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Free trade and protection: the U.S.- Canada case.


Few issues arouse so many mixed feelings of fervor and trepidation in Canada as the question of free trade between Canada and the United States. The fervor stems from the much touted argument of neoclassical economists, embraced by the current Conservative government of Canada, that a free-trade arrangement will produce substantial gains to Canada in real income and employment through unfettered access to the world's richest market. The trepidation comes from concern that free trade may undermine one of the central objectives that led to the establishment of Canada as a nation: to create and preserve a social and political culture different from that of the United States. Concern over cultural domination is nowhere more real than in Canada, given the facts that the United States accounts for about three quarters of Canadian trade, 90 percent of Canadians live within 200 miles of the U.S. border, and two thirds of Canadians speak the lingua franca of the United States, itself the greatest purveyor of market-oriented culture.

History since about the mid-nineteenth century bears eloquent witness to Canada's love-hate relationship with its neighbor to the south. The debate over free trade dates back to 1854 when Canada, after losing preferential treatment as a British colony following the abolition of the Corn Laws in 1846 in Britain, signed a reciprocity treaty with the United States. However, the treaty, entailing free trade in primary products, was short lived, being abrodated on American request in 1866.

A new era began in 1879 when a Conservative government under the leadership of John A. Macdonald adopted protectionist measures to promote and sustain an indigenous manufacturing sector. The struggle over trade policy, however, continued, and by the turn of the century a free-trade arrangement with the United States was concluded under the auspices of the Liberal Party. This in turn gave rise to an alliance between the capitalists of central Canada and the Conservatives which helped bring down both the free-trade deal and the Liberal government in 1911.

Washington's passage in 1930 of the notoriously protectionist Smoot-Hawley bill led to tariff wars between the United States and its trading partners. A truce, involving tariff reductions, was agreed to by the United States and Canada in 1935; and later, after the Second World War, another free-trade deal between the two countries was nearing completion during 1947-48. However, Canadian Prime Minister McKenzie King, after much pondering, shelved the agreement for fear of being labeled the first prime minister to sell out Canada's national interests.

Canadian policies since the 1960s reflect the growing contradictions of trying to live distinct from but in harmony with its giant neighbor. Through the Auto Pact of 1965, Canada and the United States moved to a sectoral free-trade deal in automobiles--a deal facilitated by the fact that in both countries this sector is dominated by the three big U.S. multinational auto companies. The forces of economic nationalism, however, did not take a back seat. Growing concern over foreign, especially American, ownership in Canada, led to the establishment in 1971 of the Canada Development Corporation to promote Canadian ownership; the Foreign Investment Review Agency in 1974 to control foreign investment; the national energy program in 1981 to promote Canadianization of the energy sector; and a host of policies, to be discussed later, to foster domestic "cultural industries.'

Since the Conservatives came to power in 1984, the pendulum has been swinging back to the other side. Many of the nationalistic policies have fallen into disfavor: most of the restrictions on foreign investment have been removed, and the national energy program has been abandoned. Above all, Conservative Prime Minister Mulroney has rekindled the debate over trade policy by embarking on negotations toward a comprehensive free-trade deal with the United States.

Economic Nationalism versus Free Trade

The question of free trade involves not only economic issues but also political forces. Several factors are involved in the role of politics in international trade. In this regard, it is instructive to recall what Marx and Engels had to say in the Communist Manifesto stressing the revolutionary role of the bourgeoisie in expanding the market for commodities and giving to production and consumption in every society a cosmopolitan character. Also in his "Speech on the Question of Free Trade' (1848), Marx favored free trade rather than protectionism on the ground that free trade would hasten the process of social revolution. However, as documented by Kenzo Mohri (Monthly Review, April 1979), in later years Marx became less optimistic about the historical role of free trade. Thus in a letter to Engels (November 1867), Marx argued, in the context of the Irish situation, in favor of self-determination and independence, an agrarian revolution, and protective tariffs against England.

Marx's observations about the dependent economy of Ireland are relevant to the prevailing Canada-U.S. economic relationship. A few well known facts will illustrate the degree of dependency of the Canadian economy. The incidence of foreign ownership and control of business enterprises in Canada is uniquely high among the industrialized countries, amounting in 1981 to 45 percent in manufacturing and 30 percent in mining. The United States accounts for about 75 percent of Canada's exports and 70 percent of its imports. About two thirds of merchandise imports are in the hands of foreign-controlled firms.

The disaggregated picture of Canada's trade with the United States is equally revealing. Canada has a surplus trade balance in primary commodities but a deficit in finished manufacturing products1 and "cultural goods' (books, magazines, artistic products, and films). More importantly, in non-merchandise transactions (services and investment incomes) with the United States, Canada has a huge deficit--about $12 billion in 1985.

Any government attempt to alter the status of economic dependence is interpreted by neoclassical economists as a reprehensible form of economic nationalism. Thus, speaking of economic nationalism in Canada, one economist writes:

Societies where nationalism exists invest in nationality, and the rate of return on this investment is in the nature of a redistribution of income in favor of some part or all of the middle class, not in the creation of the maximum possible wealth.2

That nationalistic policies benefit the middle class or what neoclassical economists are wont to call "the vested interests' is hardly surprising. These economists, however, are reluctant to push their arguments further and fail to see the role of class interests and conflicts in determining not only protectionist policies but also laissez-faire and free-trade policies. On the one hand the U.S. government, for example, has condemned nationalistic policies of other countries, including Canada, as hindrances to free trade; on the other, it has fostered nationalism at home. Economic warfare in the name of national security against Nicaragua, Cuba, and Libya provides only extreme examples. That the U.S. "military-industrial complex' thrives on the ideology of national chauvinism rather than benign internationalism is hardly noticed by neoclassical economists.

Role of the State in International Trade

The question of free trade has different ramifications in the era of monopoly capitalism and pervasive state interventions in the economy than it had in the era of competitive capitalism or even mercantile capitalism. Various government interventions in the form of taxes, direct and indirect subsidies, procurement policies, and technical standards concerning tradeable products, have rendered the meaning of free trade barriers and protectionism to trade increasingly ambiguous and contentious. Among the industrialized countries including Canada and the United States many of the impediments to international trade take the form of non-tariff barriers brought about directly or indirectly by state interventions that serve not only economic but also political and social objectives.

Furthermore, the problem of drawing the line between government policies that constitute indirect subsidies and those that do not often becomes a political one. The recent dispute between Canada and the United States over the trade in forest products illustrates the point. U.S. lumber producers have been complaining that low provincial government stumpage fees on Crown land timber in Canada constitute a government subsidy and have asked the U.S. Commerce Department to impose countervailing duties of up to 65 percent on Canadian softwood lumber imports. Although in May 1983 the Commerce Department had found no evidence of government subsidies, it reversed its ruling in October 1986 in response to growing protectionist pressures, stating that Canadian lumber exports were being subsidized at the rate of 15 percent. In order to forestall U.S. countervailing duties the Canadian government agreed on December 30, 1986 to impose a 15 percent export tax on softwood lumber shipped to the United States. According to the agreement, which has given rise to conflicting interpretations, the United States will monitor closely the operation to insure that the amounts collected through export taxes are not used to benefit producers or exporters of Canadian lumber. Furthermore, any change in export tax will require the approval of the U.S. government.

These terms outraged not only the opposition parties in Canada but also some who favor the ongoing free-trade negotiations with the United States. Thus the Toronto Globe and Mail, a conservative national newspaper which supports the free-trade deal, wrote on January 3, 1987, in an editorial titled "A Bully's Victory' the following:

The United States is closing in against the world, including Canada. Fair trade now means managed trade, and if the United States has to change legal definitions, harass traditional suppliers, and threaten broader relationships to defend itself, it will.

Indeed, it is hardly surprising that as the leading imperialist power, the United States strives to manage its trade and set the rules of the game, often contradicting its own rhetoric about free trade.3

U.S. and Canadian Perspectives

U.S. viewpoints about a bilateral free trade arrangement are generally different from those of Canada. For Canada the object of free-trade negotiations is to "secure and enhance' access to the big American market, while keeping "cultural industries' and the Auto Pact off the negotiating table. The United States on the other hand calls for "fair trade,' which essentially implies abolition of government subsidies for tradeable goods as well as services including the cultural ones, fundamental changes in farm marketing boards, and abolition of barriers to foreign investment.

The current inclination of the United States to favor bilateral free-trade arrangements over multilateral agreements through the General Agreements on Tariffs and Trade (GATT) may be a bargaining ploy to be used in its disputes with the EEC and Japan. This is reflected in part in the low priority accorded to the free-trade talks with Canada in official U.S. circles.

Domestic politics and the global economic and strategic interests of the United States are likely to dictate the life expectancy of a bilateral free-trade deal with Canada, should there be one in the near future. Even during a free-trade regime, it is unlikely that Canada could escape U.S. protectionist pressures against Canadian products such as lumber, uranium, steel, and natural gas. As Harvard economist Robert Reich cautions a Canadian audience: "You cannot change American politics with the stroke of a pen. . . . There is no way Congress is going to give away and kind of authority to proscribe what it considers to be unfair trade.' (Toronto Star, May 28, 1986)

The Macdonald Commission on the Canadian economy as well as most of Canada's "think-tanks' have concluded that, given GATT's problem in dealing with the diversity of the motives of the participating countries, practical wisdom calls for a bilateral trade agreement with the United States. Recently, however, the bilateral trade negotiations have engendered protectionist sentiments in both Canada and the United States and have sharpened differences of opinion among the Canadian provinces. Accordingly, the case for a bilateral trade deal has been waning, while support for a multilateral arrangement within the framework of GATT is gaining ground.

The Current Political Climate

Another noteworthy factor, perhaps the most important one, is the political milieu in which the free-trade issue is being debated. The present Conservative government of Canada is pursuing not only free trade but also embracing much of Reaganomics: less government, more deregulation, anti-labor policies, reduction of social welfare and cultural programs, greater incentives for the rich. Dominant segments of the Canadian capitalist class today seem eager to support a free-trade deal in the hope of getting access not only to U.S. markets but also to lucrative military contracts of the Pentagon. More importantly, for the Canadian capitalist class which finds Canadian taxes too high, labor policies too pro-union, and unemployment insurance benefits too generous, free-trade implies free rein for the market.

However, as Mel Watkins contends:

For a medium-sized and politically moderate Canada, harmonization with a large and politically reactionary United States is harmonization into; our policies, which are at the heart of what makes Canada distinct from the United States, could be obliterated to conform to its free-market deregulated world.4

Already, there is evidence of the process of harmonization. The Canadian government, under U.S. pressure, has agreed to allow the U.S. mega-conglomerate Gulf and Western to take over Prentice Hall, a publishing company operating in Canada. The Canadian government has also modified patent laws to favor U.S. multinational drug companies. Further, in order to create a favorable impression in Washington, the Canadian government is hesitant to differ loudly with the United States on foreign policy questions. By contrast, for the United States there is little reason to reciprocate. Indeed, the Reagan administration has been indifferent to the most contentious issue between Canada and the United States--the acid-rain problem. Contrary to an earlier commitment to spend $5 billion on acid-rain programs, Reagan allotted a paltry $287 million in the latest budget.

Free Trade and Cultural Dependency

It hardly needs to be emphasized that in capitalist societies culture has increasingly become an "industry' organized by "cultural capitalists.' It is natural in such societies that the cultural capitalists, while supplying cultural commodities and services on national and international markets, would be guided by the profit motive. As Marx and Engels noted in the Communist Manifesto, "The bourgeoisie has stripped of its halo every occupation hitherto honored and looked up to with reverent awe. It has converted the physician, the lawyer, the priest, the poet, and the man of science into its paid wage laborers.'

In the context of today's North America the list of paid laborers would comprise virtually all cultural occupations including those of musicians, painters, actors and actresses, ballerinas, hockey and football players, and writers. The economic profitability of cultural industries based on paid labor not only serves the interests of the cultural capitalists but also redounds to the benefit of the capitalist class as a whole by helping to maintain cultural hegemony over the working class.

Another phenomenon that is becoming increasingly evident, as foreshadowed by Marx and Engels, is that internationalization of capitalism inevitably entails internationalization of bourgeois culture. In the age of U.S. hegemony, internationalization of culture essentially implies the Americanization of world culture. Although American consumer products may have lost some of their attractiveness, the allure of American cultural goods and services (music, TV programs, movies, audio-visual materials, magazines, and books) continues unabated throughout the world.5 And the influence of American culture is nowhere as egregious as in Canada. Not surprisingly, therefore, the proposed free-trade arrangement has triggered debates in Canada about whether cultural industries should be included in the arrangement and whether free trade would reinforce cultural dependency in Canada. In order to comprehend the Canadian concern about cultural issues, it is useful to look into the foreign influence on such cultural industries in Canada as broadcasting, film production and distribution, recording, and publishing.

Broadcasting in Canada, in sharp contrast to the United States, has been considered to be a public service directed and controlled in the public interest by the Canadian Radio-Television and Telecommunications Commission (CRTC). The distinguishing features of Canadian broadcasting policy are: (1) the existence of the government-owned Canadian Broadcasting Corporation which can be regarded as the heart of Canadian culture in that it provides this country's writers, actors, directors, and technicians a forum in which to develop their skills and reach national and international audiences; (2) Canadian-content regulations imposed by the CRTC on radio and television stations;6 and (3) tax policies favoring Canadian broadcasters.

In television the reality, however, bears little relation to the objectives of the founders of the CBC. The CRTC has failed to cope with changing communication technology. It began licensing cable stations to import and distribute all major U.S. networks, failing to maintain a balance between importation and domestic production. A few facts illustrate the problem: (1) In 1984 only 28 percent of all English-language television programs available in Canada were Canadian. In large cities the figure is even lower. (2) Only 2 percent of programs in the category of drama are Canadian. (3) Anglophone teenagers spend only 20 percent of their viewing time on Canadian programs. (4) Canada's largest anglophone cities have more American TV on tap than comparable cities within the U.S.

Given the domination of Canadian airwaves by foreign programs, most of it American, the 1986 Caplan-Sauvageau report of the Task Force on Broadcasting Policy made a number of recommendations. It proposed that the CBC should gradually phase out the use of commercial American TV programs which are already available on other networks. The task force also proposed that the CBC operate an all-news and information channel and that a second channel deal in children's shows, regional material, films, and National Film board documentaries. Further, the task force proposed that private TV stations and networks be required to commit greater resources to Canadian programs.

Other Cultural Industries

Film production is still a relatively small industry in Canada, generating gross revenues of only $154 million in 1982. Television commercials and programs accounted for about 59 percent of revenue, feature films only 13 percent. In recent years the federal agency Telefilm, the successor to Canadian Film Development Corporation, has become the most important player in the Canadian film and television industry. With a yearly fund of more than $100 million, it provides grants and subsidies to independent Canadian producers.

Film distribution in Canada is heavily dominated by foreign-controlled firms, mostly American. In 1983, the 20 foreign-controlled distributors accounted for about 68 percent of gross revenue, while the 93 Canadian-controlled firms took in the remaining 32 percent of profits.7 The dominance of foreign-controlled distributors is coupled with the fact that about 97 percent of films shown in Canada are foreign, mainly American.

The situation in the publishing industry is not much different. Of the $1.2 billion worth of books sold in Canada in 1983, about 78 percent of the revenue went to foreign companies. In 1983, more than 20 percent of Canadian firms reported financial losses, even though federal and provincial governments provided the publishing industry with grants of $11.3 million.

It is essential to emphasize several points concerning the cultural industries. First, issues in the free-trade debate are critical to the Canadian broadcasting and publishing industries. By contrast, the free-trade issues are at best peripheral and trivial to the U.S. cultural industries, which do not need protection from Canada. Second, given the pervasive dominance of American cultural industries in Canada, it is hardly surprising that the Canadian government should strive to maintain a modicum of cultural distinctiveness through such public agencies as the CBC, the National Film Board, and the Canada Council, and through grants and subsidies to private cultural industries. Third, state intervention to promote "national culture' is of course regarded by diehard neoclassical economists as hindrances to the market mechanism and free trade. As Canadian neoclassical economist Harry Johnson put it, "What the nationalist sees as a "penetration' of Canada by the United States, the economist sees as an expression of the preference of an opulent society.'8 This argument, however, is essentially based on the neoclassical doctrine of "consumer sovereignty'--a notion that is considered a myth even by many liberal economists.9

Finally, one does not have to be a neoclassical economist to perceive the potential pitfalls of cultural nationalism. There is little merit in protectionist measures that benefit a few cultural capitalists and professionals who merely mimic American cultural products and services. From a Marxist perspective, the problem is not American culture per se but the capitalist mode of production that underlies it.

Concluding Remarks

In the age of monopoly capitalism, international trade is increasingly managed and coordinated not by the "invisible hand' of the market but by the "visible hands' of states and big corporations. The proposed free trade arrangement between Canada and the United States is no exception. The scope, terms, conditions, and durability of any free-trade deal are likely to be determined by the economic interests and political power of the involved fractions of the ruling classes in the two countries.

Free trade, however, cannot resolve the actual and potential crises of capitalism. Furthermore, from a socialist perspective, the fundamental question is whether a free-trade arrangement would tend to enhance the political power of the working class in either Canada or the United States or both. In this regard, there is little reason for optimism. Unfortunately, the American and Canadian ruling classes seem to be more united than the working classes of the two countries. Indeed, in recent months Canadian labor unions have moved away from U.S.-based international unions which have been relatively less militant against their own capitalist class.

The free-trade debate should not be allowed to submerge more fundamental issues relating to working conditions, social welfare, and environment that matter most for working men and women. Finally, for the Canadian working class nationalistic struggle against American capital and culture, however justified, can never be an adequate substitute for a direct struggle against capitalism itself.

1. In the presence of multinational corporations, official trade statistics can be misleading. For instance, Canada has a surplus in motor-vehicles trade with the United States, but motor vehicles in Canada are overwhelmingly produced by the three big U.S. multinational companies. For discussion on U.S. multinationals' investments abroad and U.S. trade deficits, see Harry Magdoff, Monthly Review, January 1979.

2. Albert Breton, "The Economics of Nationalism,' in Journal of Political Economy, 1964, p. 386.

3. Recent trade problems between the United States and the Caribbean countries provide another example. In contradiction to the much publicized Caribbean Basin Initiative, the United States has arbitrarily cut import quotas for sugar by 41 percent with devastating effect on some of the fragile Caribbean economies.

4. Mel Watkins, "Ten Good Reasons to Oppose Free Trade,' This Magazine (April 1986), p. 15.

5. For a detailed account see Armand Mattelart, Multinational Corporations and the Control of Culture (Sussex: The Harvester Press, 1979).

6. Canadian-content regulations are determined by various formulas, but briefly, 60 percent of television programs must qualify as Canadian, and at least 30 percent of musical compositions a radio station broadcasts must qualify as Canadian.

7. Data concerning the cultural industries are taken from various publications of Statistics Canada mainly Arts and Culture: A Statistical Profile and Culture Statistics.

8. H.G. Johnson, "Problems of Canadian Nationalism,' in his The Canadian Quandary (Toronto: McGraw-Hill, 1963) p. 13.

9. For instance, among others, John K. Galbraith. See "Economics as a System of Belief,' in his Economics, Peace, and Laughter (Boston: Houghton Mifflin Company, 1971).
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Author:Islam, Sadequl
Publication:Monthly Review
Date:Nov 1, 1987
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