Thu, Oct
21
2004

Canada's Surprising Prosperity IV:
Did Free Trade Work?

Thu, Oct 21, 2004

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Free Trade Cartoon

The cartoon on my left is by John Ditchburn at INKCINCT, an Australian cartoonist, and is used by permission, according to the copyright procedures listed on his website.

During the free trade election of 1988, the debate over free trade between Canada and the United States was summed up by a political cartoon in the Toronto Star. Two cars, one a rich Mercedes, the other a patched-up jalopy, each bore a rear bumper-sticker.

On the patched-up jalopy: “The minimum wage in Georgia is $1.25. OPPOSE FREE TRADE!”

On the rich Mercedes: “The minimum wage in Georgia is $1.25. SUPPORT FREE TRADE!”

Evidence that the Canada-U.S. Free Trade Agreement hurt Canada can be found in the village of Weston, in the old City of York, and on Lakeshore Boulevard through the old village of New Toronto. These areas used to be strong working-class neighbourhoods fueled by factories susceptible to free trade competition from cheaper factories and non-union workforces south of the border. When the trade barriers fell, the factories shut down, the low-skill workers were left unemployed, and the working class neighbourhoods of Toronto developed into ghettos. All of this was predicted.

What was also predicted, by proponents of free trade, was the growth of innovative industries, fed by Canada’s highly educated workforce. It would take longer for these innovative industries to replace the jobs vacated by the low skill factories, but the jobs would come. Niagara’s wineries, which greatly feared Free Trade, are now producing wines that are the envy of the world. Waterloo and Ottawa battle for the title of Silicon Valley North. Even as the tech-bubble burst in 1999, many of Canadian high-tech companies survived on the strength of their innovative products. RIM’s Blackberries are the prized possesions of U.S. Congressmen.

So, perhaps history has proven Brian Mulroney right. Free Trade demolished those Canadian industries that weren’t prepared to compete, but it gave innovative Canadian companies access to a much larger market. There may have been short-term pain (and we’re still suffering from that pain), but there have also been long-term gains. The pain from the Canada-U.S. Free Trade agreement peaked in 1992, but since then the job growth in Canada has been fueled primarily by companies which have access to American markets, but which depend upon high-priced, highly-educated Canadian workers.

You’ll have to forgive my incredulity, as I was a staunch opponent of Free Trade in 1988, and to NAFTA in 1993. But facts are facts.

Now consider the Canada-U.S. Free Trade Agreement from the American perspective. The dropping of protections allowed low-priced, low-skill jobs to migrate south of the border. The “giant sucking sound” that Ross Perot so feared in 1992 first came in 1988 from places like Georgia and Mississippi. For a while, these states benefitted from the infusion of these jobs.

But then George H.W. Bush pursued a free trade agreement between Canada, the U.S. and Mexico. Canadian opponents to Free Trade in 1988 geared up for the fight against NAFTA in 1993, expecting the economic damage of the deal to amount to more of the same and even worse. But the damage had already been done. For Canada, it couldn’t get much worse. It could, however, get a lot worse for Georgia and Mississippi and other American states who had succeeded on low-skill, low-wage, low-regulation businesses.

Put another way, there were probably very few Canadian companies so precariously placed that they could survive competition from low-priced American factories, and not survive competition from even lower-priced Mexican factories. Canada had already gone through its transformation and was emerging with an economy built upon a highly-educated, innovative workforce. The United States had slurped up low-skill jobs during the Canada-U.S. Free Trade deal, and was about to give it all away to its southern neighbour.

Back in 1996, Erin found work in full-employment Omaha, which had a staggeringly low unemployment rate of 3%. But the job she found was a phone clerk for First Data; exceptionally menial, low-priced labour. (When a merchant anywhere in North America called because your credit card purchase had been declined, Erin was at the other end of the line. Oh, joy!) A couple of years later, there was an immigration bust on a number of Mexican workers in the Omaha stockyards. One of the proponents of the immigrants was the employer himself, whose work was too messy and too low-paying to be filled by American citizens. Jobs abounded in this environment, but not jobs that would stand up to Mexico should all the protections drop.

It’s telling to see that the greatest needs cited in Canadian immigration circles today is for highly-skilled, highly qualified workers. South of the border, American companies are screaming for low-skilled, low-wage Mexican workers. The result: those American companies may not be staying in America much longer. Those that left or are leaving have contributed to the weakness of the American economy.

If this is indeed the case, then America is going through a transformation. The Free Trade Agreement is sending jobs south to Mexico, but it’s also creating hundreds of millions of consumers eager for American (and Canadian) high tech product. Perhaps when America’s jobs situation reverses, the jobs that will lead the charge back will, like Canada, be high-skill, high-tech workers in cities and states which have a strong education system and a high quality of life.

Only time will tell.


Conclusions

The reality of free trade is that there are few, if any, protections keeping companies in Toronto instead of relocating to New York, Chicago and Cleveland. When Toronto started to recover from the economic recession of the early nineties, the GTA was blessed with considerable international investment. Why did companies choose to locate in Toronto, which had tax rates as high or higher than competing American cities just a day’s drive away? Surveys suggested that these companies looked towards quality of life before taxation. The Greater Toronto Area had the skilled workforce. It had the strong infrastructure. It had an effective transportation system (road, rail and airports) and the area was laying the foundations for the information revolution. Similar factors are attracting business to Calgary, Vancouver, Montreal and southwestern Ontario.

It is true that governments don’t create national wealth, the people do. But governments do shape how that wealth is created, sometimes even intentionally. Governments can limit growth, or they can channel it into new areas. Government can also help provide the tools for the people to build that growth. How did Canada avoid the recession that hobbled the United States? I suspect the secret to our success may be a combination of our prudence, our diversity, and the maintenance of our economic infrastructure. When the economic road got rough, we didn’t throw our hat in with the lowest common denominator industries facing stiff competition from Mexico. When fiscal factors turned in our favour, we refrained from going on a complete spender bender and started paying down the debts we incurred in the 1970s. And through it all, from the seventies downturn to the nineties recovery, we maintained a strong education system and encouraged the arrival of skilled immigrants. Like Ireland, we are attracting jobs because of the quality of our workers.

Canada may not have found its prosperity by any legible road map, but we have stumbled upon an economy that pays well and depends upon a healthy and highly educated workforce. To keep this economy functioning will require further prudence. We need to ensure that the education system is maintained at the highest possible level, that municipal infrastructure continues to be built and maintained, and that our agriculture and resource-based industries continue to have access to the burgeoning American and Mexican marketplace (though it would probably be prudent to add as many other markets as possible throughout the world). And we need to cut away at the debt millstone around our necks, for as long as we are able to. For this, we must not be enticed to cut our advantages by imprudent spending or the prospect of a quick and dirty tax cut.

It means vigilance, to make sure that neither we nor our government gets too complacent. It seems we arrived in this economy by luck as well as by skill. We’ve had years of good growth, through years when we had no business growing.

This sort of situation invites complacency. The economic miracle won’t go away if we speak of it, but it might if we don’t.


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