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Jean Chretien's continental legacy: from commitment to confusion.


Assessing a prime minister's legacy presents analysts with a logical and empirical minefield. Of the many things that happen during prime ministerial tenures, only some can be attributed to their personal agency. In those international dossiers in which a prime minister has taken the lead, assessing the legacy requires making judgments about the foreign partner's contribution to the record. For instance, the contrast between Jean Chretien's productive rapport with President Bill Clinton and his obvious difficulties with President George Bush tells us that any appraisal of the former Prime Minister's management of Canada's political relations with the United States would require that as much attention be paid to the goals and behaviour of the two Americans as to the Canadian head of government.

Evaluating Jean Chretien's stewardship of Canada's economic relationship with the United States is more straightforward because of the concentration of power in the hands of the Canadian prime minister in general, (1) and because of the central role he played in causing the Liberal party's historical revirement toward the continental free trade formula that had been its mantra a century before. In 1891, Wilfrid Laurier, the Liberal Party of Canada's aspiring leader, failed to dislodge Sir John A. Macdonald's government in an election campaign focused on trade reciprocity with the United States. Twenty years later, as Prime Minister, Laurier came to political grief trying to convince his electorate of the blessings that the free trade agreement he had negotiated with Washington would bring the Canadian economy.

Laurier's successor, Mackenzie King, learned the bitter lesson of 1911, though he flirted with a new free trade agreement with Washington on the eve of his retirement. King's successors, Louis St. Laurent and Lester Pearson, were on occasion, branded continentalist by their critics--the former for such regionally unifying projects as the St. Lawrence Seaway (1952), the latter for signing the sectoral Autopact (1965)--but neither came close to advocating outright economic integration. As for Pierre Trudeau, who was the least interested in the United States of all Canadian prime ministers in the twentieth century, he became identified as a nationalist for endorsing the "Third Option" (1972), which was an effort to reduce Canada's economic dependence on the U.S. by diversifying its trading relationships.

Jean Chretien's continentalist proclivities were the natural product of his familial roots in Quebec's resource-rich hinterland, whose denizens esteemed American investors for developing the region, and appreciated the United States as its natural market. The anti-protectionist instincts of the "the little guy from Shawinigan" were seasoned in politics through his mentoring on the Liberal government's continentalist wing and through his connecting with the business communities--in Montreal, then Calgary, and finally Toronto--during his tenure of major economic portfolios during the years that Pierre Trudeau was Prime Minister (between 1968 and 1984).

His views were consistent with the fostering of continental economic integration that was advocated by another former Trudeau Cabinet colleague, Donald Macdonald, in his 1985 royal commission report. The "Macdonald Report" declared the Trudeau era's Keynesian and interventionist approach to economic development a failure, warned that Canada was losing ground in an ever-more competitive global economy, identified growing U.S. trade protectionism as an imminent danger to Canada, and argued that secure and privileged access to the world's largest, most dynamic economy would solve Canada's basic economic problems. The recently elected Progressive Conservative Prime Minister Brian Mulroney, implemented Macdonald's proposals with alacrity by negotiating the Canada-United States Free Trade Agreement (FTA) with Ronald Reagan's Administration in 1987. The FTA was signed into force following a dramatic electoral victory in 1988 over the Liberals led by John Turner, who had attacked free trade as the death warrant for Canadian sovereignty.

No sooner had he displaced Turner as Liberal leader in 1990, than Chretien repudiated Turner's opposition to free trade in a carefully managed party thinkers' conference held in Aylmer, Quebec, in 1991. There, such trade liberalizers as Roy MacLaren exulted for having won the day over nationalists like Lloyd Axworthy.

Practised as he was in the art of politics, Chretien did not identify himself as a free trader. While Leader of the Official Opposition, he had criticized Mulroney's second venture in continental integration, the North American Free Trade Agreement (NAFTA). His attacks on NAFTA led many to expect him to reject the accord if he managed to defeat the Progressive Conservatives. Indeed, the Liberal Party of Canada's election platform of 1993 tore into the "flawed" FTA and NAFTA for failing to secure access to the U.S. market. It promised "[a] Liberal government will renegotiate both the FTA and NAFTA to obtain: a subsidies code; an anti-dumping code; a more effective dispute resolution mechanism; and the same energy protection as Mexico." Actual abrogation of the FTA and NAFTA would only "be a last resort if satisfactory changes cannot be negotiated." (3)

Once elected Prime Minister, however, Chretien showed his true continentalist colours by speedily ratifying the trinational deal. In obvious contrast with his American counterpart, he did not deliver on his promise to seek NAFTA's reform. While Bill Clinton had insisted, once sworn in as President of the United States, on renegotiating NAFTA's labour and environmental provisions, Chretien was satisfied by a face-saving letter, with no legal weight, that expressed Ottawa's position on some aspects of NAFTA, and was signed by both the Canadian and American heads of government. Chretien did not demand that NAFTA abolish anti-dumping and countervailing duties and so create a real free trade area. Instead, he completed the neo-conservative revolution that Brian Mulroney had begun by entrenching the supra-constitutional framework that restructured Canada's position in the global economy.

The men he appointed as ministers for international trade--first Roy MacLaren, then Sergio Marchi, and ultimately Pierre Pettigrew--were staunch spokesmen for the trade-liberalization panaceas championed in the Department of Foreign Affairs and International Trade. Even in 1997, when he appointed the nationalist Lloyd Axworthy to be Minister of Foreign Affairs and International Trade, there seems to have been a clear understanding that the left-winger from Winnipeg was to stick to foreign affairs and leave international trade to the ministrations of his free-trading colleagues. Under their evangelistic aegis, the Chretien government proceeded to ratify the World Trade Organization (WTO, 1995), to try engineering a Multilateral Agreement on Investment at the Organization for Economic Cooperation and Development, to negotiate a Canada-Chile Free Trade Agreement (CCFTA, 1997), to participate in continuing liberalization negotiations within the WTO, to play an active role in fostering the Asia-Pacific Economic Cooperation forum, and to interact vigorously on the working groups preparing to create a Free Trade Area of the Americas (FTAA).

In sum, trade liberalization, which was central for the restructuring of Canada's economic position in the global economy, can be directly attributed to Chretien's leadership. In evaluating it, we first assess NAFTA's narrowly defined economic results in the areas of trade and investment, productivity, and quality of life, and then examine its broader legal, political, and institutional dimensions in the areas of social and cultural policy, labour, and the environment. We will conclude with some reflections on the significance of Chretien's confused legacy for the future of the economic relationship between Canada and its neighbour, the global hegemon.


With the United States pursuing an aggressive trade policy in order to protect the intellectual property of its most powerful corporations, and with the consolidation of Europe as a self-contained trade and investment bloc, Canada, as a peripheral country with only one, if giant neighbor, had focused on securing access to this market of over 300 million. Ottawa's objectives in negotiating trade liberalization were clear--to reverse a decades-long decline in the Canadian economy's annual rate of growth, to close a widening productivity gap with the United States, and to enhance its citizens' standard of living. The high quality of Canadian statistics should make it comparatively easy to determine to what extent these objectives have been achieved. Whatever these outcomes, it is more difficult to determine what credit or blame the trade agreements deserve.

A. Trade

An analysis of the trade figures reveals that NAFTA has indeed coincided with a strong increase in bilateral Canada-U.S. merchandise trade. Canada's merchandise exports to the U.S. have increased by over 200 percent since the early 1990s (4) (or 12 percent per year) reaching $360 billion in 2000. (5) American merchandise exports to Canada also grew under NAFTA, up 150 percent from 1990 levels, (6) and reached $268 billion in 2000. (7) The resulting $92 billion surplus finances Canada's trade deficit with the rest of the world. The sheer magnitude of Canada-U.S. trade volumes is demonstrated in the estimated $1.9 billion dollars of goods and services that cross the Canada-U.S. border each day. (8) Americans trade more with Canada than with the fifteen European Union countries combined, (9) and a total of thirty-eight states have Canada as their primary export market. (10)

Within the context of an overall increase in Canada-U.S. trade, the relative role of FTA- and NAFTA-induced tariff reductions remains unclear. While Daniel Schwanen's analysis of the disaggregated data reveals an increase in America's share of Canadian exports for products that had been liberalized by up to twice as much (139 percent) as for those products that were already liberalized (65 percent) between 1988 and 1995, (11) a Canadian government working paper has shown that only 25 percent of the 200 percent total increase in two-way Canada-U.S. trade between 1989 and 2000 was directly attributable to a reduction in tariffs. (12) An historical analysis of the trade figures reveals that Canada-U.S. trade was already trending upward prior to the free trade agreements. Indeed, the continuing growth of Canada's trade dependency on the U.S. market was what discredited Pierre Trudeau's "Third Option" effort to diversify the country's trade patterns.

Beyond simple tariff reduction, other factors were involved in boosting trade. The steep devaluation of the Canadian dollar, which fell to US$0.63 in 2002, or 16 percent below its 1987 value, provided massive, if invisible, export promotion, making Canadian goods cheaper in the U.S. market. Since the devalued dollar also made U.S. goods significantly more expensive in Canada, the major increase in U.S. imports and their concomitant loss of Canadian jobs would have been far greater without this veiled protection. Another factor increasing Canadian exports was a burgeoning U.S. economy--which grew in real terms from US$4.9 trillion in 1980 to US$9.3 trillion in 2001 (13)--providing additional boosts to Canada's trade performance. With a cooling U.S. economy (2000-2003) and an appreciated Canadian dollar (2003), Canada's overall export performance experienced a modest decline from $360 billion in 2000, to $348 billion in 2002. (14)

Canadian government officials and the business-boosting media rarely miss an opportunity to interpret increased trade volumes as NAFTA's "unconditional success." (15) More trade is assumed to be the engine of economic growth, yet increased trade figures by themselves are not necessarily good news. Despite an increase in merchandise exports, Canadian economic growth rate continued its decades-long decline. The rate of growth had fallen from 5.3 percent in the late 1960s to 3.6 percent between 1975 to 1979, to 2.9 percent in the early 1980s. (16) Under free trade the slide continued to 2.0 percent from 1988 to 1997, (17) down to 1.5 percent in 2001. (18) When the Canadian economy outperformed G-7 countries with a growth rate of 3.4 percent in 2002, it managed the feat despite a decrease in exports, suggesting that Canada's destiny may not be as dependent on trade as proponents of trade liberalization think.

While increased Canadian exports to the U.S. were not enough to increase Canada's share of the U.S. market, (19) they reflect a further increase in the peculiarly open nature of the Canadian economy, (20) and also correspond to an increasing Canadian export dependency on a single market. By 1999, a full 86 percent of Canadian goods were destined for the U.S., up from 77 percent in 1988, (21) accounting for roughly 38 percent of Canadian GDP. As a result, Canada became more vulnerable to protectionist forces in Washington--a point driven home by the unilateral border closures on September 11, 2001, which caused panic in the continent's corporate boardrooms. No longer the unique concern of "dependency theorists," Canada's trade dependence on the U.S. has caught the attention of Canadian business. In a recent report published by the Canada West Foundation, diversifying Canadian export markets was included as one of its top policy recommendations. Similarly, Perrin Beatty, President of Canadian Manufacturers and Exporters, called for a reopening of the debate over diversification. 23 As Beatty put it:
 Our strong connection to our North American partners in not an
 excuse for ignoring the rest of the world.... To simply hitch your
 caboose to someone else's train is risky--it can be great when
 there is a powerful engine pulling you up the mountain, but it
 provides little protection if things start to go off the rails.

If big business was advocating some variant of Pierre Trudeau's Third Option effort to diversify Canada's trade from the United States, Jean Chretien's trade record cannot be considered unblemished.

B. Investment

Unlike Canada's trade performance, flows of foreign direct investment (FDI) have not met the expectations of NAFTA. Despite granting foreign investors the right of establishment, "national treatment," and the right to claim damages against federal, provincial, or municipal government measures that diminish their earnings, NAFTA failed to make North America in general, and Canada in particular, a relatively more attractive site for FDI. Under free trade, the NAFTA partners' share of global FDI fell sharply from 44 percent (1984-1988) (25) to just 28 percent (1994-2000). (26) Within the context of North America's overall decline, Canada's share declined by 25 percent, from 4 to 3 percent, (27) while Mexico's increased. In absolute terms, Canada's stock of FDI did increase, but at a slower rate than during the years before free trade. (28) Far from becoming a "magnet" for FDI as claimed by NAFTA's Trade Commission, (29) the North American continent seems "destined, through the joint forces of demography and catch-up, to be a smaller and smaller share of the world economy." (30)

While NAFTA coincided with a strong increase in bilateral flows of FDI between Canada and the U.S.--particularly in the 1990s by--2000, the relative importance of each country as a receiver of each other's FDI declined. Flows of Canadian direct investment abroad (CDIA) (31) to the United States increased by over 150 percent, from $60 billion in 1990 to $154 billion in 2000, (32) but such growth represented a decline in America's share of CDIA, from roughly 61 percent in 1990, (33) down to 50 percent in 2000. (34) Since part of the reason for increased CDIA, especially to the U.S., is the failure of free trade to guarantee secure access to the U.S., such a decline may indicate NAFTA's success in assuring Canadian enterprise that it can serve the American market from Canada without actually having to move there. To make this point, persistent anti-dumping and countervailing duties to protect domestic U.S. steel caused Canada's relatively more productive steel companies to place all new mills in the U.S.--to the benefit of American as opposed to Canadian steel workers. Ironically, this was interpreted positively as Canadian investment abroad, despite the fact that along with the outward-bound CDIA goes the high-tech, high-value-added jobs that are the dream of Ottawa's policy-makers.

Despite an increase in American FDI flows to Canada (which reached $186 billion in 2000, (35) or double the amount in 1994), Canada declined in importance as a destination for American FDI. Between 1990 and 2000, the proportion of total U.S. FDI going to Canada shrank from 16 to 10 percent. While this may seem reassuring to those concerned with foreign control of the Canadian economy, America's share of Canada's overall FDI stock actually increased 8 percent, from 64 to 72.2 percent from 1993 to 1999, while European and Japanese shares declined by 2 and 1 percent respectively. (36) In short, Canada represented a smaller part of total U.S. foreign direct investment, but this smaller part nevertheless represented a larger concentration of foreign direct investment in Canada.

Apart from influencing FDI stocks and flows, the impacts of the new rules governing investment under NAFTA have been significant. Canada has benefited from the increase in CDIA, which has supported a devalued Canadian dollar in improving Canada's current accounts, (37) provided government revenue, (38) and given Canada a presence abroad. (39) Theoretically, increased CDIA improved Canadian competitiveness by consolidating links with Canada's trading partners and by stimulating vertical linkages in the form of joint ventures and strategic alliances between foreign-controlled transnational corporations (TNCs) and domestically owned small- to medium-sized enterprises (SMEs). These claims, however, are extremely difficult to prove. By the same token, inward FDI is also supposed to increase Canadian access to technology, capital, and transnational innovation networks, but the secrecy surrounding internal corporate transactions makes verification of these propositions next to impossible.

Notwithstanding such benefits, inflows and outflows of FDI under NAFTA also carry some costs. Given the opportunity for cross-border reorganization and rationalization made possible by the new rules governing trade and investment under NAFTA, some firms have chosen to integrate their Canadian branch plants into the widened economic space of the parent company's production network, while others have chosen to relocate management, production and marketing functions--along with the associated jobs--to headquarters in the U.S. This prevents the forward and backward linkage effects necessary for regional clustering, since it favours the importing of inputs and exporting of unfinished goods within the global production network of the parent TNC. This model tends to create a maquiladora phenomenon with an enclave export sector that remains largely disconnected from the local economy.

A second model leads to a "hollowing out" of corporate Canada as the most important corporate functions (e.g. management, research and development) are relocated south of the border, leaving behind mere warehousing operations to distribute imports to the Canadian market. Apart from diminishing final demand linkages for professional and other services, increased FDI leads to increased concentration in the ownership and control of corporations, and oligopolization means less competition, less efficiency and monopoly pricing.

Ten years after Jean Chretien's decision to implement NAFTA, the debate over FDI has come full circle, with business--which pushed for freer trade and investment in the first place--expressing concern over the potential negative effects of "hollowing out." A report published by the Conference Board of Canada, for example, has warned, "the potential consequences of hollowing-out are too significant to ignore." (40) In May 2002, a Financial Post poll found 70 percent of Canadian CEOs in agreement that "hollowing out" contributes to the exodus of Canada's top executives and management personnel." Even the Business Council on National Issues (now the Canadian Council of Chief Executives)--a group that masterminded the move to free trade--has expressed concerns about the impact of FDI on corporate Canada. Given the lack of information about corporate decision-making available to the public, however, the debate over FDI and the ultimate shape of corporate responses to NAFTA remain unresolved.

C. Productivity

In the mid-1980s, advocates of trade liberalization argued persuasively that free trade would stimulate Canadian manufacturing productivity which, with access to a continental market offering substantial economies of scale, would soon rise to American levels. In the face of global competition, it was held that Canadian firms would be forced to adopt new technology, or else fail. Contrary to such predictions, however, the growth of Canadian labour productivity in manufacturing was slower than it had been in the years before free trade and did not even keep up with American productivity growth. While all G-7 members experienced a productivity gap with the United States, only Canada fell further behind. By 1996, Canadian productivity ranked fifth among the G-7, down from second place in 1976. (42)

Within the context of a world-wide productivity slowdown that began in the 1970s, information about Canada's productivity gap with the U.S. is particularly disputed. Most authors point to a growing productivity gap in Canadian manufacturing relative to the U.S. Jeffrey Bernstein, Richard Harris, and Andrew Sharpe, for example, have shown that Canada's productivity gap in manufacturing relative to the U.S. has increased by 17.3 percent--from 12.3 percent in 1994, to 29.6 percent in 2000, to 32.3 percent in 2001. (43) Most recently Andrew Sharpe summarized the economic research as follows:
 They all show that output per hour in Canada has always been below
 that of the United States, that the productivity gap has increased
 in the 1990s, particularly since 1994, and that the current gap is
 between 11 and 19 percentage points depending on the source of
 hours data used. (44)

In contrast, University of Toronto economist Daniel Trefler has shown that Canada's manufacturing productivity (defined as total factor productivity) has grown since 1988 at the compound rate of 0.6 percent per year, actually closing the gap with U.S. productivity by 0.56 percent per year. (45) While such information may seem reassuring for advocates of liberalized trade, Trefler also shows that Canadian productivity grew at a slower rate under free trade than before the FTA was signed. The growth rate of labour productivity was 50 percent higher (0.9 percent per year) in the immediate pre-free trade period (1980-1988) and 150 percent higher (1.5 percent per year) under the previous economic paradigm of Keynesian intervention and import substitution (1961-1980). (46) This, of course, does not deal with the counterfactual argument that the rate of Canadian productivity growth would have decreased even further had Canada not liberalized its economy under FTA and NAFTA.

The persistent lag in Canadian productivity can be explained with reference to several interrelated factors. First, the increase in the Canada-U.S. productivity gap is based on the accelerated growth of output per hour worked in the U.S. (which grew to 4.9 percent per year between 1994 and 2000) and the deceleration in Canada (from 3.7 percent in 1994 to 1.1 percent in 2000). (47) By 2001, output per hour worked in Canadian manufacturing fell to 67.7 percent of the U.S. level, down from 87.7 percent and 70.4 percent in 1994 and 2000 respectively. (48) Second, Canada's lagging productivity gap can be explained with reference to the dominance of foreign-owned and controlled corporations in Canadian manufacturing industries, which generally perform less R&D than do domestic firms. (49) Finally, "transfer pricing"--i.e. the corporate practice of over-or under-charging branch plants through technology transfers, royalty and management fees in order to decrease profits in jurisdictions where taxes are greatest--may themselves explain the putative differences in productivity rates between Canadian and American corporations. This debate is unresolvable, however, since Canadian jurisdictions do not require foreign TNCs to disclose enough data on their pricing policies to produce an accurate productivity profile.

D. Standard of Living

Relative employment levels and incomes provide good indicators with which to measure worker well-being. Under free trade, the unemployment rate--the number of eligible non-working Canadians actively seeking work expressed as a percentage of the total population--rose from a low of 5 percent from 1960 to 1973, (50) to an average of 9.3 percent between 1990 and 1999. (51) By 2000, the unemployment rate reached its lowest figure since 1974, (52) registering at 6.8 percent, only to increase in 2001 (7.2 percent) and again in 2002 (7.7 percent). (53) Job losses induced by free trade--particularly in Canada's protected manufacturing sector which lost some 400,000 employees, or 17 percent of its 1988 workforce--combined with a deep, world-wide recession, contributing to the loss of employment prospects experienced in the early 1990s. In the economy as a whole, wages and the number of jobs declined among the lower skilled, the rate and duration of unemployment rose, and the participation rate by both the youngest and the oldest in the labour force declined. (54)

Between 1994 and 2000, as the Canadian economy adjusted to continental corporate restructuring, employment in Canada's manufacturing sector grew at an annual rate of 3.1 percent per year (compared to only 0.1 percent in the U.S. over the same time period) resulting in the creation of 350,000 new jobs, or fully one-fifth of all net job growth in Canada. (55) According to the Government of Canada, trade and investment helped create roughly 167,000 jobs in 2001, and one out of every four j obs is directly or indirectly dependent on trade. (56) But while the impact of NAFTA on employment levels is close to nil, it has failed to produce the "better" jobs that were expected. (57) Indeed, employment prospects for Canadians are categorically different from their pre--free trade manifestations, most being part-time, low-wage, and service-oriented.

Proponents of economic liberalization argued that "an open trade policy was necessary to prevent the country's average incomes from falling behind those of competitors with more open economies." (58) Despite the extreme openness of the Canadian economy under GATT-, FTA-, NAFTA-, and WTO-induced trade liberalization, per capita income for Canadian households actually declined between 1989 and 1996 at an average rate of minus 0.1 percent, while the G-7 figure grew at 1 percent. As was predicted by its critics, real wages stagnated under free trade, reflected in the unchanged median income for Canadian families between 1990 and 2000. (59) Wage stagnation is probably related to the relative decline in the power of Canadian labour. With a restructured Canadian manufacturing sector, many senior-level managerial jobs disappeared, and workers lost bargaining power as companies threatened they would close down and move south. The largest decline in the wage gap occurred for those with less than eight years of education--those most likely to work in the primary and manufacturing industries, where many unionized jobs for men turned into part-time work.

Free trade was meant to ratchet Canadian living standards up to American levels. But wage rates for U.S. production workers are 14 percent higher, whereas U.S. management and professional salaries are 38 percent higher than in Canada. (60) Whatever the cause of this continuing problem, the free trade era--with its increased economic interdependence and accompanying flows of investment--did not achieve a reduction of the gap. It saw the gap grow.


Though largely an economic agreement supposedly embodying free market principles in the areas of trade and investment, NAFTA rules have had broader political implications. Despite proponents of economic liberalization arguing that free trade would strengthen Canadian sovereignty, NAFTA has entrenched supra-constitutional constraints on Canada's policy choices. (61) In stark contrast to the European model of creating a continental economy managed by continental political structures designed to offset asymmetries of power, the NAFTA negotiators deliberately avoided creating any institutions that might have given Canada (or Mexico) a voice at the centre of North American governance, i.e. in Washington. While its much-touted dispute settlement mechanisms (DSM) theoretically represented movement in this direction, there is little to indicate that they have mitigated existing power asymmetries. Indeed in such cases as the ongoing Canada-U.S. dispute over softwood lumber, Canada became more exposed to U.S. pressure to harmonize provincial public-sector stumpage policies with American private-sector auctioning practices. (62) Moreover, NAFTA actually increased existing power asymmetries. For their part, Canada and Mexico were constrained by new limits on the policy options available to their governments, new rights for foreign investors and their TNCs, and new supra-territorial judicial processes that enforce international commercial law. Although these norms technically applied to all, the continental hegemon was less constrained, because the new rules reflected its interests, because the U.S. Congress retained the right to pass trade measures that superseded the agreement and because American trade representatives proved better able to take advantage of the new rules once they were in place. (63)

A. Social and Cultural Policy

In the realm of social policy, the impact of NAFTA's free-market norms is indirect, indeterminate, and contradictory. On the one hand, job losses resulting from NAFTA-induced continental restructuring served to increase the demands of Canadian citizens for social welfare benefits, including education and training to help displaced workers become part of the knowledge-based economy. On the other hand, trade liberalization has simultaneously undermined the revenue basis for funding such programs. While reduced tariffs decrease government revenue, liberalized rules on trade and investment place significant pressure on Canadian jurisdictions to reduce tax rates, which are declining in the U.S. and are already significantly lower in Mexico. The logic of tax cuts to attract FDI in the context of free trade is complemented by the neo-conservative ideology privileging smaller government with leaner and meaner social policies.

For Canadian cultural policy, the impact of NAFTA has been equally contradictory, if somewhat more visible. When Time Warner decided to launch a Canadian edition of Sports Illustrated, for example, the Chretien government responded with an 80 percent excise tax on the value of advertising revenue contained in every issue of split-run magazines. The legislation was intended to protect the Canadian magazine industry (whose revenues amounted to $850 million in 1992) from American competitors whose larger market ($22 billion in 1992) and reuse of American editorial content subsidized their costs of production in Canada, which allowed them to dump heavily discounted advertising on the Canadian market. Confident that culture was exempted from both FTA and NAFTA rules, Ottawa's cultural policy community believed this new legislation to be compatible with WTO rules--specifically national treatment--because it applied to any magazine that had less than 80 percent Canadian content (so was consistent with the principle of national treatment), and because Canada had not committed itself to including advertising under the General Agreement on Trade in Services.

In a striking example of just how little Canadian trade officials knew about the agreements they had signed, Ottawa was wrong every step of the way. Given FTA and NAFTA's grandfathering of existing cultural policies, Washington ignored NAFTA and brought the Sports Illustrated Canada case before the WTO's dispute adjudication procedure to set a global precedent. In making their case, they contested not just Canada's excise tax, but also the protective magazine tariff--established in 1965--as well as Canadian postal subsidies set up in the 1920s. In a single, crushing blow to Canadian cultural policy, the WTO ruled in Washington's favour on each point, declaring Canadian magazine policies even those developed decades earlier--to be illegal.

B. Labour and Environment

Although largely about trade and investment, NAFTA included two side agreements wedding trade with labour and environmental concerns. This innovation in trade agreements, however, was not the doing of Jean Chretien, but of his American counterpart. Responding to the calls of American labour and environmental groups, it was presidential candidate Bill Clinton who declared on 4 October 1992 that he could support NAFTA only if it were accompanied by two supplemental agreements on environmental protection and labour issues whose purpose would be to "require each country to enforce its own environmental and worker standards." (64) Anxious to appease its labour and environmental supporters, a newly elected Clinton administration insisted on supplementary negotiations, resulting in two side deals, which although imperfect, express the need for linking human and environmental rights with trade.

The North American Agreement on Labour Co-operation created a trinational North American Commission for Labour Co-operation (NACLC) which consisted of a secretariat based in Dallas, Texas, (subsequently moved to Washington, D.C.) and a ministerial council composed of the three national governments' labour ministers. (65) While the NACLC's job was to report on each country's labour laws and to encourage compliance with them, it failed--to the great disappointment of North America's labour unions--to give labour rights any means of enforcement. The NACLC's dispute settlement mechanism did not require domestic law to implement its eleven principles. (66) Nor did it prevent governments from lowering labour protections. In addition, only three of the rights it allegedly protects were sanctionable--minimum wages, child labour, and occupational health and safety--while other fundamental rights--including the rights to organize, bargain collectively and strike--were not. (67) Beyond the promotion (as opposed to enforcement) of labour rights, the NACLC provided a forum for trilateral labour research and co-operation. Since labour law falls largely under provincial jurisdiction, and since few Canadian provinces signed on to the side agreement, the NACEC has had minimal importance for Canada beyond encouraging some labour unions to co-operate with their Mexican counterparts when working out strategies for negotiating wage agreements with continentally-structured corporations.

The North American Agreement on Environmental Cooperation created the North American Commission for Environmental Cooperation (NACEC) in Montreal. This tripartite organization--whose professional secretariat was given supranational standing--constituted the most promising aspect of continental governance under NAFTA, because it incorporated citizens directly into its processes. However, its actual effectiveness has been found wanting. Under article 14 of the environmental agreement, for example, individuals and NGOs are able to submit a complaint that one of the NAFTA partners is not enforcing its environmental law. Of the thirty-five submissions filed since 1995, only three have been made public. (68) Moreover, the NACEC has such a cumbersome dispute settlement mechanism at its disposal that it has never been used. (69)

Despite the promised potential of both side agreements, environmental and labour concerns continue to be subjected to the primacy of trade and economic logic. The NACEC has failed to slow the pace of environmental degradation in North America and its limited success is outweighed by the use of the NAFTA Chapter 11 investor-state tribunals to challenge the North American governments' capacity to regulate environmentally harmful products and practices. As demonstrated by Chapter 11 cases aborting policies such as Ottawa's ban of the gasoline additive MMT (a dangerous neurotoxin suspected of causing Alzheimer's) and Ottawa's ban on exports of PCB waste, the issue is no longer which level of government, but rather, whether any level of government--federal, provincial, or municipal--can initiate environmental legislation at all. (70) At a time when Canadians increasingly want their governments to protect a fragile environment, NAFTA's investor-state dispute mechanism is creating a policy chill that makes this objective much more difficult to achieve.

C. Institutional Performance

Despite the new trade rules, the biggest issues affecting Canada-U.S. commercial relations have been left unresolved. Indeed, from a Canadian perspective, the single greatest irritant in the Canada-U.S. relationship, as identified in the first Liberal Red Book, has been the failure of free trade to guarantee "secure access." As evidenced by border closures reflecting heightened U.S. security concerns in the wake of September 11, 2001, and in the continuing application of U.S. countervail and anti-dumping actions against Canadian exports, Canada remains no less vulnerable to protectionist forces in Washington than it was prior to "free" trade. The reality of NAFTA's institutional deficit, which prevents it from managing relationships of "complex interdependence" (71) among NAFTA partners, is further complicated by the Agreement's incapacity to evolve in response to changed circumstances. This impotence was reflected in NAFTA's inability to work out a continental solution to the uncertainty surrounding North America's borders when Washington launched its global war on terror, which subsequently challenged the "shared values" of the Canada-U.S. "security community." (72) Nor were the three NAFTA signatories able to work out a common position for the new trade negotiations taking place in either the WTO's Doha Round or in the Free Trade Area of the Americas. In short, despite creating a complex dynamic among its partners, NAFTA was incapable of supporting and massaging their sometimes bumpy evolution.


Jean Chretien's legacy in the Canada-U.S. economic relationship is contradictory and confused. As Leader of the Official Opposition, Chretien was a critic of both the FTA and NAFTA agreements and promised to renegotiate NAFTA to include clear definitions of anti-dumping and countervail. After blatantly betraying his promise, the Chretien government called NAFTA an "unconditional success" (73) in the face both of statistical evidence attesting to the contrary and of multiple proposals from the business community demanding major repairs to a patently imperfect arrangement. Apart from increases in Canadian imports and exports, which failed to lift Canadian economic growth to pre-free trade levels, NAFTA has not improved North America's nor Canada's share of global FDI, has not improved Canada's productivity performance, has not raised real wages, and has not increased employment. NAFTA's labour and environmental side agreements have proven ineffectual, and perhaps most importantly, NAFTA has failed to deliver on its most important objective--securing access to the U.S. market.

When set against such failed objectives, the costs of NAFTA seem disproportionate. Indeed, the constraining effects of NAFTA on Canadian jurisdictions seem to outweigh any benefits of increased commerce, which are not uniquely attributable to NAFTA-induced tariff reductions and which also correspond to an increase in Canada's dependence and vulnerability toward developments happening in the U.S. Under NAFTA, Canada has lost much of its capacity to limit or tax exports, to regulate investment in the interests of Canadian workers, to protect the environment, and to assist Canadian corporations to become more globally competitive. In contrast, foreign investors have gained greater monopoly rights over such intellectual property as brand-name drugs that cost the public health care system hundreds of millions of dollars.

Jean Chretien's contradictory legacy in Canada's economic relationship with the U.S. has led to confusion over the future of Canada's economic and political relationship with the global hegemon. While NAFTA increased Canada's export dependence on the American market, it failed to guarantee Canadian industry protection from U.S. protectionist forces. Ironically, the solutions to increased vulnerability under NAFTA proposed by big business in the aftermath of September 11, 2001 aim to increase continental integration, which would further increase Canada's vulnerability to developments in the U.S.

Behind all this confusion, many proposals advocating deeper integration with the Unites States contain an implicit threat. Arguing that Canada must embrace a new "Big Idea," (74) Wendy Dobson and others suggest that Canada must take a new leap of faith and give up more sovereignty (in immigration and security policy, for example) or else risk being punished by Washington further down the line. The continuing and unresolved controversy about such prescriptions confirms Jean Chretien's confused free trade legacy, which, while a putative success in terms of increased trade flows, has left the Canadian economy insecure in relation to Uncle Sam and still in search of that ever-elusive panacea.

(1) A number of sections of this article are drawn from Stephen Clarkson, Uncle Sam and Us: Globalization, Neoconservatism and the Canadian State (Toronto: University of Toronto Press, 2002) [Uncle Sam and Us].

(2) Donald J. Savoie, Governing from the Centre: The Concentration of Power in Canadian Politics (Toronto: University of Toronto Press, 1999).

(3) Liberal Party of Canada, Creating Opportunity: The Liberal Plan for Canada (Ottawa: Liberal Party of Canada, 1993) at 23-24.

(4) Standing Committee on Foreign Affairs and International Trade, Partners in North America: Advancing Canada's Relations with the United States and Mexico (Ottawa: December 2002) at 59 [Partners in North America].

(5) Statistics Canada, Imports and Exports of Goods on a Balance of Payments Basis, online: <>.

(6) Partners in North America, supra note 4 at 58.

(7) Statistics Canada, supra note 5.

(8) Standing Committee on Foreign Affairs and International Trade, The Canada-United States Economic Relationship (Ottawa: 2001) at 1.

(9) See U.S. Census Bureau, Foreign Trade Statistics, online: < 2002/ exh13tLtxt>.

(10) See Canadian Embassy, online: <>.

(11) Daniel Schwanen, "Trading Up: The Impact of Increased Continental Integration on Trade, Investment, and Jobs in Canada" (1997) 9 C.D. Howe Institute Commentary, Tables A-1 and A-2, 25 ["Trading Up"].

(12) Peter Berg et al., Canada and the future of the North American relationship: shaping a long-term Canadian agenda, online: <>, Part V at 1, n. 19.

(13) Robert Roach, Beyond our Borders: Western Canadian Exports in the Global Market (Canada West Foundation, May 2002) at 7 [Beyond our Borders].

(14) Statistics Canada, "Imports and Exports of Goods on a Balance of Payments Basis," online: <>.

(15) See e.g. NAFTA Free Trade Commission, "A Foundation for Future Growth," Joint Statement (Puerto Vallarta, Mexico, 28 May 2002), online: <>.

(16) Organization for Economic Co-operation and Development, OECD Historical Statistics. 1960-97 (Paris: OECD, 1999), Table 3.1, 50.

(17) Organization for Economic Co-operation and Development, OECD Economic Surrey 1998-9 (Paris: OECD, 2000), Table A3.

(18) Statistics Canada, The Daily (28 February 2002), National Economic and Financial Accounts, online: <>.

(19) This is a result of American imports from China and Mexico rising at a faster pace than imports from Canada. See Partners in North America, supra note 4 at 59.

(20) At approximately 43 percent, Canada's export to GDP ratio ranks highest in the G-7. Canada's dependence on trade is growing. Exports plus imports as a proportion of GDP rose from 52 percent in 1987 to 54 percent in 1992 and to 74 percent in 2000. See Biz/ed Business and Economics Service for Students, online: <>.

(21) Canada, Trade Update 2000, First Annual Report on Canada's State of Trade, 2d ed. (Ottawa: Department of Foreign Affairs and International Trade, 2000) at 7.

(22) Beyond our Borders, supra note 13 at 20-21.

(23) Andrew Cohen, While Canada Slept: How We Lost Our Place in the World (Toronto: McClelland & Stewart, 2003) at 112.

(24) Perrin Beatty, quoted in ibid.

(25) Uncle Sam and Us, supra note 1 at 211.

(26) United States Trade Representative, NAFTA at Eight: A Foundation for Economic Growth, online: < nafta8_brochure-eng.pdf> at 3.

(27) "Trading Up," supra note 11 at 18.

(28) The growth rate of Canada's FDI stock slowed from an annual rate of 12.9 percent between 1978 to 1988, down to 9.5 percent from 1989 to 1999. Shawn McCarthy, "Business Sounds Alarm on Vulnerability" Globe & Mail (8 May 2000) B1.

(29) Supra note 26.

(30) John Helliwell, quoted in David Crane, "Who will stand up for Canadian nationalism?" Toronto Star (17 May 2003) C2.

(31) Not all CDIA is "Canadian." CDIA figures include investments made outside Canada by foreign corporations with operations in Canada.

(32) Partners in North America, supra note 4 at 61.

(33) Ibid. at 62.

(34) Statistics Canada, Canada's International Investment Position, online: <>.

(35) Partners in North America, supra note 4 at 61-62.

(36) DFAIT, Trade Update 2000 Report, online: < trade/ state_of_trade0900-e.pdf> at 34.

(37) The ratio of CDIA receipts to FDI outflows increased from 97 percent in 1998 to 105 percent in 2002. Derived from Statistics Canada data. Statistics Canada, "Canada's balance of payments," online: <>.

(38) Earnings from CDIA, which amounted to $16 billion, or 2 percent of Canadian GNP in 1998, are taxable when claimed by the parent company as income.

(39) Having a presence abroad can sometimes be negative, however, since CDIA can reinforce the regressive capacity of repressive regimes abroad. Craig Forcese, Putting Conscience into Commerce (Montreal: International Centre for Human Rights and Democratic Development, 1997).

(40) Potential consequences of hollowing out listed in the report include "the loss of high-paying senior level jobs and a subsequent decline in the tax base, diminished development opportunities for mid-level individuals, job losses at the support level as positions become redundant, job creation genius leaves the country--the job drain effect, potentially reduced investment in Canada, reduced corporate donations of both money and volunteer time, diminished prestige for Canada as a global player, possible erosion of distinct Canadian values and standards." Quoted from Derrick Hynes, Restructuring in a Global Economy: Is Corporate Canada Being Hollowed-out? Conference Board of Canada (May 2001) 6, 15.

(41) Andrea Mandell-Campbell, "FP CEO Poll: 'Hollowing out' contributes to brain drain" Financial Post (27 May 2002) 1, 2.

(42) Andrei Sulzenko & James Kalwarowsky, "A Policy Challenge for a Higher Standard of Living" (2000) 1:1 Isuma 126.

(43) Jeffrey 1. Bernstein, Richard G. Harris & Andrew Sharpe, "The Widening Canada-US Manufacturing Productivity Gap" (2002) 5 Int'l Productivity Monitor 3.

(44) Andrew Sharpe, "Why are Americans More Productive than Canadians?" (2003) 6 Int'1 Productivity Monitor 24 [emphasis added].

(45) Daniel Trefler, "The Long and Short of the Canada-U.S. Free Trade Agreement," National Bureau of Economic Research Working Paper W8293 (May 2001) at 21, 24.

(46) Ibid., Figures 1, 4.

(47) Approximately 70 percent of the resulting 3.8 percent spread in absolute productivity growth was attributable to the difference in productivity growth rates between the relatively larger and more dynamic high-tech industries in the U.S. relative to Canada, whereas the remaining 30 percent was due to the relative increase in capital intensity growth which accelerated more quickly in the U.S. due to higher labour costs. Jeffrey I. Bernstein, et al., The Widening Canada-US Manufacturing Productivity Gap (Ottawa: Centre for the Study of Living Standards, 2002) at 4-5, 12-13, 18.

(48) Ibid. at 3.

(49) Foreign firms perform 67 percent less research and development (R&D) than domestic firms--spending 1.2 percent of their revenue on research, compared to 2 percent by Canadian-owned firms--evidence that, with an increase in FDI, the high value-added jobs associated with R&D head south of the border.

(50) Organization for Economic Cooperation and Development, OECD International Statistics (Paris: OECD Publications, 1999) at 45.

(51) See the statistical appendix of the International Monetary Fund's website, online: < 1098/pdf/1098sta.pdf>.

(52) In 1974, the unemployment rate was 5.3 percent. See Scotia Capital online: < econ/canquart.pdf>.

(53) Statistics Canada, "Labour Force Statistics," online: <>.

(54) "Trading Up," supra note 11 at 19.

(55) Bernstein et al., supra note 47 at 6.

(56) Cohen, supra note 23 at 109.

(57) See e.g. supra note 26 at 4.

(58) "Trading Up," supra note 11 at 4.

(59) Statistics Canada, "2001 Census Highlights," online: <>.

(60) John Britton, "Is the Impact of the North American Trade Agreements Zero?" (1998) 21 Can. J. Regional Sci. 167 at 187-88.

(61) Stephen Clarkson, Canada's Secret Constitution: NAFTA, WTO and the End of Sovereignty (Ottawa: Canadian Centre for Policy Alternatives, 2002).

(62) Despite favourable panel decisions, Ottawa has been forced to impose restrictions on exports to the U.S. Tony Porter, "The North American Free Trade Agreement," in Richard Stubbs & Geoffrey R.D. Underhill, eds., Political Economy and the Changing Global Order (New York: Oxford University Press, 2000) 249.

(63) Uncle Sam and Us, supra note 1 at 56.

(64) Pierre Marc Johnson and Andre Beaulieu, quoted in Partners in North America, supra note 4 at 153.

(65) Rafael Fernandez de Castro & Claudia Ibarguen, "Las instituciones del TLCAN: una evaluacion a los cinco anos," in Beatriz Leycegui & Rafael Fernandez de Castro, eds., Socios naturales? Cinco anos del Tratado de Libre Comercio de America del Norte (Mexico: ITAM, 2000) 486.

(66) Including: (1) freedom of association and the protection of the right to organize; (2) the right to bargain collectively; (3) the right to strike; (4) prohibition of forced labour; (5) labour protections for children and young persons; (6) minimum employment standards; (7) elimination of employment discrimination; (8) equal pay for women and men; (9) prevention of occupational injuries; (10) compensation in the cases of occupational injuries and illnesses; and (11) protection of migrant workers. See North American Agreement on Labor Co-operation, online: <>.

(67) Partners in North America, supra note 4 at 156.

(68) Ibid. at 154.

(69) Ibid.

(70) Uncle Sam and Us, supra note 1 at 349.

(71) We refer to "complex interdependence" here as the "ideal type" constructed as the opposite of "political realism" by Robert O. Keohane and Joseph Nye in Power and Interdependence: World Politics in Transition (Boston: Little, Brown, 2001).

(72) For an excellent discussion of "security communities" in theory and practice, see Emanuel Adler & Michael Barnett, eds., Security Communities (New York: Cambridge University Press, 2001).

(73) Supra note 15.

(74) Wendy Dobson, "Shaping the Future of the North American Economic Space: A Framework for Action" (2002) CD Howe Institute, Commentary--Border Papers.

Stephen Clarkson * and Erick Lachapelle **

* Professor of Political Economy, University of Toronto.

** Doctoral Student, University of Toronto.
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Author:Clarkson, Stephen; Lachapelle, Erick
Publication:Review of Constitutional Studies
Date:Jan 1, 2004
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