The Financial Post

01/13/1992 (Weekly)

Free trade helps us defend our interests
Peter Morici

As we mark the third anniversary of the Canada-U.S. free trade agreement, claims abound about the disposition of disputes and jobs won and lost. Although the agreement stands up well against these standards, it has given Canada something much more significant - a new special relationship with the U.S.

During the early post-war decades, two fundamental sets of realities defined Canada's relationship with the U.S. First, as a consequence of its industrial pre-eminence, the U.S. both set the agenda and determined the outcome of General Agreement on Tariffs and Trade multilateral negotiations. The benefits of access to the U.S. market were too large for other nations to ignore as the U.S. pressed to open international commerce.

Second, although many of Canada's resource industries were supplanting U.S. producers, the structure of the U.S. trade policy-making process and the special relationship - forged by wartime co-operation - shielded Canadian interests.

By the 1970s, waning industrial dominance and an increasing sense that U.S. competitiveness problems resulted from unfair trade practices abroad caused Congress to revise U.S. trade law, permitting private businesses to force the president to grant heavy doses of protection through quasi-judicial processes in the International Trade Commission and the Commerce Department.

The resulting effects on Canada's commercial fortunes are well-known, and these motivated its interest in a trade agreement that could provide more secure access to the U.S. market. The free trade agreement delivered on this fundamental goal at two levels.

First, it provides Canada with special status within the U.S. system of contingent protection, ensuring that U.S. trade laws are applied fairly and accurately. Chapter 19 permits firms to appeal findings regarding subsidies and dumping before binational panels in which Canadians share equal representation with Americans. No other nation or its citizens can so pre-empt the U.S. judiciary. This is a fundamental compromise of Americans sovereignty.

Canada's victory in the pork sbusidies case illustrates - and the controversial ''extraordinary challenge'' confirms - that the free trade agreement can provide safe haven for Canadian industries threatened by American sectional politics. The softwood lumber problem has been festering, welling up in unseemly disputes, since the mid-1950s. The current instalment of this dispute could prove difficult, but Canadian federal and provincial governments, as well as the forest industry, apparently agree that the agreement's dispute-settlement processes will confirm their position.

Second, the free trade agreement establishes for Canada insulation from many congressional actions that could change the rules of the game and has created an acknowledgment among U.S. government officials and business leaders of Canada's special stake in the U.S. market.

U.S. policy will increasingly emphasize bilateral initiatives with Japan, Mexico and the rest of Latin America and pressures for an activist industrial policy to support corporate alliances, research consortiums and generic pre-competitive R&D will mount.

Essentially, the free trade agreement guaranteed Canada a place at the negotiating table with Mexico and a special status in those talks that just would not have been possible without the precedent-setting character of the Canada-U.S. agreement.

Turning to industrial policy, indecision among economists and the apparent paralysis of the Washington policy-making establishment in the face of the worst recession in the post-war era stem from the structural, as opposed to cyclical, nature of the American malaise - short sighted business planning, poorly trained workers, ill-equipped managers and professional staff and the crushing overhead imposed by America's free-market legal and medical care systems. When the dust settles and the roots of American industrial decline are recognized, we can expect to see enormous pressure for a proactive American policy - the next presidential election could prove decisive.

Two kinds of pressures are mounting in the U.S. - reactive and proactive. On the one hand, protectionist interests are acting on the administration to use all the levers at their disposal under U.S. trade law and to pursue all options provided by the free trade agreement - witness the extraordinary challenge in the pork case. On the other hand, observers more sensitive to long-term structural problems in the U.S. economy are advocating a more positive competitiveness building policy.

The free trade agreement, by instituting special dispute-settlement procedures, by affording Canada special status within the American trade policy-making apparatus and by manadating negotiations concerning the application of subsidies, government procurement and other instruments of industrial strategy, affords Canada the means and forum to defend its national interests.