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Tarnished anniversary: Why the free-trade deal didn’t deliver

Twenty-five years ago this week, the signing of the Canada – U.S. free-trade agreement (FTA) sparked one of the most passionate political debates in Canadian history.

Reflecting on the debate, and the outcomes of the FTA, can we now say who was right, and who was wrong?

Conventional wisdom holds that the trade deal worked out fairly well for Canada. However, the subsequent social and economic consequences are more like what the deal’s critics predicted.

The FTA’s supporters argued that it would help close the long-standing economic performance gap between Canada and the U.S., especially in the manufacturing sector. Dismantling the remaining tariff and non tariff barriers was expected to lead to an overall increase in economic efficiency through increased specialization and greater economies of scale.

The Macdonald Commission famously asked Canadians to take a “leap of faith” that free trade would lead to a much more productive and dynamic economy. Alongside Prime Minister Brian Mulroney, they scoffed at the idea that greater economic integration would lead to convergence to the less generous U.S. social model.

While many other factors have been at play, the argument that the FTA would close the performance gap does not hold water.

According to the U.S. Bureau of Labor Statistics, Canadian real GDP per hour worked – the most important measurement of our national productivity – has declined sharply in relation to the U.S., from 87.4 per cent in 1988, to just 76 per cent in 2010.

Our increasing economic reliance on natural resource exports helps explain poor productivity performance. In 2011, energy made up 24.5 per cent of our exports, up from 8.9 per cent in 1988. Only 12.9 per cent of our exports are now automotive products, compared to 24.2 per cent in 1988.

While other advanced industrial countries are working to develop highly-innovative, “knowledge-based” economies, we continue to lag behind.

We are now running an enormous deficit in manufacturing and services trade with the rest of the world, and even the booming energy and mineral sectors leave us with a large overall trade deficit.

It was the critics of the FTA, most notably University of Toronto economist Mel Watkins, argued that the deal would lock us into the traditional Canadian trap of resource dependency, not least by depriving us of the policy tools such as resource processing requirements, the auto pact, and the ability to impose significant conditions on foreign corporations which helped to build a stronger manufacturing sector in the 1960s and 1970s.

Part of the FTA’s legacy has been that our governments dismiss as “out of touch” anybody who calls for actively shaping our comparative advantage in the global economy – even though this is precisely what many of the most successful developing countries are doing.

Proponents of the FTA were also sanguine about the social impacts of closer economic integration. Greater efficiency, it was argued, would create better jobs and more wealth to spend on social programs.

But the reality is that increased competitive pressures, albeit not only from the U.S., have kept real wages remarkably close to where they stood in the late 1980s, with most of the increase in national income going to the top 1 per cent. And they, it must be said, have been much keener on tax cuts than on sharing their wealth.

A recent major OECD report on inequality noted that Canada became much more unequal than other advanced industrial countries since the late 1980s. Why? Because our social programs failed to counter rising earnings inequality as effectively as in the past.

The failure of political will to maintain and renew our progressive social model owes something to the changed economic and cultural environment generated by the FTA.

There is, of course, no path back to where we were in the late 1980s.

But the failure of the FTA to deliver on its promises tells us that we need to rethink the idea that more market and less government will lead us to shared prosperity.

Andrew Jackson is Senior Policy Adviser with the Broadbent Institute and the Packer Professor of Social Justice at York University

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/tarnished-anniversary-why-the-free-trade-deal-didnt-deliver/article4591214/

(Image credit: MIKE CASSESE /REUTERS)