25 years on, not all agree free trade with U.S. is the success story most insist

OTTAWA – For most policy-makers, economists and Canadians, the verdict on the Canada-U.S. free trade agreement was rendered years ago — with the pact, Canada grew up as a nation and established the most lucrative economic partnership in history.

That’s certainly the message of a gala event Wednesday in Toronto on the eve of the agreement’s 25th anniversary, which will feature FTA prime mover Brian Mulroney as the keynote speaker.

“It made Canadians think as winners,” the former prime minister said in an interview on Toronto TV station CP24 before the event.

“If we can win… in the American market we can win anywhere,” was how Mulroney characterized the impact the free trade agreement had on attitudes in Canada.

“So they’ve gone out as happy warriors around the world.”

And it was the message of Trade Minister Ed Fast’s opening act earlier in the day, when he declared nay-sayers — few though they may be — “free trade deniers” who, if they had their way, would imperil Canada’s economic future.

But a dissident group of economists is asking Canadians to consider another possible reality: what would the country’s economy look like if Canada had never opted for free trade with the United States?

The question may be unanswerable, but they point out that with the benefit of hindsight, FTA has not turned out as advertised.

For some left-wing economists who have always been skeptical of the free trade song book, from which successive Canadian governments have taken their cue, FTA has been one big bust.

“Whatever free trade was about it hasn’t helped Canada in the modern era,” says Canadian Auto Workers economist Jim Stanford.

For evidence, he rhymes off the Canadian hopes for FTA and the results so far.

FTA was supposed to have bought Canadian exporters special access into the lucrative U.S. market, but Canada’s share of total American imports is now lower than it was in 1988. How’s that for “special access,” he says.

As well, at 19 per cent of gross domestic product, the value of Canadian exports to the U.S. is in relative terms at about the same level as before the deal.

Another selling point was that FTA would force Canadian firms to compete or die — harsh but necessary Darwinian medicine meant to ensure Canada could compete globally.

Instead, business sector productivity has continued to decline, from about 90 per cent of U.S. levels before the deal to about 72 per cent today.

As for harm, Stanford says the deal contributed to the diminishing of Canada’s industrial base, increased regional disparities, and made Canada more — not less — a nation of “hewers of wood and drawers of water.”

“I think free trade has contributed to the de-industrialization of Canada and the growing, and I would say precarious, reliance on resource extraction and export,” he concludes.

Economist Erin Weir of the Progressive Economics Forum adds another negative, as he sees it.

He says FTA and NAFTA, which followed five years later, have restricted the power of governments to intervene in the economy to push back against global forces, namely because they fear law suits for protectionist practices. He cites the $130-million payout to AbitibiBowater in return for expropriated assets by Newfoundland after the company shut down its Grand-Falls Windsor pulp and paper mill.

Bank of Montreal deputy chief economist Doug Porter considers FTA to have been a net positive for Canada and has written an op-ed article to support his claim. But even he does not dispute Stanford’s data and agrees the question is up for legitimate debate.

“I think it’s fair to say that some of the benefits of free trade were oversold, but at the same time some of the biggest concerns of the opponents were overdone. I think the reality has been a bit more benign,” he says.

Surprisingly, Porter says the key benefit of FTA was not so much what it did for exports but what happened to imports.

Because of the elimination of import tariffs, FTA and subsequent liberalized trade agreements contributed to the taming of inflation in Canada, meaning Canadians are paying less than they would have been.

Annual inflation in Canada has averaged 0.5 percentage points lower than in the U.S. in the 25 years following FTA, as opposed to 0.6 points higher in the quarter-century prior.

Another benefit, he said, is that U.S. investment into Canada has ballooned since FTA, although Porter concedes some would not consider the takeover of Canadian firms to foreigners an unalloyed good.

The critics’ argument is not that FTA has not been transformative, or even that it is a failure. Rather, that it is less than the sum of its parts.

The deal looked like a rampaging success in its first decade when exports to the U.S. expanded at about 12 per cent annually. But they began to slow after 2000 and during the recession actually headed down.

FTA advocates say such a cooling was to be expected given the recession, weakness of the U.S. economy, tighter border controls following 9-11, and strength of the Canadian dollar, which reached par in 2007 and has mostly remained there since.

But that misses the point, say critics. If the FTA is not responsible for the recent drop-off, maybe it was not responsible for the earlier successes.

“Certainly there was a large increase in exports following the agreement, but during the 1990s you had a very robust American economy and a declining Canadian dollar,” Weir points out.

“So I wouldn’t credit free trade with the increase in exports in the 1990s and wouldn’t blame it for the decrease now.”

Ironically, one of the lasting legacies of the FTA may be that it succeeded tying Canada’s fortunes closely to those of it’s larger souther neighbour. That’s not such a good policy today.

Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney — both free trade supporters — have been hectoring the corporate sector for years to break its dependence on the weakened U.S. and fasten on to emerging strength in Asia and even South America.

“That was an argument that was being made against free trade in the 1980s, so I find it interesting that it is now essentially being repeated by the Bank of Canada governor,” said Weir. “I’m just noting the irony more than anything.”