2 percent, export revenue grew 13.4 percent. Motorola Another leading high technology firm which targeted its Canadian plants for North American operations is Motorola Inc. In 1988, Motorola ranked 32 on the list of leading U.S. multinationals, and the Canadian sales contribution to its global revenue was approximately four percent, a slightly higher contribution than that of IBM Canada. Motorola Canada was deemed to be a "specialized" company by the Government of Canada, a characteristic fully apparent in the parent company's submission to the U.S. International Trade Commission in support of immediate reciprocal elimination of duty on select articles. These duties were originally to be phased out over a period of five years, beginning January 1,1989. Motorola manufactures and distributes multiplexers and other units and data communications equipment through its information systems group. The operations of that group include the manufacture in Ontario of statistical multiplexers, which are distributed in the United States and throughout the world by a Motorola subsidiary in Massachusetts which manufactures similar products. Motorola's submission highlighted the following key points:14 1.

2.

3.

In recent years, there has been price erosion attributable to technological advances, entry of Japanese electronic giants and the globalization of competition. The global environment is expected to become even more competitive as European companies position themselves for 1992. In a market increasingly sensitive to price and quality, tariffs on shipments between the U.S. and Canada hinder competitiveness by adding cost and diverting funds that could be better invested in research and development and the adoption of advanced manufacturing technologies. Elimination of U.S. and Canadian tariffs on data communications equipment would increase the ability of

76

Canada Among Nations 1990-1991 U.S.-owned suppliers in North America to compete with off-shore suppliers and thus enhance their competitiveness internationally.

INTRA-CORPORATE COMPETITION The Canada-U.S. free trade agreement has significantly quickened the pace of business adjustment by U.S. subsidiaries in Canada, a process commenced by many in the mid-1980s. The process has been particularly difficult for companies which are being converted into distribution and sales outposts for the U.S. parent. While it is true that the majority are retaining a Canadian manufacturing presence the end result is no less significant. The plants are fewer, larger, more automated, and the product lines from components through finished goods are narrower, longer and destined for export markets, primarily the United States but also, and to an increasing extent, offshore destinations. The immediate competitive threat facing these subsidiaries does not originate in the Canadian market place. The concern is with the "internal" global corporate competition from sister plants in the United States and abroad whose manufacturing performance may be superior in terms of cost, quality and delivery or any of these three factors. While noting that it is difficult and unwise to generalize about the impact of free trade, C. David Clark, Chairman of Campbell Soup Company Ltd., offered the following observations: The impact of free trade upon specific businesses depends on the relative standing of its plant or product lines [in North America].... As part of this globalization trend, Campbell Canada is now buying many of its raw materials abroad .... We must constantly search the world for the highest quality ingredients at the lowest possible cost.... This global trend is a two-way street... we will start to manufacture a line of unique Japanesestyle canned soups in our Toronto plant to be shipped to a sister company for sale in Japan. This would not have happened if we had not already started to improve our costs in that plant in preparation for free trade.15

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In November 1990, Campbell Soup had four plants in Canada, down from 11 plants in 1986. Three of the Canadian operations were mandated to serve the North American market. However, recently Campbell acquired a number of Canadian companies whose products complement the Company's product lines. The parent company's strategy is to concentrate in a few, strategically important core businesses. As previously noted this was also the case with OMC. Probably the most significant corporate political and psychological event occurred when the Canadian subsidiary became an "operating division" of the U.S. parent in Camden, New Jersey.16 Similar actions are being taken by other leading U.S. manufacturing multinationals. For example, the Canada-U.S. Free Trade Agreement did not have an immediate impact on ITT Canada because approximately 50 percent of the Canadian subsidiary's output is made up of original equipment automotive parts which trade duty-free under the Canada-U.S. Automotive Trade Agreement of 1965. However, major decisions are now being made to realign and rationalize ITT Canada's other manufacturing business to take advantage of the 1989 FTA. ITT Canada's "connector" manufacturing unit in Ontario has been selected by ITT's worldwide Electronic Components Group to become a manufacturing location for two additional product lines. U.S. multinationals whose operations were affected by the automotive trade agreement provide an excellent basis for projecting the potential type of North American corporate restructuring scenarios that will emerge in the 1990s. Chrysler purchases over 75 percent of vehicles produced by its Canadian subsidiary and about 75 percent of vehicles sold in Canada are purchased from the U.S. parent. The parent supplies approximately 40 percent of the component parts used in the assembly process in Canada and performs most of the vehicle design, research, and engineering on behalf of the Canadian subsidiary. In the words of a Ford Motor executive, the Canadian operations of "the Big Three are integrated with North American Automotive Operations, and as such, cannot be viewed as standalone businesses."

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Canada Among Nations 1990-1991

MEXICO: RIDING THE FREE TRADE WAVE On September 24, 1990, the Canadian government announced that it would participate in trilateral free trade discussions with Mexico and the United States.17 While Canadians who are already debating the merits of Canada becoming a member of a North American free trade arrangement (NAFTA), may question this decision, the die has already been cast. Many U.S. multinationals with Canadian subsidiaries that rank among the largest firms in this country are in the process of further restructuring certain of their manufacturing and sourcing operations and activities in a North American context. The more than one thousand U.S.-controlled assembly plants along the Mexico-U.S. border, known as "maquiladoras" or "screwdriver" plants, could be transformed, potentially, into regional companies that will manufacture and/or assemble in Mexico and buy and sell both in Mexico and the United States. Currently these plants obtain 97 percent of their components from the United States, to which they also export their output.18 A growing number of U.S. multinationals, particularly those that have Mexican affiliates and/or maquiladoras, are committed to strengthening and expanding their Mexican base. More importantly, these corporate plans are predicated on greater integration between the company's U.S. and Mexican operations. At the forefront of such strategic thinking are multinationals such as IBM, GE, Ford, and General Motors. In other words, a cast of players similar to those which responded to the globalization imperative well before political action was taken to ratify the Canada-U.S. free trade agreement. By their own corporate actions, these and other U.S. multinationals are anticipating a U.S.-Mexico free trade agreement. The Canadian option is somewhat limited. Whether the government supports NAFTA or does not, the corporate situation is such that many U.S.-controlled Canadian facilities and operations will eventually be linked, if not integrated with the parent company's U.S. and Mexican operations. It can be expected that in the coming months, Canadian economists and policy makers will intensify the debate concerning the merits of a North American free trade agreement; specifically, they will be asking what it will offer Canada and Canadian businesses in terms of

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further opportunities to specialize and to expand economies of scale in production, distribution and marketing (see Chapter 5). The debate, undoubtedly, will be a heated one; however, it will not deter most U.S. multinationals with operations in Canada and Mexico from putting in place plans to restructure their North American operations in order to capture the very economies that are being studied and debated. Organized labour acknowledges that "more than 90 percent of North American trade is carried out by a small group of transnational corporations.... More than 75 percent of all trade in manufactured goods is intra-firm made..." however, organized labour "is not willing to accept the argument that access to cheap pools of labour and larger markets free from government interference will benefit Canada and its citizens."19 In spite of organized labour's valid concerns about potential job losses, particularly those involving unionized employees, the writing is on the wall. A harbinger of things to come appeared recently in the following news item: Prestolite Wire to Axe 33 Jobs Prestolite Wire Corp. of Cambridge, Ont., a manufacturer of battery cables, plans to eliminate 33 jobs after a decision by its parent, Prestolite Wire Inc. of Farmingdon Hills, Mich., to move some production to Mexico. Sixty-one jobs will remain at the plant.20 CONCLUSION Policy makers are rightly concerned that Canada might suffer economically if it is excluded from a free trade arrangement between the United States and Mexico. If this should happen, U.S. plants would have "free access" to both Canadian and Mexican markets, and Canadian plants would be at a distinct competitive disadvantage. As previously noted, competition in the 1990s will be to an increasing extent intra-corporate and across national boundaries. This reality must not be ignored, and it applies equally to Canadian-owned manufacturing firms with plants in the United States.

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Canada Among Nations 1990-1991

As a result of the FTA, plants are increasingly viewed as "moveable," rather than as "fixed," assets. The production process employed by today's manufacturing-based multinationals is one that frequently locates the three stages of production in different geographic regions; for example, the "component" stage may be assigned to plants in country X, the "sub-assembly" may take place in Y, and the "assembly" stage, or a combination of stages, may be located in country Z.21 In essence, the stages of the production process are deployed as a configuration of country-plant locations, with a view to exploiting "cheaper, more reliable and more fungible materials, subassemblies, parts, labourers, and vendors and where laws and governments are more congenial."22 Another observation that can be founded on the experience of Canadian manufacturers, domestic and foreign-owned, is that a country's macro- economic policies are critical to realizing the potential benefits of a free trade agreement. Membership surveys conducted by the Canadian Manufacturers' Association, Canadian Exporters' Association, and industry-specific associations such as the Canadian Chemical Producers' Association, indicate that the combined impact of the high Canadian dollar and high interest rate has had a deleterious effect on Canadian manufacturers, making it difficult and in some cases impossible to reap the full benefits of the Canada-U.S. free trade agreement. Finally, in response to the globalization of markets, multinationals are having to exercise greater head-office control over their international network of foreign affiliates and operations. This is done to ensure the cost-effective and profitable orchestration of the multinational's production-procurement and distribution-sales strategies. The style of leadership requires the parent company to provide centralized control over the multinational organization through common policy, uniform administrative systems, key personnel decisions, and long-term strategy. Centralized control is designed to contribute to the stability of the overall organization and to consistency of operations, by providing common direction, standardizing key operating functions, reducing duplication of activities, and improving operating efficiencies. In this global arena, Canada is but one spoke of the multinational corporate hub.

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NOTES 1

D. C, MacCharles, "Canadian International Infra-Industry Trade" in Imperfect Competition and International Trade ed. D. Greenway and P. K. M. Tharakan, (Sussex: Wheatsheaf Books, 1985).

2

Statistical and Data Base Services, Foreign-Owned Subsidiaries In Canada, 19791981, Ottawa, Department of Regional Industrial Expansion, September 1984, pp. 45.

3

W. H. Davidson and D. G. McFetridge, "Recent Directions in International Strategies: ProductionRationalizationorPortfolioAdjustment,"Co/ttffjfciayoMrna/q/WorW Business, (Summer 1984) pp. 95-9.

4

J. R. Baldwin and P. K. Gorecki, et al., Entry and Exit into Canadian Manufacturing Industries, 1970 and 1979. Discussion Paper 225, Economic Council of Canada, Ottawa, 1983, p. 106.

5

SeeD. C. MacCharles, Canadian Domestic and International Intra-Industry Trade, A study prepared for the Department of Industrial Regional Expansion, Ottawa, Government of Canada, April 1984.

6

John A. Kazanjian, "Cross-Border Mergers & Acquisitions," Presentation made to the Americas Society, New York City, November 29,1989.

7

Robert Hamersclag, "Benefits to the United States from a Free Trade Agreement with Canada," A Presentation to the Williamsburg Meeting of the Canada-United States Relations Committee, U.S. Chamber of Commerce, March 17,1986, pp. 6-7.

8

For more details concerning OMC' s global strategy and operations see OUTBOARD MARINE CORPORATION, 1990 Annual Report, November 30,1990.

9

Memorandum from industry sources.

10

Marina Strauss, "Whirlpool Wants Rest of Inglis," The Globe and Mail, December 15,1989; "Inglis Ltd. Becomes Unit of Whirlpool," The Globe and Mail, February 13,1990; and Gail Lent, "Inglis Looks Beyond Hard Times," The Globe and Mall, October 20,1990.

11

Whirlpool Corporation, "Regarding United States-Canada Free Trade Agreement," Statement to the International Trade Commission, Washington, D.C. (54 FR 32701), September 6, 1989.

12

Gail Lem, "Free-Trade Pact Blamed for WCI's U.S. Move," The Globe and Mail, August 22,1990.

13

See 1989 IBM Canada Story, (Toronto: IBM Canada Ltd., 1990).

14

See Motorola Inc., Written Statement before the International Trade Commission, Washington, D.C., September 6,1989.

15

Speaking notes. The Canadian Club, Toronto, February 12,1990.

16

Oliver Benin, "Campbell Shrinks Under Free Trade," The Globe and Mail, November 29,1990.

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Canada Among Nations 1990-1991

17

Minister for International Trade, Statement to the House of Commons, Ottawa, October 9,1990, p. 1.

18

"Mexico; A New Economic Era." Business Week, November 12,1990, pp. 107-108; and S. W. Sanderson and R. H.Hayes, "Mexico - Opening Ahead of Eastern Europe," Harvard Business Review, Vol. 68, No. 5 (September-October 1990) p. 33.

19

See Canadian Labour Congress, "Major Reservations About a Canada-U.S .-Mexico Free Trade Agreement," Brief to the House of Commons, Standing Committee on External Affairs and International Trade, August 31,1990.

20

TheGlobeand Mail, November 10, 1990,p.B16.

21

For an interesting discussion of the stages, and the strategies pursued by some multinationals, see T. Kumpe and P. T. Bolwijn, "Manufacturing: The New Case for Vertical Integration," Harvard Business Review, Vol.88, No. 2 (March-April 1988) pp. 75-81.

22

Alonzo L. McDonald, "Of Floating Factories and Mating Dinosaurs," Harvard Business Review, Vol. 64 No. 6 (November-December 1986)pp. 82-87.

5

CANADA DISCOVERS ITS VOCATION AS A NATION OF THE AMERICAS

Michael Hart1

O ver the years, Canadians have made a cult out of a perpetual na-

tional identity crisis, seeking to be a European nation, an Atlantic nation, a Pacific nation, and even an Arctic nation — anything but what we are, a nation of the Americas. Historian Ramsay Cook has captured this preoccupation with identity: [Canada] has suffered for more than a century from a somewhat more orthodox and less titillating version of Portnoy's complaint: the inability to develop a secure and unique identity. And so ... intellectuals and politicians have attempted to play psychiatrist to the Canadian Portnoy, hoping to discover a Canadian identity.2 In 1990, however, the Government of Canada finally appeared ready to accept the incontrovertible fact that geography makes Canada an American nation. Canada occupies half of the North American continent, sharing a vast land mass with the United States and Mexico. Whether Canadians like it or not— and many do not — they are as much "Americans" as the British are Europeans. More critically, Canada's trans-Atlantic and trans-Pacific trading partners regard it as a nation of the Americas. They view Canadians' insistence on being recognized as a European or Pacific nation or as the "other" North American nation as quaint and self-deluding. Instead of building on the benefits that flow from their geography, Canadians have often preferred to place the accent on Canada's status as a European, a Pacific, and even an Arctic nation by emphasizing the diversity of their ethnic origins. Canadians have sought refuge in a multiplicity of relationships to avoid being dominated by one key relation-

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ship, that with the United States. Canada's geographic location, next door to the United States, continues to engender feelings of ambivalence in many Canadians. As Margaret Atwood suggests:"... if the national mental illness of the United States is megalomania, that of Canada is paranoid schizophrenia."3 Canadians generally admire the energy and ingenuity of their U.S. neighbours, watch their television, listen to their music, read their books and magazines and visit back and forth, but they are also worried by the thought that the all-pervasive U.S. presence undermines Canadians' capacity to be themselves — themselves often being defined as other than American. Some are prepared to go even further and advocate ever more stringent regulatory steps aimed at differentiating Canada from the United States.4 Despite this ambivalence, the last few years have seen Canada take a series of deliberate steps to come to grips with its vocation as a nation of the Americas. In 1988 Canada signed a bilateral free-trade agreement (FTA) with the United States, recognizing that the very close trade and economic ties between the two nations could no longer be managed satisfactorily through multilateral channels or by ad hoc procedures. After years of divisive debate, Canada joined the Organization of American States (OAS) in 1990 and changed its representation from that of an observer to that of a member. The spectre of U.S. dominance of the organization seemed, after all, to be less important than the opportunities offered by the OAS for furthering Canadian interests in Latin America. In 1990, the government took a further step, initiating discussions with the United States and Mexico to explore the implications of a three-way North American free-trade agreement. Also in 1990, first steps were taken to explore the potential for a "Partnership for the Americas," in other words the government showed signs of interest in a much more intensive relationship with Canada's Latin American neighbours.5 This chapter reviews some of the national and global forces which disposed Canada to take these steps and examines the implications of these decisions for the future evolution of Canadian trade policy. It suggests that implicit Canadian acceptance of Canada's status as a nation of the Americas marks an historic step in the country's evolution and will influence decisions on a range of issues, particularly trade and economic policy issues.

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GLOBAL CHANGE From the standpoint of trade policy, the enduring image of 1990 will be the near collapse of the Uruguay Round of multilateral trade negotiations.6 The spectacle of over a hundred ministers and several thousand officials scrambling to assemble a worthy product to crown four years of intense negotiations may symbolize a continuing situation. It suggests the increasing exhaustion of the postwar order of multilateral institutions. Exhaustion in this case should not be equated with unimportance. A multilateral system of trade rules remains a critically important ideal. Unfortunately, the capacity of the General Agreement on Tariffs and Trade (GATT) to maintain such a system is increasingly being questioned.7 The GATT is very much a creature of its time. Conceived during the middle of the second world war in response to the debilitating experiences of depression followed by the war, GATT reflects the ideas, practices and priorities of the 1940s and 1950s. It succeeded in restoring order to the trade world of those days. Members agreed to reduce the traditional barriers to trade in goods — principally tariffs and quotas — and limit other practices, on the basis of a set of rules organized around the twin principles of most-favoured-nation and national treatment. The GATT instilled respect for transparency and multilateral dispute resolution among its members. During its first forty years, trade grew tenfold as exports expanded twice as fast as domestic production. The GATT played a critical role in fostering the high degree of economic interdependence evident today.8 But the GATT was originally established as the solution to yesterday's problems. Along with the International Monetary Fund (IMF) and the World Bank, it was one of the three pillars of post-war economic cooperation, established as defences against the devils of competitive currency manipulation, discriminatory quotas and prohibitively high tariffs. The underlying principles remain correct, but the detailed obligations are irrelevant to the devils of today, let alone those of tomorrow. As trade has grown and economic interdependence has increased, the nature of trade has changed and resistance to adjustment has risen, undermining the capacity of GATT to renew itself. International trade theory, which assumes that trade reflects comparative advantage and results largely in the exchange of one commodity for another between

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sovereign nations (English wool for Portuguese wine in the classic Ricardian example), has had to scramble to explain trade which involves exchanges of cars for cars and computers for computers. It now has to explain the new phenomenon of intra-corporate trade. It has to factor in the complications of imperfect competition. It has to take account of new forms of industrial organization and theories to explain them. It has to describe the role of technology in changing the nature of international transactions. It has to explore the implications of the tremendous increase in the exchange of capital and services.9 National trade policies have begun to reflect these changes in new forms of protection and new domestic and international regulatory regimes. The multilateral trade and payments system, however, has lagged behind in reflecting these changes.10 The Uruguay Round of multilateral trade negotiations represents a concerted effort to modernize the GATT. Its ambitious agenda, organized around fifteen negotiating groups, seeks to provide the world trading system with a new constitution to reflect the importance of trade in services, investment, innovation and competition policies as influences upon world trade. It seeks to introduce the liberating principle of nondiscrimination to these important aspects of modern international economic exchange. It seeks to modernize dispute resolution and institutional mechanisms, in order to strengthen transparency and encourage consultation rather than confrontation. While efforts continue to bring the Round to a successful conclusion, it would not be unfair to suggest that the prospect of achieving its ambitious objectives appears increasingly remote. Even if some are reached, confidence in multilateral trade negotiations will have been severely undermined by the experience of the past few years. It is ironic, therefore, that the issue which may torpedo this ambitious effort is a hold-over from the past: agriculture. From the 1930s onwards, governments have sought to shelter the farm sector from both the vicissitudes of weather and the uncertainties of international competition. While the objective of farm price and income stability may be widely shared, the techniques employed vary greatly and therein lies the problem. Each government's approach creates distortions in domestic and international markets, but each approach does so differently, and as a result creates much ill-will and dispute. The wide range of techniques historically employed also makes the negotiation of solutions very diffi-

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cult. From the time of the U.S. efforts to exempt much of agriculture from the GATT at its inception, the rules governing trade in agricultural products have become less and less stringent. The lack of international discipline has made it too easy for governments to introduce an increasing array of trade-distorting practices leading to silos bursting with wheat, towering mountains of butter and spreading lakes of wine, to be disposed of at any price. It also has created deeply entrenched interests dependent on government support and regulatory programs.11 The United States and other countries exporting agricultural products are determined that the Uruguay Round make progress in establishing serious discipline for farm income and price support programs, particularly the practice of subsidizing the export of surplus production. They have been prepared to make all other negotiating issues hostage to progress on agricultural trade, including efforts to bring the framework of global rules more into line with modem trade and investment practices. The European Community and others have to date not shared this view. The politics of domestic agricultural protection have convinced European politicians that they cannot take the large steps demanded by the United States, even for the sake of progress on important but unrelated issues such as intellectual property and services.12 THE APPEAL OF REGIONALISM An essential ingredient in the European Community (EC) trade policy arithmetic is the calculation that progress on the GATT front is important but not critical. For the EC, the GATT has become a secondary instrument. The primary focus of European trade policy has become the network of agreements and arrangements built around the 1958 Treaty of Rome establishing the European Common Market. For Europe, now largely dependent on this network of preferential trading arrangements, participation in the GATT is motivated more by a desire to maintain a broad system of international rules than by a desire to update those rules by negotiating new disciplines and obligations.13 As the Brussels meeting of the Uruguay Round foundered, with most of the public blame being heaped on the EC, European energies were directed at more critical and largely positive developments at home. Goaded on by the effect of the global recession in the early 1980s on European competitiveness and by the rigidities evident in the response of its members to the challenge posed at home and abroad by Japanese

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and other competitors, the EC embarked on an ambitious program of reform and consolidation popularly known as EC-1992. The result has been startling. In a matter of less than five years, the European Commission, under the energetic leadership of its French president, Jacques Delors, has turned a moribund, inward-looking Europe into one of the more dynamic corners of the global economy. By mid-decade, the integrated European market will offer freer internal movement than Canada for goods, services, capital and labour.14 It is not surprising, therefore, that the Europeans, preoccupied with the demands of these internal reforms, have found it hard to build up much enthusiasm for U.S. demands for global reforms. Nevertheless, a more confident and more competitive Europe has been prepared to make significant proposals for progress on the international agenda in other areas, as is evidenced by the EC offer on procurement in the Uruguay Round.15 European intransigence on agriculture should not blind us to European resourcefulness in other areas. Additionally, Europe has been at the forefront in responding to the economic challenge posed by the collapse of the Soviet Empire. Led by a vigorous and now united Germany, the Europeans are quickly moving to build new links with the countries of Eastern Europe. While the benefits of these links may be years away, the EC is demonstrating both foresight and the new power of regionalism. Challenges close to home take precedence over broader, global challenges. This Eurocentrism in the last few years of the 1980s does in fact reflect the triumph of regionalism, a phenomenon that may be most advanced in Europe but is not uniquely European. It is the second major indication of the institutional exhaustion of GATT. The 1980s saw an acceleration in the retreat from the universalism symbolized by the GATT, and an increasing fascination with the particularism of regional arrangements. Not only did the EC expand from nine to ten and then to twelve during the decade, but the European Free Trade Association (EFTA) countries began considering either closer association or even membership in the Common Market. Europe's economic dependencies, the African, Caribbean and Pacific (ACP) countries covered by the Lome1 Convention, are also looking to closer ties with the Community. In Oceania, Australia and New Zealand transformed their moribund 1965 trade agreement into a dynamic new free-trade arrangement. Israel succeeded not only in securing a FTA with the EC but in putting an end to U.S.

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disdain for such arrangements. Once Israel broke the ice with its precedent, Canada followed suit with a much more comprehensive agreement of its own with the United States. As we shall see below, regionalism, which once flourished and then disappeared in Latin America, has returned there with renewed vigour. Around the Pacific, a whole alphabet soup of regional initiatives is vying for the attention of politicians and analysts alike (see Chapter 11). In addition, Japanese investment activity has greatly accelerated regional economic integration. The point has now been reached at which less than half of world trade in goods and none in services takes place under the basic rules of the General Agreement. The combined impact of regional trade arrangements, unilateral preference schemes, grey-area measures and other departures from the core rules has further underscored the less central role GATT rules now play in determining who trades what with whom.16 This renewed fascination with regionalism has had two effects: it has made regional preferences respectable and it has reduced the critical mass of commitment to GATT so essential to successful negotiations. Among the changed attitudes, however, the most important has been that of the United States, a conversion that has deeper foundations than a new fascination with regionalism. THE UNITED STATES TURNS INWARD In the United States, the problems of the Uruguay Round have been laid squarely on Europe's doorstep. But in reality, the problem is as much a U.S. failure as an EC one. Observed The Economist: ... America's willingness to stop the talks, and thus cast aside gains in many other areas of trade, is far more threatening to the future of the multilateral trading system than the EC's mainly self-damaging stupidity over agriculture. It confirms that America is ready to pursue "fair trade" on its own terms. If it follows this route, European liberals will find it immensely difficult to resist demands for a Fortress Europe.17 The anger in Washington appears to stem as much from a desire to justify its curious new — but in reality very old — brand of trade policy as to an attempt to bring the EC around to the U.S. point of view. Failure to convince its GATT partners of the U.S. vision for agricultural reform

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and a revitalized GATT added "legitimacy" to U.S. proponents of unilateralism. U.S. administration and congressional spokesmen, in their angry denunciations, may have inadvertently provided further evidence of a United States returning to its ancient protectionist roots.18 For more than a decade, the United States has been steadily turning inward, both upon itself and upon its own region. It has traditionally provided leadership in maintaining momentum toward liberalization, but itnow as often substitutes rhetoric for leadership.19 Much of this rhetoric has a strong moral overtone, expressing anxiety about "fairness," "level playing fields" and the need for "disciplines." It now approaches international negotiations with an agenda built up from individual irritants and no longer brings either comprehensive vision or substantive leadership to the table. It has yet to come to grips with the challenge to its economic leadership from Europe and Japan and with the profound changes that are taking place in the trade relations system. Until American officials adjust to these new realities, the United States will continue to have difficulty galvanizing other GATT members into acceptance of forwardlooking commitments that provide a balance between competing interests in the export and import areas. As the United States enters the 1990s, three forces contend for the direction of American trade policy. One represents the traditional multilateral orthodoxy that fuelled U.S. leadership in the erection and maintenance of the multilateral trading system, and now drives much of the U.S. manoeuvring in the Uruguay Round. The second is a resurgence of unilateralism and protectionism, with proponents disdainful and distrustful of the multilateral trading system. The third favours the negotiation of regional or bilateral agreements with selected countries, notably Canada, Mexico and those of the Pacific Rim, either on their own merits or as a complement to the Uruguay Round of multilateral trade negotiations.20 It is, of course, possible for a superpower like the United States to ride off in several directions at once for a considerable period of time. In the practice of trade policy, consistency is a virtue much honoured in the breach by both great and small powers. Indeed, the distinctions are blurred both by current U.S. trade policy and by the debate about its direction in the administration, the Congress and the U.S. business community. Nevertheless, the multilateralist position has lost some of its potency; it is no longer the pre-eminent and unchallenged position; the geo-

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political impulses that, until recently, successfully subordinated trade policy to U.S. foreign policy, no longer command the same authority.21 The unilateralists, while paying lip service to the multilateral ideal, appeal to deeply embedded U.S. mercantilism and strike an emotionally powerful chord in the American psyche. For their part, the regionalists and bilateralists are struggling to find a patch of secure ground by marrying the liberal virtues of the traditional multilateral approach to a recognition that the future may lie in tailor-made trade agreements with particular countries and regions. President Reagan's Caribbean Basin Initiative, the Canada-U.S. FTA, the Bush administration's Mexico and Enterprise for the Americas initiatives all reflect not only efforts by the administration to channel enthusiasm for unilateralism and bilateralism into more constructive directions, but also a response by the United States to developments in the region, particularly Latin America. LATIN AMERICA TURNS OUTWARD While the United States has been turning inward, Latin America has been turning its back on its own past (see Chapter 6). Nation after nation has rejected a past of dictatorship and corruption and embraced a new future of pluralism, democracy and open markets.22 From an economic perspective, the remarkable "apertura" in Mexico marked a high point in this transformation of Latin America.23 Small wonder, then, that attitudes toward the region also underwent a transformation in Canada, in the United States and elsewhere. The energies unleashed by the end of the Cold War are finding outlets here as elsewhere. One important outlet was President Bush's "Enterprise for the Americas Initiative." It may do much to strengthen democracy and market forces in Latin America. Like the Marshall Plan of a generation earlier, it builds upon enlightened self-interest and combines elements of self-help with material and other assistance. The Initiative, first enunciated by the President before a group of Latin American leaders in Washington in June 1990, involves a range of U.S. policies, programs and proposals. Like the EC Lome" Convention, it seeks to combine possible commitments on aid, trade, debt relief, investment and technology into a more holistic approach to economic development. It encourages the countries of Latin America to do much more

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among themselves, to foster the habit of regional cooperation. To date the response has been enthusiastic, in itself a major change in tone in U.S.-Latin America relations. Not only have Latin American countries begun to reconsider their past of government interventionism and dictatorship, they also appear eager to bury the confrontational nature of their past relations with the United States.24 To date there is growing evidence of a Latin America that wants to make the best of the U.S. initiative. Argentina, Brazil, Paraguay and Uruguay have entered into negotiations aimed at eliminating a range of tariff and other barriers between them by 1995. Chile and Mexico will sign a free trade agreement early in 1991. The countries of Central America and the Caribbean are looking to revival of their moribund regional arrangements, stimulated in part by the success of the earlier Caribbean Basin Initiative. Chile, Colombia, Venezuela and others have initiated discussions with the United States on the possibility of concluding framework agreements. Like similar agreements concluded between the United States and Mexico in 1985 and 1987, these instruments may prove to be a prelude to free trade discussions. Others are discussing bilateral investment and double taxation agreements in order to create a better basis for bilateral trade and investment flows. In short, there is now an unprecedented level of activity in Latin America and the United States, aimed at improving hemispheric trade and economic cooperation. Renewed U.S. interest in Latin America represents a mixture of altruism and self-interest. It taps the energies unleashed by the end of the Cold War and the relaxation of the focus on Nicaragua. It builds on a natural interest in promoting democracy and human rights. But it also represents an economic interest. An economically healthier Latin America translates into increased trade and investment opportunities. The region's potential is great, with its population of 450 million people, its wealth of natural resources, and its relatively high level of economic development Additionally, for an administration adjusting to the reality of the Uruguay Round, the prospect of scoring some constructive successes in Latin America must appear very attractive indeed. While the timing may have been accidental, the symbolism could not have been missed. As ministers and their advisors struggled in Brussels, George Bush toasted Latin American leaders during a successful tour of the continent.

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CANADA TURNS ITSELF INSIDE OUT AND UPSIDE DOWN Canadians have not liked the implications of these changes in the global economic environment. They would prefer to retreat to the comfortable assumptions of an earlier era, an era which allowed Canadians to pursue their interests in the relative safety of multilateral institutions without having to pay too large a price at home. The challenges they face as a result of global change could not have come at a less propitious time. While they are being asked to come to grips with the external situation, they are also facing major challenges to the status quo from within (see Chapter 2).25 Canadians' feeling of drift, as they are buffeted by the pressures of global change, can be directly related to their failure to come to grips with their identity and vocation as an American nation. Uneasy about too close a relationship with their neighbour to the south, Canadians have sought relationships that are more remote and therefore less threatening. Canadians have long prided themselves on being internationalists, but the truth of the matter is that the more Canadians learn about the rest of the world, the less they want to have anything to do with it. Canadians were internationalists when international events only barely touched their lives, but with increasing awareness came increasing doubts about the world on their doorstep and all its inconveniences. This growing anxiety about the world around them is compounded not only of ambivalence about close relations with the United States, but also of a desire to run from the challenges of modern economic life and a pining for the simplicity of the past. To people living in Europe, Asia or Latin America, Canada is viewed as one of the most fortunate of countries, blessed with an abundance of resources, an educated population, wide open spaces, an invigorating climate and a location next to the most dynamic economy in the world. To Canadians, these blessings are more often viewed as liabilities: its abundance of resources condemns Canadians to the role of hewers of wood and drawers of water; its population is too small and scattered to provide a sufficient critical mass for economic development; its climate adds enormously to the cost of doing business; its land mass makes the country a challenge to govern; and its neighbour overshadows or even stifles potential virtues. For many Canadians, global economic developments appear to have accentuated these perceived difficulties and

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exposed the weaknesses in the Canadian economy, just at a time when the country's fragile constitutional fabric seems to be coming apart at the seams. They have also accelerated the need to come to grips with the reality of Canada's position as an American nation, in a world in which regional ties are becoming increasingly important. Over the past year, Canadians' dissatisfaction with themselves and with their country seemed to boil over. With the failure of the Meech Lake Accord, Canadians appeared to want to give up on the 120 years of compromise and pragmatism that had kept the genie of centrifugal forces safely bottled up. In a strident spirit of me-tooism, Canada's native peoples ran out of patience as Mohawk "Warriors" took the law into their own hands in an ugly standoff at Oka. To add insult to injury, seven years of steady growth finally came to a crashing halt as the country fell into a recession, heightening Canadians' already overwrought sense of vulnerability. There is a trade policy point here. Few may be prepared to agree that Canada's domestic crisis is also a crisis for its trade and foreign policy. Over the years, Canada has gained a place at the international table. That place, however, is not guaranteed. It was earned by participating in, and contributing to, the councils of the world, from the GATT to the Summit Seven. It reflects the size of the economy as well as Canada's capacity to contribute. Canada will have to emerge relatively quickly from its present troubles, with a new stability and a new sense of purpose, if its ability to influence and even to participate is not to be permanently impaired. It must therefore not only solve its constitutional crisis, but also tackle its economic dilemma and define its place in the evolving world economy. Many Canadians now look back nostalgically to the 1960s and 1970s. Those were the days when their country seemed to come into its own. Canadians seemed to have found the identity they had long sought. They adopted their own distinctive flag, brought home the constitution and came to grips with bilingualism and multiculturalism. The kindling of the centennial flame in 1967 symbolized a new-found energy and pride. But the 1960s and 1970s also left a legacy of self-indulgence which would come back to haunt the country. It threatened to undo the progress, made in earlier decades, in developing a modern industrial economy well integrated into the world economy.26 Canada was running the risk of be-

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ing left by the economic wayside because it had come up against some fundamental problems: -

As a small, relatively open economy, it had experienced increasing difficulty in attaining the productivity improvements needed to keep up with foreign competition without reducing high levels of protection for secondary manufacturing;

-

Greater competition from Third World resource producers undermined the security of the country's traditional source of wealth;

-

It proved difficult to achieve greater Canadian participation in world trade in more fully manufactured and more sophisticated products; The globalization of production and markets posed new challenges to Canadian-based producers and investors;

-

-

Increased competition for mobile investment capital underlined the need for Canadians to demonstrate their capacity and willingness to compete on a global scale; and

Canadians' desire for a high level of social assistance encountered the hard reality of the economics of global competition. In reacting to these constraints, Canadians did not know where to turn. The Conservative government elected in 1984 introduced a program of economic renewal which Canadians have found less and less to their liking — deregulation, free trade, privatization, fiscal parsimony and tax reform have all been intended to arm the country with the necessary tools to take on the competitive challenge from outside. New competition, energy and investment policies all sought to make Canada a more hospitable place in which to do business. And the Free Trade Agreement with the United States clearly identified Canada as an American nation. But Canadians did not like the adjustments that flowed from this program. Many seemed to prefer the indulgence of the 1960s and 1970s.

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While Canadians complained and grumbled, report after report emanating from the IMF, the Organization for Economic Cooperation and Development (OECD) and the GAIT strongly praised the new direction in Canadian economic policy. These compliments appeared to make little impact on Canadians. Canada seemed to lack the broad internal consensus needed to take advantage of the opportunities created by the government's program of economic renewal, suggesting that the factors that have undermined Canada's competitiveness are not related to endowment and capacity but to attitude and application. A new attitude will gradually have to take hold and first efforts to build a new partnership in the Americas should play an important catalytic role. The painful business of adjustment contributed to the sour mood that spilled over in the summer of 1990 and continues to plague Canada today.27 The need to adjust, of course, is not peculiar to Canada. The situation and the forces that have worked upon Canada over the past few years are also increasingly working upon most countries and regions of the world. THE FTA AND CANADA'S NEW-FOUND VOCATION In many ways, the 1988 free trade debate was a debate that involved not only the government's program of economic renewal but also the direction of Canadian foreign policy and, by implication, Canada's vocation as a nation of the Americas. It forced Canadians to confront the reality of economic interdependence, of global competition and of geographic location. It brought the issue of adjustment to the forefront. It suggested the extent to which adjustment requires a national consensus favouring competition, a consensus forged between government, business, labour and the academic community and extending to programs that involve not only trade policy and practice but also such diverse domestic policies as training and education, competition policy, tax reform, and environmental protection. In that sense, the FTA was a critical step towards achieving the Government's program of economic and national renewal. In it, the Government sought three basic objectives: the most important, if least publicized, was to effect domestic economic reform by eliminating, at least for trade with the United States, the last vestiges of Sir John A. Macdonald's National Policy and to restrain

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the use of the more subtle new instruments of protection. By exposing the Canadian economy to greater international competition while simultaneously improving access to the large market to the south, Canadian firms would be given an incentive to restructure and modernize and become more efficient and productive. the most publicized objective was to create a bulwark against U.S. protectionism. By gaining more secure and open access to the large, contiguous U.S. market, Canadian business would be able to plan and grow with greater confidence. finally,the agreement would provide an improved and more modern basis for managing the Canada-U.S. relationship. New and more enforceable rules, combined with more sophisticated institutional machinery, would place the relationship on a more predictable and less confrontational footing. The FTA largely achieved these objectives. Nevertheless, it has been a disappointment to many Canadians in that nothing dramatic has happened in the first few years. The dawning of free trade proved remarkably dull. There is understandable disappointment that four years of thrilling debate should now appear as a prelude to the mundane. Canadians seem to be waiting for Promethean signs of splendour. They may be looking for the wrong things. Bombarded with the shallow inanities of political debate and the sensationalism of the front page, they have become too conditioned to the allure of statistics and immediate results. Free trade is too complex a policy to produce significant gains in a year or two, especially when tariff cuts are to be phased in over ten years. Perhaps five years or even ten years from now, there may be some interesting statistics for the experts to analyze. But not this early. There are simply too many other factors at play. Monetary and fiscal policies — real or anticipated — have, for example, had a much larger impact on business decisions over the past two years than the free-trade agreement, in some instances wiping out the influence of the FTA, in other cases reinforcing it.

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Trade policy seeks directly to influence the extent and nature of a country's foreign trade and indirectly a country's economic development. Historically, trade policy has been a major instrument used by governments to guide economic development. Generally speaking, minor changes in the deployment of trade policy instruments will lead to minor changes in exports or imports or industrial activity while major changes may lead to more substantial results. Over the years, most changes have been small and incremental, despite claims to the contrary. The FTA may have been larger than most, but it is being implemented over ten years. Its ability to produce major modifications, therefore, was and continues to be too easily exaggerated, both by its supporters and critics. In effect, at this early stage, the FTA's impact is more psychological than real. What we are seeing is a country that is painfully rejecting its past attachment to the false comfort of protectionism. Convinced by the success of the resource sector that Canadians were international traders, few appreciate how few companies and how limited a range of products are involved in exporting.28 The National Policy succeeded in establishing an uncompetitive manufacturing sector in Central Canada. Forty years of chipping away at that policy under GATT had some impact but not enough. The 1981-82 recession showed that more needed to be done. The FTA succeeded in getting that more fundamental process started, even before it was in place. Canadian business is reacting gradually to the challenge of adjustment to the demands of global competition. More and more Canadian companies are developing international strategies comprising not only exports, but also joint ventures, licensing arrangements, investment packages, mergers and distribution networks. The free trade debate alerted many companies to the changing realities of international business and the FTA gave them the incentive to get started or move faster. They are proceeding to take advantage of the latest technologies; to develop markets beyond their traditional territories; to source inputs from all over the world; and to enter into joint ventures and other cooperative arrangements with partners in far-flung places. These strategies all assume more competition at home and abroad. Successful companies have concluded that strategies based on protection are recipes for short-term gain and long-term pain. Open borders and free competition, on the other hand, have the opposite consequences. Such a change in attitude is hard to capture with numbers. The results may take a few years. The first steps

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may hurt, requiring the closing of antiquated plants and uncompetitive product lines. But from such painful decisions will emerge companies able to take on the world, not just in Canada but also in the United States, Latin America, the Pacific and Europe. These are the companies that will provide the good jobs of the future. The ones that close are those that supplied the jobs of the past. That progress has been slow, however, should not surprise. The GATT experience was similar. It is almost conventional wisdom now that the stability and trade liberalization fostered by the GATT was one of the major factors underwriting the spectacular growth in trade and production over the GATT's first twenty-five years. This rosy assessment was not evident in Canada in the first few years. The aborted 194748 free trade negotiations with the United States were an indication of a government having trouble adjusting to the new policy framework that it had itself helped to create.29 CANADIAN TRADE POLICY IN THE 1990s The FTA indicated the extent to which Canadian trade policy needed to return to fundamentals, reflecting the strengths and weaknesses of the Canadian economy and Canada's place in the global economy. Policy must respond to the realities of the international trade and economic system. As we have seen, that system is no longer dominated by a single multilateral system. It has become more complex, more layered and less all-encompassing. An increasingly important dimension is the degree to which rules and economic relations are organized along regional lines. In negotiating a free trade agreement with the United States in 1987, Canada introduced a contractual duality into its trade policy.30 It suggested that for the United States, the FTA would become the principal instrument for managing trade relations, while the GATT would continue as the primary instrument for managing relations with the rest of the world and provide the general framework within which the FTA would operate. Experience in Europe and elsewhere, and with the FTA suggest too, that Canadians should now broaden their thinking even further and move from a two-track to a multi-track or multi-layered approach to trade negotiations. While maintaining the basis of the GATT's enduring principles, Canada should not shy away from opportunities to negotiate new rights and obligations under complementary, less universal arrangements

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that look across the Atlantic, across the Pacific and south to the rest of the hemisphere. At the same time, Canada should accept the possibility that others may do the same. The Europeans have already made great strides in adopting a multi-tiered approach and there are signs that similar sentiments are at work in Asia. The FTA, a North American Free Trade Agreement to include Mexico, and perhaps even a hemispherewide arrangement, indicate the extent to which Canadians and Americans are moving in the same direction. The FTA suggests that a layered approach is feasible. It was negotiated under the umbrella of the GATT but in no way diminishes Canadian and U.S. bilateral rights and obligations under the GATT. The agreement carefully spells out that the two parties retain their GATT rights and obligations and that only in the case of any inconsistency between the GATT and the FTA do the provisions of the FTA take precedence over those of the GATT. Article 104 explicitly recognizes that the FTA in a number of places either improves upon the rights and obligations under the GATT or provides an agreed interpretation of a GATT article and that therefore the FTA should take precedence over the GATT. Specific instances include articles 409 and 904 which provide an agreed interpretation of GATT articles XI and XX; article 103 which strengthens the provisions of GATT article XXIV: 12; and article 502 which extends the provisions of GATT article III to the sub-federal levels of government. The interrelationship between the two agreements is reinforced by the provisions of article 1801:2 which gives the parties a choice of forum for resolving disputes arising out of obligations common to the two agreements (but not issues that are unique to either agreement). The 1989 salmon and herring dispute in effect addressed obligations under the FTA which required an interpretation of obligations under GATT. This dual approach to issues between Canada and the United States also extends to the negotiation of new obligations or the improvement of those which already exist Part of the new challenge facing Canadian trade policy, therefore, is the need to make the best use of a range of instruments to promote Canadian trade interests. In effect, Canada should in the future be prepared to negotiate in any number of fora on the establishment of new or improved rules or procedures or on the reduction or elimination of barriers. It should also be prepared to use negotiations in one forum to resolve issues that have emerged as a result of unsatisfactory negotiations (or experience) in another.

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As was indicated above, the United States is now pursuing a much more diversified approach to its trade relations. Given the extent of our interests in the United States and the special relationship established by the FTA, there is considerable scope for working in concert with the United States for the realization of a common agenda. A good place to start is the Western Hemisphere. By working together with the United States in promoting development in the Western Hemisphere, Canada would underline its new-found vocation as an American nation. Some will criticize such cooperation as evidence of Canada abandoning an independent foreign policy for the sake of better relations with the United States. Such criticism is both shallow and inimical to Canadian interests. Canada has interests in Latin America from which it is more likely to profit if, instead of acting alone, it promoted them through actions parallel to those of the United States, or even engaged in joint ventures with the latter. As Secretary of State for External Affairs, Joe Clark, notes: There is a perpetual debate in this country about whether or not our foreign policy is different enough from that of the United States. For some people, being different is more important than being right. I think the real phenomenon in recent years is that Washington's approach to foreign policy is becoming more Canadian, I think that has happened with regard to the CSCE, to NATO, to Latin America, to the United Nations and that is a welcome development appropriate to this new era of pragmatism and cooperation.31 The objective of strengthening regional ties and promoting hemispheric development should not be the creation of an exclusive trading bloc but rather the consolidation of a step towards further international cooperation. A strong North American partnership is a natural and necessary complement to strong Atlantic and Pacific partnerships. Canada and the United States have many common interests in Europe and in the Asia-Pacific region. The two countries may achieve them more readily in concert than alone — as partners, and not rivals. In this way Canada will demonstrate its new maturity as an American nation.32 The first real test of a joint approach to hemispheric cooperation has come with Mexico's request for a free trade negotiation with the

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United States. Mexico, convinced by Canada's example that a bilateral agreement with the United States was a pragmatic way to advance its trade and economic interests in that market, formally proposed to the United States in June, 1990 that the two countries negotiate a free trade agreement. The United States welcomed the overture, persuaded that such an agreement would not only advance its own trade and economic interests but would also favor its political agenda, including support for democracy and market forces as well as resolution of the narcotic and migration problems. Canada, at first hesitantly, but then with growing insistence, concluded that it would be in its interest to join the negotiations. Not only did Canada have an interest in expanding opportunities for CanadaMexico trade and investment, but it did not want to see the United States pursue a regional policy leading to arrangements in which Canada had interests but no influence. A trilateral accord embracing Canada, the United States and Mexico would take the achievements of the FTA even further. It would transform a free trade area of some 270 million people into one of more than 350 million people — larger than the 12 countries of the European Community. Trade in goods alone would exceed $210 billion annually. In keeping with Canada's more pragmatic approach to trade negotiations and its greater willingness to accept the consequences of the development of a more layered global trading system, Canadian participation in trilateral negotiations involving the United States, Canada and Mexico as well as potentially broader negotiations involving other Latin American nations should be guided by three strategic objectives: -

Canada should ensure that these negotiations help to promote an international environment that rewards shifts toward a more competitive economy. The resulting agreements should provide a better base from which Canadian companies can implement global strategies and adjust to international competition. Like the FTA, broader regional agreements should provide a positive investment signal and encourage restructuring and rationalization to the long-term benefit of the Canadian economy. By participating in such

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negotiations as a full partner, Canada should be able to shape an outcome responsive to Canadian concerns and at the same time reinforce the economic strategy behind the FTA. -

Given the importance of its economic links to the United States, Canada should use these negotiations to influence the direction of future U.S. policy in ways that promote and protect Canadian trade interests. A successful trilateral negotiation would set a precedent for Canadian involvement in other regional arrangements. A trilateral accord involving Mexico may, therefore, prove to be the first move in a more extensive strategy reflecting renewed Canadian interest in the Western Hemisphere. It would build upon a solid foundation. The United States, of course, is the most important trading partner of both its northern and its southern neighbours. Mexico is already Canada's most important trading partner in Latin America, and the United States' third most important trading partner in the world after Canada and Japan. Mexico's recent reforms in economic, trade and investment policy are also creating new opportunities for Canadian and American exporters in a growing Mexican market.

Depending on the success of this first regional negotiation, Canada should be willing to go further. It should be prepared to foster wider regional cooperation as well as the development of inter-regional links. The hallmark of these various policy initiatives should be the renewed pragmatism emanating from Canada's new-found vocation as a nation of the Americas. CONCLUSION The past year marked a watershed for Canada. The sour mood created by political and economic upheaval at home may prove to be a catharsis, which will make it easier to deal with the challenges and opportunities of global change. It may lead to the necessary consensus favouring economic renewal. The steps Canada has taken in the past few years to consolidate its place as a nation of the Americas may have been of critical importance. As the two continents grapple with the challenges of mod-

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em life, they may discover important new ways of working together. By building on geography and affinity as a nation of the Americas, by developing a more secure base within the region, Canadians may for the first time be able to make a solid effort to reach more remote markets and opportunities and as a result contribute to the development of a more prosperous and cohesive Canada. NOTES 1

The views in this article are those of Mr. Hart and do not necessarily reflect those of the Government of Canada.

2

Ramsay Cook, The Maple Leaf Forever: Essays on Nationalism and Politics in Canada (Toronto: Macmillan, 1977), pp. 188-189.

3

Margaret Mwood,TheJournaUofStuannaMoodie:Poems(Taran\c>:

4

Seymour Martin Lipset celebrated the negotiation of the Canada-United States FTA by publishing his sensitive and moving portrait of two people, capturing the things that both unite and divide Canadians and Americans. See Seymour Martin Lipset, Continental Divide: The Values and Institutions of the United States and Canada (Toronto: C. D. Howe, 1987).

5

See "Building a New Partnership for the Americas," address by de Montigny Marchand, Undersecretary of State for External Affairs, to the Americas Society (New York, November 15, 1990). This article builds upon some of the themes explored in that speech. The Uruguay Round, the eighth in a series of multilateral trade negotiations sponsored by the GATT, was launched by a ministerial meeting at Punta del Este, Uruguay in September 1986, and was expected to conclude at another ministerial meeting in Brussels in December, 1990. The negotiations were suspended on December 7, 1990 when it appeared clear that differences on the key issue of agriculture could not be bridged. Efforts are continuing to find a basis for bringing the Round to a successful conclusion.

6

Oxford, 1970).

7

See, for example, Robert Gilpin, The Political Economy of International Relations (Princeton: Princeton University Press, 1987). U.S. economist LesterThurow went so far as to greet the difficulties experienced at the 1988 Montreal mid-term ministerialreview of the Uruguay Round with the pronouncement that theGATT was dead.

8

I have dealt elsewhere with the principal characteristics of the GATT as well as its historical development: see Michael Hart, Canadian Economic Development and the InternationalTrading System (Toronto: University of Toronto Press, 1985); Michael Hart, A North American Free Trade Agreement: the Strategic Implications for Canada (Ottawa; Centre for Trade Policy and Law, 1990) and Michael Hart, From Colonialism to Interdependence (forthcoming). See also W. Frank Stone, Canada,

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9

105

the GATT and the International Trade System (Ottawa; the Institute for Research on Public Policy, 1984) and John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (Cambridge, Mass.: MTT Press, 1989). For a synthesis of recent developments in trade theory, see Nigel Grimwade, International Trade: New Patterns of Trade, Production and Investment (London: Routledge, 1989).

10

Sylvia Ostry in Governments and Corporations in a Shrinking World (New York: Council on Foreign Relations, 1990) argues that the trade, financial and technological links that now draw national economies together have dramatically changed the policy context for transnational corporations, governments and international institutions. Michael Porter and Kenichi Ohmae, the new gurus of globalization, have each added their own, sometimes conflicting, insights to this phenomenon. In The Competitive Advantage of Nations (New York: The Free Press, 1990), Porter argues the importance of securing for strategic industries the necessary critical mass at the national level if countries are to prosper in the highly competitive circumstances of the 1990s. Ohmae, in The Borderless World: Power and Strategy in the Interlinked World Economy (New York: Harper Business, 1990), contends that neither products nor corporations have a nationality. Government insistence that they do, expressed through various national and international laws, institutions and policies, will only frustrate the development of competitive industries.

11

The emphasis on agriculture in the Uruguay Round has produced a plethora of literature. See, for example, Dale E.Hatheway.Agn'cu/fure andthe GATT: Rewriting the Rules (Washington: Institute for International Economics, 1987); William Miner and Dale Hatheway,eds.,Wor!dAgriculturalTrade: Building aConsensus (Halifax: Institute for Research on Public Policy, 1987); J. C. Gilson, World Agricultural Changes: Implications for Canada (Toronto: C. D. Howe Institute, 1989); OECD, Agricultural Policies, Markets, and Trade: Monitoring and Outlook (Paris: OECD, 1989); and Grace Skogstad and Andrew Cooper, Agricultural Trade: Domestic Pressures and International Tensions (Halifax: Institute for Research on Public Policy, 1990). An additional factor to consider is that the US and the EC have developed different views of the balance between economic and social values. Differing views of the appropriate balance between equity and efficiency will be one of the most difficult issues for those who in future will be striving to develop a more modern set of global trade and economic rules.

12

13

Throughout the 1980s, intra-EC trade and trade with those countries that have preferential trading arrangements constituted more than three-quarters of total EC trade.

14

For a recent analysis of what is involved in EC-1992 as well as its implications for the United States (and for Canada), see Gary Clyde Hufbauer, ed., Europe 1992: An American Perspective (Washington: Brookings Institution, 1990). Also of continuing value is Michael Calingaert, The 1992 Challenge from Europe: Development of the European Community's Internal Market (Washington: National Planning Association, 1988).

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15

The EC has indicated it is prepared to open its public markets to international competition, on a reciprocal basis, to an extent that the United States is still unable to stomach.

16

Notes Vancouver trade lawyer, Chris Thomas, "As a result of the proliferation of regional preferential agreements, the international trading system has evolved in a fashion quite unanticipated by the drafters of the GATT. While non-discrimination remains an important rule and continues to govern the conduct of GATT signatories, it has in some parts of the world retreated into a residual role as opposed to its intended dominant, central position in regulating trade." (1991 J. V. Clyne lecture, " The GATT, Protectionism and Continentalism: A New International Trading Order," The Vancouver Institute, February 2, 1991).

17

"Guilty on trade," The Economist, December 15,1990, p. 16.

18

I have described the enduring nature of the U.S. attachment to protectionism elsewhere; see A North American Free Trade Agreement: the Strategic Implications for Canada (Ottawa: Centre for Trade Policy and Law, 1990).

19

For an American analysis of declining U.S. leadership of the global trade relations system and the problems this poses for both the United States and the system, see Raymond Vemon and Debora L. Spar, Beyond Globalism: Remaking American Foreign Economic Policy (New York: The Free Press, 1989).

20

A more detailed examination of the various strains in American trade policy, including the new fascination with bilateralism, can be found in William A. Dymond, "Lord Ronald and United States Trade Policy," (Occasional Papers - Ottawa: Centre for Trade Policy and Law, 1990).

21

For a clear statement of multilateral orthodoxy, see Michael Aho and Jonathan Aronson, Trade Talks: America Had Better Listen! (New York: Council on Foreign Relations, 1986).

22

For a consideration of developments in Latin America, see John Williamson, ed., Latin American Adjustment: How much has happened? (Washington: Institute for Interna-tional Economics, 1990).

23

I discuss developments in Mexico in detail in A North American Free Trade Agreement: the Strategic Implications for Canada (Ottawa: Centre for Trade Policy and Law, 1990). In less than five years, Mexico has managed to transform its economy from one of the most closed in Latin America to one of the most open.

24

S ee the testimony of U.S. Under S ecretary of the Treasury D av id Mulford, before the U.S. Senate Committee on Foreign Relations, (Washington, D.C.: U.S. Treasury Press Release, June 27, 1990).

25

A CBC-Globe and Mail poll released at the end of October, 1990 indicated the extent to which Canadians are uneasy about the pace of change being forced upon them.

26

Conrad Black comments acidly: " ... our quest for an identity independent of the Americans has given us a prime rate five points above that of the United States; top tax rates almost twenty points higher; a sharply higher price index; a growing and proportionately much larger public sector deficit despite the American defence burden; and only seventy percent of the U.S. standard of living, despite the unique problems of the American black underclass. We are wedded to a redistribution of

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107

money between regions and individuals which makes excessive taxation and public sector insolvency almost inevitable." ("Our OwnMeechShoot-Qut,"Saturday Night, September, 1990, p. 76.) On the trade policy front, the sour mood is not just a matter of Canadians disliking the Canada-U .S. free trade agreement because it is a bilateral agreement with the United States. It is a much more comprehensive attitude, as is indicated by the equal anger with which many greeted adverse decisions reached by GATT panels adjudicating complaints lodged by the European Community with respect to alcoholic beverages and by the United States on the subject of salmon and herring and ice cream and yogourt. The higher profile of trade policy, resulting from the FT A has translated into a general dissatisfaction with the intrusion of international obligations into national decision-making.

28

Some five sectors account for more than 70 percent of all exports: transport equipment, forest products, basic metals, petrochemicals and food products. More startling is the fact that some 70 percent of Canada's manufacturing establishments have no significant stake in international markets. At best, their involvement is that of suppliers to internationally involved companies.

29

I describe the 1947- 48 negotiations in Michael Hart, "Almost But Not Quite: The 1947-48 Bilateral Canada-U.S. Negotiations," The American Review of Canadian Studies, vol. 19, no. 1 (Spring, 1989): pp. 25-58. Canada and the United States are not unfamiliar with the challenge of having more than one legal instrument available to address issues between them. Prior to the FTA, the auto pact and the defence production sharing arrangements had provided such dual tracks, while a 1984 arrangement on safeguards spelled out more detailed procedures the two countries would pursue in applying any safeguard measure that affected the other.

30

31

Joe Clark, Secretary of State for External Affairs, "Canada and the World: Foreign Policy in the new Era," (address to the Canadian-American Committee of the C.D. Howe Institute, Ottawa, September 13, 1990).

32

See "Building a New Partnership for the Americas," address by de Montigny Marchand, Undersecretary of S tate for External Affairs, November 15,1990 to aNew York Seminar sponsored by the Americas Society.

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6

CANADA AND LATIN AMERICA

Maxwell A. Cameron

he challenges facing Latin America in 1990 were not so much the T result of external forces as of economic decline and the piecemeal disin-

tegration of domestic institutions.1 The end of the Cold War brought hope to the region that it would not serve as a battlefield for future superpower confrontation. It also revealed the isolation of Cuba and the lack of revolutionary options in the rest of Latin America. The M-19 guerrillas in Colombia participated in municipal and presidential elections, despite violence directed against them by narcotics traffickers that claimed the life of their presidential candidate. The Fuerzas Armadas Revolucionarias de Colombia (FARC) insurgents were also on their best behaviour in the hope of negotiating a peace deal similar to that obtained by the M-19. Likewise, the Fuerzas Populares de Liberaci