15.4 - Trade Policies
 Early Canadian Trade Policy
 The National Policy
 In 1879, Canada’s first prime minister, Sir John A. MacDonald
instituted a wide-ranging tariff policy based on the infant industry
argument for trade protection
 This was done to prevent low-priced American competition
 Due to this policy, American manufacturers chose to “jump the
tariff wall” by setting up branch plants in Canada, which allowed
them to continue to sell in Canadian markets
Early Canadian Trade Policy cont’d
 The Great Depression
 When output and employment are falling, domestic producers
see trade barriers as a way of maintaining their sales despite
shrinking markets
 This made foreign countries retaliate by placing trade barriers
on their own exports
 All countries were made worse off by this decline in world trade
 Now, countries know, that even in an economic downturn, it’s
not a good idea to put up trade barriers with other countries,
because it will make everyone worse off
General Agreement on Tariffs &
Trade
 In 1947, Canada was one of 22 nations that signed the General
Agreement on Tariffs and Trade (GATT)
 In 1995, GATT was replaced by the World Trade Organization
(WTO)
 Through negotiations, both tariff and non-tariff barriers have been
gradually reduced
 Average tariffs in the 1930s were above 50% and have since then
fallen to below 5%
General Agreement on Tariffs &
Trade cont’d
 The rapid expansion of manufacturing in emerging economies is
one of the reasons Canada’s natural resource suppliers had a
boom in prices (in mid-2000s)
 Countries like China and India are gaining comparative
advantage in the production of many manufactured goods and
services
 Results for the world as a whole are good, but there will be
painful adjustments in the short-run in established economies
like Canada
Recent Trading Blocs
 A trading bloc is a relatively small group of countries involved in
a trade agreement
 3 types:
 Free trade area
 Customs union
 Common market
Free Trade Area
 Trade within a free trade area is tariff-free
 Examples include NAFTA (North American Free Trade
Agreement)
 Among Canada, USA & Mexico
 Largest trading bloc in the world
is the free trade established in
2010 between China and the
ten-nation Association of
South-East Asian Nations
Customs Union
 A group of countries that have agreed to charge the same
import duties as each other and usually to allow free trade
between themselves.
Common Market
 A group of countries imposing no duties on trade with one
another and a common tariff on trade with other countries.
 Best example is the European union (EU), formerly known as the
European Economic Community (EEC)
 ECC was first formed in 1956 by six countries
The Auto Pact
 The Auto Pact of 1965 was an example of free trade in the area
of autos and auto parts
 The pact was beneficial for the 3 companies involved: GM, Ford
and Chrysler
 They wanted at least 50% of the car sales in North America
 This allowed their costs/prices to fall, employment to rise, and the
Canadian economy to rise as a whole
 In 2000, Japan and EU challenged the Auto Pact which led to
the World Trade Organization (WTO) decision telling Canada
that the Auto Pact broke International Trade Rules
 Auto Pact is no longer in effect, but it was an example of how a
free trade area can be limited to a particular sector
 2 of the 3 Big companies actually had to be saved from
bankruptcy in 2008-09 recession
The Free Trade Agreement
 Canada-US Free Trade Agreement (FTA) – includes trade in
virtually all products between 2 countries
 Signed by Canada and the United States in 1988
 http://www.cbc.ca/archives/categories/economy-business/tradeagreements/canada-us-free-trade-agreement/free-tradeagreement-signed.html
 Prime Minister Brian Mulroney’s Progressive Conservative
government negotiated the treaty to increase economic growth by
obtaining secure, stable market access to Canada’s largest trading
partner
The Free Trade Agreement cont’d
 PROS:
 Benefits occurs when you have increased specialization
 Reduces the risk of American protectionist measures against
Canadian exports
 CONS:
 Loss of political sovereignty for Canada
 Loss of Canadian jobs – branch plants close in Canada so
American companies can centralize their production and take
advantage of increasing returns to scale
Effects of the FTA
 Both countries experience expanding trade flows
 Canada exported mostly in manufacturing industries
 Office, telecommunications equipment, paper
 Canada’s imports grew in merchandise industries
 Processed food, clothing, furniture
 Short-term adjustment costs: workers who lost jobs in formerly
protected industries were now getting jobs in expanding
export industries
The North American Free Trade
Agreement
 NAFTA came into effect on January 1,
1994, creating the largest free trade
region in the world
 Generates economic growth and helps
raise the standard of living for the people
of all three member countries
 By strengthening the rules and
procedures governing trade and
investment, the NAFTA has proved to be
a solid foundation for building Canada’s
prosperity and has set a valuable
example of the benefits of trade
liberalization for the rest of the world
The North American Free Trade
Agreement cont’d
 Critics say there is a problem of including a country with a low
GDP (Mexico) with 2 wealthier countries (Canada and US)
 EX. Companies may move to Mexico to take advantage of cheaper
labour
 Mexico also has a lax enforcement of labour and environmental
standards
 To counteract this, two-side
agreements to NAFTA were
instated
 Two NAFTA members can
set penalties on the third
member if that country does
not enforce its labour and
environmental laws