Inside Policy, October 2012: Free trade at 25 by The Macdonald-Laurier Institute

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@25 Special Issue – October 2012

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Table of Contents Published by the Macdonald-Laurier Institute

“True North in Canadian Public Policy” Brian Lee Crowley MANAGING DIRECTOR mgdir@macdonaldlaurier.ca EDITOR L. Ian MacDonald l.ian.macdonald@macdonaldlaurier.ca COPY EDITOR Rachael

Fajardo

3 5 6

Word of welcome from the Managing Director Mot de bienvenue du directeur général

Editor’s note, Free Trade @ 25 Le mot du rédacteur en chef, Les 25 ans du libre-échange

Q&A A conversation with Brian Mulroney

CONTRIBUTING WRITERS

Thomas S. Axworthy Andrew Balfour Derek H. Burney Catherine Cano Celine Cooper Patrice Dutil Daniel Gagnier Tasha Kheiriddin Jeremy Kinsman Brad Lavigne Velma McColl Geoff Norquay Robin V. Sears Gil Troy

Douglas Porter Free Trade at 25: How the FTA positioned Canada for the 21st century

Kevin Lynch Canada’s Challenge – From Good to Great: A changing world, in transforming times

Robin V. Sears The 1988 Free Trade Election: A campaign for the ages

GRAPHIC DESIGN AND PRODUCTION

Monica Thomas, Foothills Graphics, Calgary ADMINISTRATION AND ADVERTISING

Rita S. Karakas (613) 482-8327, rita.karakas@macdonaldlaurier.ca Inside Policy 8 York Street, Suite 200 Ottawa, Ontario, Canada K1N 5S6 (613) 482-8327 Inside Policy is published six times a year by the Macdonald-Laurier Institute. The contents of the magazine are copyrighted, but may be re-produced with permission in print, and downloaded free of charge from the MLI website. www.macdonaldlaurier.ca

Patrice Dutil and David MacKenzie The Ghost of Elections Past: 1988 and 1911

Martin Goldfarb Great Prime Ministers Have Big Ideas

Jeremy Kinsman From Baie-Comeau to Chicago: Defending Canadian cultural sovereignty

Stephen Blank and Jennifer Jeffs The NAFTA Region: A work in progress

Subscriptions: $39.95 per year, single issue, $6.95. The digital edition is available at www. zinio.com for $19.95 per year, single issue $3.95. Printed in Canada The contributors to this publication have worked independently and are solely responsible for the views presented here. The opinions are not necessarily those of the Macdonald-Laurier Institute, its Directors, or Supporters.

Cover Photo credit: Montreal Gazette archives, taken at the G7 Summit at Hart House, University of Toronto, June 1988.

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Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

Word of welcome from the Managing Director I

f you are in the think tank world, you have to believe that ideas are, as Victor Hugo said, plus puissantes que toutes les armées du monde. Unlike the force of arms, a good idea convinces people to change their behaviour, not because they are forced to, but because they are convinced of the merit of a new way of seeing the world. That is exactly how think tankers, like the Macdonald-Laurier Institute, see themselves. Our job is to change Canada for the better by defining and then popularizing new policy ideas, ideas that sweep away old prejudices and fears, that challenge established interests, that inspire Canadians to believe they can do more. Could there be a more compelling example of the impact of ideas on Canada than the Free Trade Agreement, negotiated on October 3, 1987? At bottom that agreement wasn’t about efficiency or productivity or harmonization with our American trading partners. It was about ideas like freedom, self-confidence, and fearless engagement with the world. In the debate that raged after the agreement was signed, those ideas won in a titanic struggle with older attitudes like defensiveness, anti-Americanism, and protectionism. Canadians were deeply divided in the 1988 election, but free trade prevailed. And now as we look back after 25 years we see a settled consensus that it was the right choice and there is no going back. As the report from the Bank of Montreal you can read in this inaugural issue of Inside Policy shows, we can now see that, just as its proponents foretold, free trade has become a cornerstone of Canada’s prosperity. In fact so enamoured have we become that successive governments have sought to expand the benefits of free trade to many more of our partners, including today the countries of the European Union and the Trans-Pacific Partnership. Not a bad record for an idea. It was because we are all convinced of the value of good ideas at MLI that we were delighted and enthusiastic when L. Ian MacDonald came to us with a proposal for a brand new national vehicle for good policy ideas. This first edition of Inside Policy is the result. With Ian’s impressive skills behind us, we are confident that, like free trade, in a few years people will say, “We couldn’t imagine being without it.”

Mot de bienvenue du directeur général S

i vous évoluez dans l’univers des think tanks, vous croyez sûrement que les idées sont « plus puissantes que toutes les armées du monde », comme le disait Victor Hugo. Contrairement aux armes, les idées ont en effet ce pouvoir d’amener les gens à modifier leur comportement, non par contrainte mais par conviction, parce qu’ils ont été persuadés des mérites d’une nouvelle vision des choses. Et c’est précisément ce que recherche un laboratoire d’idées comme l’Institut Macdonald-Laurier : améliorer la situation du Canada en définissant et en diffusant de nouvelles idées stratégiques qui viennent balayer les peurs et les tabous, défier les intérêts établis et donner aux Canadiens pleine confiance en leurs capacités. Y a-t-il au Canada meilleur exemple du pouvoir des grandes idées que l’Accord de libre-échange, conclu le 3 octobre 1987 ? Car au fond, cet accord n’était pas affaire de rentabilité, de productivité ou d’harmonisation avec notre partenaire commercial américain. Il reposait en vérité sur les idées de liberté, de confiance en soi et de franche ouverture sur le monde. Et dans le débat qui a fait rage après sa signature, ces idées ont remporté une bataille épique sur des attitudes dépassées comme la méfiance, l’antiaméricanisme et le protectionnisme. Les Canadiens étaient profondément divisés lors des élections de 1988 qui ont finalement consacré le libre-échange. Mais il s’est dégagé en un quart de siècle un solide consensus sur ce choix que nous avons fait, et tout retour en arrière est désormais exclu. Car le libre-échange est devenu la pierre angulaire de la prospérité du pays, exactement comme l’avaient prévu ses instigateurs et comme le confirme l’étude de la Banque de Montréal publiée dans ce premier numéro d’Inside Policy. En fait, le libre-échange nous est bientôt apparu si avantageux que nos gouvernements successifs ont voulu l’appliquer à plusieurs autres de nos partenaires, dont aujourd’hui les pays de l’Union européenne et du Partenariat transpacifique. Pas mal pour une simple idée... C’est d’ailleurs parce que l’IML sait reconnaître les bonnes idées qu’il a accueilli avec enthousiasme la proposition de L. Ian MacDonald de créer une nouvelle publication nationale consacrée aux meilleures idées politiques et stratégiques. Voilà comment est né ce premier numéro d’Inside Policy. Nul doute que les vastes compétences et l’impressionnant parcours de L. Ian MacDonald nous assureront dans quelques années d’être aussi indispensables à nos lecteurs que le libre-échange à tous les Canadiens. Brian Lee Crowley DIRECTEUR GÉNÉRAL, IML

Brian Lee Crowley MANAGING DIRECTOR, MLI

Special Issue – October 2012

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Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

EDITOR’S NOTE

Free Trade @ 25 W

elcome to this special issue of Inside Policy, the new flagship magazine of the Macdonald-Laurier Institute. This souvenir issue is aligned to the symposium Free Trade 2.0, hosted by the Munk School for Global Affairs, and the Free Trade @ 25 Tribute Dinner, in honour of Brian Mulroney, with proceeds to the Canadian Diabetes Association. Both events are being held in Toronto 25 years to the day since the negotiation of the Canada-US Free Trade Agreement on October 3, 1987. Mulroney remembers that evening well. In a wide-ranging Q&A, the former prime minister recalls how it very nearly didn’t happen over his deal-breaker, the demand for an independent dispute settlement tribunal. Twenty-five years on, his reflection is that because of free trade, “Canada is a much more confident and outward looking country.” In an important 25-year economic impact study from BMO Financial Group, deputy chief economist Douglas Porter concludes there’s no doubt of the benefits of free trade to the Canadian economy. Of all the profound shifts in the Canadian economy in the last quarter century, he writes: “none has had as far-reaching and long-lasting effects as the FTA and its successor, the NAFTA.” BMO Vice-Chair Kevin Lynch, former Clerk of the Privy Council, considers the FTA to be one of the most important economic achievements of the modern era. Former Liberal pollster Martin Goldfarb agrees, and writes that Mulroney was Canada’s last transformational prime minister. Robin Sears, who was on the other side as national director of the NDP during the 1988 free trade election, writes about a campaign for the ages. Patrice Dutil and David MacKenzie, coauthors of Canada 1911: The Decisive Election that Shaped the Country, look at comparative outcomes. And finally Jeremy Kinsman, who was assistant deputy minister of Communications at the time of the free trade talks, recalls how Canada obtained a cultural exemption.

LE MOT DU RÉDACTEUR EN CHEF

Les 25 ans du libre-échange B

ienvenue à ce numéro spécial d’Inside Policy, la nouvelle publication phare de l’Institut MacdonaldLaurier. Il s’agirait même d’un numéro souvenir, publié dans le cadre du symposium Free Trade 2.0 organisé par l’École Munk des Affaires internationales, et du dîner Free Trade @ 25 en l’honneur de Brian Mulroney, dont les recettes iront à l’Association canadienne du diabète. Deux événements tenus à Toronto 25 ans après la conclusion de l’Accord de libre-échange Canada–États-Unis (ALE), le 3 octobre 1987. Une journée dont se souvient parfaitement Brian Mulroney. Dans un long entretien, l’ancien premier ministre rappelle comment tout a failli échouer face à son exigence d’établir un tribunal de règlement des différends indépendant. Un quart de siècle plus tard, résume-t-il, le libre-échange a fait du Canada un pays « beaucoup plus confiant et ouvert sur le monde ». Suit une importante étude d’impact économique de BMO Groupe financier, dans laquelle l’économiste en chef adjoint Douglas Porter confirme que le libre-échange a clairement bénéficié à l’économie canadienne. Aucun des grands changements ayant transformé notre économie depuis un quart de siècle n’a eu « d’effets aussi profonds et durables que l’ALE et son successeur, l’ALENA », écrit-il. Pour Kevin Lynch, vice-président de BMO et ancien greffier du Conseil privé, l’ALE est l’une de nos principales réussites économiques de l’ère moderne. Un avis partagé par l’ancien sondeur libéral Martin Goldfarb, selon qui Brian Mulroney a été notre dernier premier ministre transformateur. Robin Sears, qui était dans l’autre camp comme directeur national du NPD lors des élections de 1988 sur le libre-échange, évoque une campagne historique. Quant à Patrice Dutil et David MacKenzie, coauteurs de Canada 1911: The Decisive Election that Shaped the Country, ils proposent une étude de résultats comparative.

L. Ian MacDonald

Sous-ministre adjoint des Communications pendant les pourparlers sur le libre-échange, Jeremy Kinsman rappelle enfin comment le Canada a obtenu une clause d’exemption culturelle.

EDITOR, INSIDE POLICY

Le libre-échange, l’enjeu qui a transformé le Canada.

Free trade – the issue that changed Canada.

L. Ian MacDonald LE RÉDACTEUR EN CHEF, INSIDE POLICY

Special Issue – October 2012

Q&A A CONVERSATION WITH BRIAN MULRONEY

“We’re a much more confident people”

Prime Minister Mulroney greets President Reagan at Air Force One in Quebec City for the Shamrock Summit, March 17, 1985. Montreal Gazette archives

In the run-up to the 25th anniversary of the negotiation of the Canada-US Free Trade Agreement, former Prime Minister Brian Mulroney met at the Montreal office of his law firm, Norton Rose, with Inside Policy Editor L. Ian MacDonald. Mulroney’s reflection on how free trade changed Canada: “We’re a much more confident, outward looking people.”

En vue du 25e anniversaire de la conclusion de l’Accord de libre-échange Canada– États-Unis, le rédacteur en chef d’Inside Policy L. Ian MacDonald s’est entretenu

avec l’ancien premier ministre Brian Mulroney dans les bureaux montréalais du cabinet Norton Rose, dont il est aujourd’hui associé principal. Comment

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

le libre-échange a-t-il changé le Canada ? « Nous sommes aujourd’hui un peuple beaucoup plus confiant et ouvert sur le monde », répond M. Mulroney.

Inside Policy: Mr. Mulroney, thank you for doing this. On October 3, 1987, in the wee hours of Sunday morning, at the bottom of the staircase of the Langevin Block, you came down and met the media and said about the Free Trade Agreement: “A hundred years from now, all that will be remembered is that it was done, and the naysayers will be forgotten.” How do you feel about that statement 25 years later?

The Rt. Hon. Brian Mulroney: Well, I feel that

statement was accurate. The Free Trade Agreement has proven to be of great significance for Canada, both economically and psychologically. It’s established Canada as a winner, a clear winner in our bilateral relationship, and by that I mean that we were not at all crushed as many of our opponents said. On the contrary, we’ve competed very effectively, as I believed we always could, and it’s helped us multilaterally, as it led to NAFTA, a tremendous profile now throughout Latin America, and it was the basis for the World Trade Organization multilateral agreements. So I think the Free Trade Agreement did a lot of good, and I think it will be so regarded as the decades flow by.

IP: Do you regard it as your most important achievement? Brian Mulroney: It is certainly an important achieve-

ment of the government of the day. There were others as well that range from the Meech Lake Accord, that had its own tremendous importance; to the work we did leading the Commonwealth with regard to the liberation of Nelson Mandela, and the fight against apartheid in South Africa; and the acid rain treaty with the US, which was very important. But I think, generally speaking, the FTA had such an impact on the country that you’d have to say it’s right up there in terms of important achievements.

IP: Getting there really wasn’t half the fun, was it? Brian Mulroney: (Laughs). I wanted to send a signal to President Reagan and his people that this was extremely serious, and that if this were not done, it would have enormous consequences for us all, including the United States. Moreover, we were against a unique backdrop here, because the fast track authority was set to expire in two days.

IP: Could I take you back to the evening of October 1, 1987?

You were standing in a back corridor of the York Club in Toronto, where you were speaking to the Bilderberg Group, talking on a public pay phone to your delegation at the US Treasury Department in Washington and ordering them home. And then they went back the next morning, and sat there until five minutes to midnight and the expiration of the US fast track authority. Take us through those two or three days. Why did you bring them home?

Brian Mulroney:

Well, I wanted to send a signal to President Reagan and his people that this was extremely seri-

ous, and that if this were not done, it would have enormous consequences for us all, including the United States. Moreover, we were against a unique backdrop here, because the fast track authority was set to expire in two days, and with that, had we lost the fast track, my sense is that we could never have gotten the FTA, through normal means, because we would have been whipsawed to death by each Congressman and Senator, who would then have been able to deal with their pet projects to the disadvantage of Canada, whereas the fast track required an up or down vote on the entire package, without amendments. And so it was vital to Canada that what we had secured be maintained, and we had one major bridge to cross, and that, of course, was the independent dispute settlement mechanism.

Jim Baker was a godsend. President Reagan appointed him, towards the end of the negotiations, to take over the file, and my guess is that without him we wouldn’t have got the deal. He was a unique and powerful player in Washington.

IP: On the evening of October 3, as the fast track authority

was running out, and the hands of the clock were ticking towards midnight, you had this famous conversation with Jim Baker, the US treasury secretary, who was their guy in charge of the file. Tell us about that.

Brian Mulroney: Well, Jim Baker was a godsend. Presi-

dent Reagan appointed him, towards the end of the negotiations, to take over the file, and my guess is that without him we wouldn’t have got the deal. He was a unique and powerful player in Washington. Baker’s problem at the very end came from the Congressional leadership, with whom he met that night, and they said to him: “We’ll support this, but we cannot support an independent dispute settlement mechanism, as proposed by Canada, because this would have the effect of diluting Congressional oversight and authority in matters of international trade and commerce.”

IP: So that was your deal breaker. Brian Mulroney: That was

the deal breaker. I had made it very clear to them that we needed this, because without this, there was an economy on the one side 10 times as strong as ours, they could crush us in any dispute, and so we had to have some independence and some impartiality in that structure. And so Jim Baker called me, and he and I had been good friends for some time, and still are all these years later. Jim called me and he said, “Prime Minister, look, we’re very close to an agreement, but I have to tell you I don’t think this is do-able with the independent dispute settlement mechanism for the reasons I’ve just mentioned.”

Special Issue – October 2012

And I said: “Well, OK Jim, fine. I’m now going to call President Reagan at Camp David and I’m going to ask him one question.”

Brian Mulroney: For the NAFTA and the WTO, it was

And he said: “PM, what’s that?” And I said, I’m going to say to him: ‘Ron, I want you to tell me how the United States of America can sign a nuclear reduction treaty with its worst enemy, the Soviet Union, but cannot sign a free trade agreement with its best friend, Canada.’ There was silence and then Baker said, “PM, can you give me 20 minutes?”

IP: George H.W. Bush, the first President Bush, has said that

IP: And then what? Brian Mulroney:

And then the next thing was when I heard from Derek Burney, and received what I’m about to tell you, that 20 minutes later or thereabouts, they were seated, the Canadian delegation, eight of them, that they were sitting around in the boardroom of the Treasury Department in Washington that had been assigned to them for the negotiations, and Jim Baker charged in and he threw a piece of paper on the table, and he said: “There’s your goddamn dispute settlement resolution.” And he said: “Now, can we get this to Congress?” Before midnight was what he meant, before the fast track expired.

incorporated into the WTO, the first dispute settlement mechanism since it ever existed. he never had a better friend and that America never had a better ally than you as Prime Minister of Canada. But he also famously said once that he got “an earful” from you about acid rain. How did you keep the Americans close without being too close to them, and stating our interests along the way?

Brian Mulroney: Well, it’s largely a personal initiative

between the prime minister and the president, and the vicepresident, but also leaders on both sides of the aisle in the Senate and in the House of Representatives, and leaders of interest groups, the media, and so on, and I made it my business over nine years to do that. I was interested in it and I enjoyed it. We had two excellent ambassadors, Allan Gotlieb and Derek Burney who did a tremendous amount on the ground, and we had great staff at the Embassy, and they would call me and say, “Senator Kennedy is upset about such and such a thing,” and I’d call him and I’d say, “Teddy, what’s going on, what about such and such?” And in the media, I often spoke to Ben Bradlee when he was editor of the Washington Post and also to the New York Times, and we would always explain Canada’s position to all of them, so that when there was a quarrel, it would take place with some firmness on our side, a lot of firmness, but without losing the friendship that you need from the president and his allies.

We’re a much more confident, outward looking people. We’re much more competitive and confident, because we know we can compete and succeed with anyone in the world. Look, if you can do it with the United States of America, you can do it with anyone. Prime Minister Mulroney welcomes President Reagan at the Shamrock Summit in Quebec City, March 17, 1985. Montreal Gazette archives

And so then, Derek Burney called me, and he was with the eight members of the Canadian delegation, and I was still in the Langevin Building. I asked him a few questions, and he said, “We’ve got our dispute settlement mechanism,” and I said, “That’s great, because without this, there’s no deal.”

IP: Did you have any doubts in your own mind at the time

that this would be good for Canada? I remember you saying at the time that free trade with the US would fundamentally change the mindset of Canada as a trading nation.

Brian Mulroney:

Then we went through it. Then he read me the salient parts that he had agreed upon, and I wanted to make sure that they were all there the way we had written them, then I asked him a few more questions, then I asked all the members of the delegation: “Does this meet the test that we had set for the fundamental test, the criteria of this negotiation?” and every one of them responded, all eight of them, Yes.

I think it’s one of the big achievements of the Free Trade Agreement, the transformation in our attitudes from being somewhat timorous about the Americans, and somewhat fearful of the Americans, to a situation where Canadians are not only confident about dealing with our friends in the US, but also around the world. We’re a much more confident, outward looking people. We’re much more competitive and confident, because we know we can compete and succeed with anyone in the world. Look, if you can do it with the United States of America, you can do it with anyone.

IP: And it later proved to be the dispute settlement mecha-

IP:

nism for the NAFTA, did it not?

In other words, that Canada has become a kick-ass country.

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

Brian Mulroney: You know how much I eschew vulgarity (laughs). But that’s an apt way to describe it.

IP: There were some elements that were left out of the FTA.

It used to be said back in the 1980s before the FTA that the main irritants in Canada-US trade were “hogs and logs, suds and spuds.” And the logs got left out. Softwood lumber.

Brian Mulroney: That is true. Softwood lumber in the

sense that it was always hanging out there, and that we had to make a decision. You know, President Reagan and the administration were under enormous pressure from the Pacific Northwest, the Senators and Congressmen out there were going to hold this thing hostage and so we had to make a decision. We had a terrific deal. Some of those guys out there were organizing their own little holdups. If you tried to get the Free Trade Agreement today, in Washington, I think you’d be waiting in a big line at the White House. We were the first in line in those days. And we were able to do this because of the influence that President Reagan and then-Vice President Bush brought to bear on this. Without that we don’t have a deal. The good faith that both of them showed in this, both of them, was absolutely remarkable.

If you tried to get the Free Trade Agreement today, in Washington, I think you’d be waiting in a big line at the White House. We were the first in line in those days. And we were able to do this because of the influence that President Reagan and then-Vice President Bush brought to bear on this.

IP: You remember President Reagan’s toast at Rideau Hall in

April 1987 when he said, “Americans look forward, Your Excellency, to the day when they can toast an occasion such as this in fine California wines.” And at the end of the day, wine was in the agreement and beer was out. And it was supposed to be the end of the Canadian wine industry, but it didn’t turn out that way, did it?

Brian Mulroney: Well, it was supposed to be the end

of Canada, too. You may remember Liberal ads in the 1988 election that erased the border, and this was the supposed consequence. Brian Mulroney, they intoned, was so enamoured of the Americans that he wanted to be governor of the 51st state. And he wanted to make Canada the 51st state. That was pretty preposterous stuff. But that’s what they were peddling in those days. Now one of the main victims was to be the wine industry. It’s prospering today in the Niagara Peninsula and the Okanagan Valley as never before in our history. As, for example, the clothing industry was supposed to be shut down, and yet Peerless Clothing here in Montreal is, as I understand it, the largest manufacturer of men’s suits in the world. And there are hundreds of examples like that. When you get privileged access to the largest, richest, most dynamic market in the world, as we did at that time, and trade expands to over $700 billion a year between two countries, you’re doing pretty well.

IP: Do you think the wine industry could serve as a model, in terms of transitioning, for supply management, in talks for the Trans-Pacific Partnership and the Canada-Europe Trade Area negotiations?

Brian Mulroney: Well, these are big challenges for the

present government, and they’re going to have to look at the precedents we established, and others, and see how to get it done. A government has to make some pretty vital decisions, based on their understanding and their appreciation of what the future is going to look like. You know, if you say, “I’m going to make a decision based on tomorrow’s headlines,” you’d probably be popular. But what will you have accomplished? You’ve got to be able to try, as best you can, to think, what is the world going to look like, 10 or 15 years down the road, and where does Canada fit in? How do we position Canada to make it more competitive and more prosperous with a greater capacity to create high-paying jobs in the new economy? And that, of course, is led by our exports. And so our access to international trading markets is where it all begins and ends for the future. And it’s up to the government, as it was for us, to try and anticipate where Canada’s going to be in a decade, and what instruments can we provide Canadians that will enhance their capacity to grow and prosper into that new era? And they can learn from our successes and failures and take them all to heart and see how they can better position the country in this regard. I think the present government, the Harper government, is doing a very good job in that. They seem to be moving the ball down the field, in a methodical, prudent but successful manner.

When you get privileged access to the largest, richest, most dynamic market in the world, as we did at that time, and trade expands to over $700 billion a year between two countries, you’re doing pretty well.

IP: They’ve got something like 60 bilateral negotiations on the go, that’s a lot of balls to keep in the air at one time.

Brian Mulroney: It is a lot. And consider that when we

came in, Canada didn’t have a single trade agreement with anyone in the world. So I think that the free trade agreement that Sir Wilfrid Laurier was ready to sign in 1911, which we finally got in 1987, was a real ground-breaker, a seminal moment in Canada’s history.

IP: How about the quality of our trade negotiators, both the politicians and the public servants?

Brian Mulroney: World class. The best in the world. The

ones that I associated with, both the public service, and people like Derek Burney, Michael Wilson, Pat Carney, and their colleagues, they were fabulous. They did a wonderful job.

IP: Let me take you back again to the York Club in Toronto

on the night of October 1, 1987, that pay phone, because

Special Issue – October 2012

there were no cell phones in those days, except for the one in the back of your car that was as big as a shoe box. So how has the world changed? All these digital platforms didn’t exist then. In your own lifetime, this has been a period of transformational change. Are we still at the beginning of this revolution?

Brian Mulroney: I remember, soon after I left office in

1993, watching the television news with Mila one night. To show you how long ago it was, I was actually watching the CBC. (Laughs) And I remember Peter Mansbridge coming on at the end of one of his newscasts, and Peter said something to the effect that, in the future when you want to communicate with me at the CBC, and you’ll write to petermansbridge@cbc.ca or something like that. And I saw that and I said to Mila, this will never work. That was my reaction to the Internet and its prospects. It’s been an extraordinary revolution. It was really nurtured in its infancy by our own children. I mean, they were born into it, they’ve grown up in it, and they’ve mastered it. People like myself, it’s taken a long time to catch on and catch up. But it’s changed everything we do, how we communicate, how we think, how we share information, how we process information, how we benefit from it. And we had none of that at the time, and so we had to rely on a lot of shoe leather and blood, sweat, and tears.

IP:

You travel a lot. The Free Trade Agreement probably helped create such global Canadian brands such as BlackBerry, CAE, and Bombardier, companies that do 95 percent of their sales outside of Canada.

Brian Mulroney:

Well, look, when you’re generating the kind of dollars that we are as a percentage of GDP, much of it coming through the Free Trade Agreement and NAFTA, it’s astonishing. You can see not only the economic benefits of it, but the benefit of being a player in a broader region. When you look at Latin America, for example. NAFTA was an extension of the Canada-US FTA. Mexico is going to be a super power in the future. We had to fight to get in that negotiation, but we did, and we’ve made a terrific contribution, but Canada has also benefited from the entrée that we didn’t have previously into Latin America. At the same time, we decided to join the Organization of American States. We had been absent from our own hemisphere for decades and now we are significant players down there, in all aspects of life, political and economic. And the present Harper government has made Latin America a priority, and one day I think you’ll see a Free Trade Agreement of the Americas, with 34 countries and 900 million people, and a GDP of $20 trillion to $25 trillion a year, with Canada right in the catbird seat with the United States in promoting this huge development.

IP: You’ve just articulated President Reagan’s original dream and vision of a hemispheric free trade area.

Brian Mulroney: Well, he was consistent on that. Presi-

dent Reagan was a true free trader. And he was from the very beginning and to the end, in the FTA negotiations, when he stepped in and helped both his country and ours achieve this major objective.

IP: Finally, my 22-year old daughter says to me from time to

time about the 1988 free trade election, “Dad, what was that

all about?” And it seems to me that it was the last election in Canada that was truly consequential, fought as a matter of honour, on a battlefield of honour among the three leaders, yourself, Mr. Turner, and Mr. Broadbent.

President Reagan was a true free trader. And he was from the very beginning and to the end, in the FTA negotiations, when he stepped in and helped both his country and ours achieve this major objective.

Brian Mulroney: It was a great election. It’s referred to in one of the most recent books as one of the two or three most important elections in Canadian history, and I think it was. It was a tough one. John Turner was a very tough opponent, as was Ed Broadbent. But we had a position where I put free trade in the window and they were on the other side of the issue. They made it extremely difficult for us throughout. We had to defend against it and also be positive about what free trade could mean for our children and grandchildren. And you had people understandably terrified when you had responsible people like the leader of the opposition and the leader of the NDP saying we were going to lose our Medicare, we were going to lose our languages, we were going to lose regional development, we were going to lose our water. You name it, we were going to lose it. And we were going to be integrated into the United States and we were going to become the 51st state. This scares the hell out of a lot of people. Good thinking, hard working people would say, “I don’t want that.” Of course, it never was that. But I’ll tell you, in that election campaign, it sounded like that to a lot of people. So we had to fight off two very formidable adversaries, and we did. And we came back with another majority government. But I think Canada has benefited as a result of all that. And I’m glad that we were able to rally Canadians to our cause in 1988, because as I’ve said, you wouldn’t want to try to secure this agreement today.

IP: But on a personal level, you liked those two guys, didn’t you?

Brian Mulroney:

Yeah, sure. Still do. Mr. Broadbent was and is a great guy, and John Turner was not only impressive but a very persuasive person. I remember John Turner in his early years in politics in the House of Commons. He was a marvellously successful young man in those days. And he became a very effective cabinet minister, and then came back in very difficult circumstances, because Mr. Trudeau’s government had been there for about 15 years, and so he was carrying the water for them, and that’s a tough thing to do. But they’re both very impressive people.

IP: Thank you for this. Brian Mulroney: Happy to do it.

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

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MY MEDICINE is my hope

I was born with an extremely rare disorder which means I have zero growth hormone. As a child, I received medication to keep my condition in check but there was no treatment for adults with this disorder, so for 20 years my health deteriorated drastically. By sheer willpower and a My name is Maureen Smith I’m 53 years old I’m from Ottawa and I live with a rare hormonal disorder

lot of luck, I found a clinical trial for a new drug – my life was changed. I can’t describe the exhilaration of taking a medicine that literally turns your despair into hope. I’m healthier today than I was at 25, and I am so grateful for the medicine that keeps me alive. www.canadapharma.org/hope

Canada’s Research-Based Pharmaceutical Companies Making Canada Better

Special Issue – October 2012

Free Trade at 25 HOW THE FTA POSITIONED CANADA FOR THE 21ST CENTURY Douglas Porter

Douglas Porter, Deputy Chief Economist, BMO Capital Markets, analyses the far-reaching and long-lasting effects of the Canada-US Free Trade Agreement (FTA) on its 25th anniversary. Porter argues that the FTA, and the subsequent North American Free Trade Agreement (NAFTA), were critical ingredients in helping modernize the Canadian economy, and have ultimately played a significant role in transforming Canada from a relative underachiever among industrial world economies to a relative overachiever. Dans cette analyse des effets profonds et durables de l’Accord de libreéchange canado-américain (ALE) conclu il y a 25 ans, Douglas Porter, économiste

en chef adjoint de BMO Marché des capitaux, affirme que jumelé au subséquent Accord de libre-échange nord-américain (ALENA), il a clairement favorisé la mod-

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

ernisation de l’économie canadienne et fait évoluer le Canada de pays relativement sous-performant à pays relativement surdoué parmi les nations industrialisées.

he Canada-US free trade negotiations reached agree ment in October 1987, exactly a quarter century ago. While the agreement did not come into force until the start of 1989, and only after a bruising Canadian federal election focused almost exclusively on the Free Trade Agreement (FTA), there is little doubt that businesses and the economy began preparing for free trade almost from the minute the ink was dry in the fall of 1987. Over the past 25 years, the Canadian economy has dealt with a number of transformational issues, some driven by changes in domestic policy and some foisted upon the country from abroad. The former group would include the Goods and Services Tax (and later Harmonized Sales Tax in many provinces), inflation targeting, and sustained government restraint in the second half of the 1990s. The latter group would include a collapse in interest rates, a tech sector boom and bust, the rapid industrialization of China, a commodity price boom, a 75 percent appreciation of the Canadian dollar in the short span of five years in the 2000s, the global financial crisis of 2008/09, and the Eurozone sovereign debt and banking crisis. But among all of these profound shifts, arguably none has had as far-reaching and long-lasting effects as the FTA and its 1994 successor, the North American Free Trade Agreement (NAFTA).

“Canada’s choice also reflected recognition of the dynamism of the US economy, the waning prospect of the EU’s ever emerging as anything more than specialized, regional market for Canadian suppliers, and frustration at the slow pace of multilateral trade negotiations at the GATT in Geneva. At the time, there was also some hope that stronger Canada-US ties would create an enhanced platform from which Canadian firms could pursue emerging markets in Latin America and Asia.” REPORT FROM THE C.D. HOWE INSTITUTE

hile proposed Canada-US free trade deals have a long history – featuring prominently in the 1911 federal election – the genesis of the FTA really began in the 1982 recession. In the wake of that devastating downturn, which brought even deeper GDP and employment losses than the 2008/09 recession in Canada and saw the unemployment rate spike to 13 percent in late 1982, the Trudeau government asked the Macdonald Royal Commission to find steps to strengthen and improve the Canadian economy. One of the key recommendations of the Macdonald Commission was to seek a free trade agreement with the United States. As Michael Hart commented in a recent C.D. Howe report, “Canada’s choice also reflected recognition of the dynamism of the US economy, the waning prospect of the EU’s

ever emerging as anything more than specialized, regional market for Canadian suppliers, and frustration at the slow pace of multilateral trade negotiations at the GATT in Geneva. At the time, there was also some hope that stronger Canada-US ties would create an enhanced platform from which Canadian firms could pursue emerging markets in Latin America and Asia.” When the Macdonald Commission reported, the Mulroney government seized on the recommendation, and began negotiations in June 1986. The deal was struck little more than a year later, signed in early 1988, and approved later that year in both countries – but only after the highly contentious Canadian election campaign during the autumn. Negotiations to expand to NAFTA began in earnest in the early 1990s, with a deal signed in San Antonio by the three leaders of Canada, the US, and Mexico on December 17, 1992. And, it became a hotly debated topic in 1993, proving much more politically sensitive than the FTA. It was officially approved in the US in November 1993, following a tight vote in the House of Representatives (and relatively easy passage in the more trade-friendly Senate). While NAFTA was a feature in the 1993 Canadian federal election, along with pledges to renegotiate it by the eventual winning Chrétien Liberals, it played far from a dominant role in the campaign, in stark contrast to the FTA five years earlier. The final side deals on labour and the environment, which the Liberals had pledged during the election, proved relatively minor. In contrast to the US experience, NAFTA was much less contentious than the FTA in Canada, partly reflecting the much smaller impact of Mexico on Canada’s economy, as well as generally positive early reviews of the FTA.

While NAFTA was a feature in the 1993 Canadian federal election, along with pledges to renegotiate it by the eventual winning Chrétien Liberals, it played far from a dominant role in the campaign, in stark contrast to the FTA five years earlier. Since NAFTA, Canada has signed a series of bilateral trade deals with some other smaller countries, including Israel (1997), Chile (1997), Costa Rica (2002), Colombia (2008), Peru (2008), Jordan (2009), Panama (2010), and EFTA (2009). The country is also in negotiations with Japan, Korea, and the European Union. Prime Minister Harper aims to strike a wide-ranging deal with the EU by the end of 2012, although there have already been nine formal rounds of negotiations and there are still a few key sticking points. Given the likelihood of years of subpar economic growth in Europe, as it deals with its debt crisis, the Trans-Pacific Partnership may ultimately hold more promise for future trade growth.

Special Issue – October 2012

here are numerous ways to assess the FTA. Since it was fundamentally a trade agreement at heart, the impact on trade is probably the best way to start. But, perhaps the most straightforward way of assessing the FTA, and also the most common way of gauging its impact, may also be the most misleading – the value of Canadian merchandise exports to the US. Proponents of the deal readily pointed to the rapid run-up in Canadian sales to the US in the first decade after the deal came into effect. Bilateral exports shot up from barely $100 billion per year in the late 1980s to more than $350 billion by 2000, an incredible annualized growth rate of more than 12 percent (chart 1). It was a broadly similar, if slightly less dramatic, picture on the import side. That tremendous burst in trade flows is typically seen as a strong endorsement for the deal, and the majority of analysts pointed to it as all the evidence needed to judge the FTA (and NAFTA) as a success, particularly at the 10-year mark of the deal. (See, for example, “Two Cheers for the FTA: Ten-Year Review of the Canada-U.S. Free Trade Agreement”, by John McCallum.)

dian exports to the US have grown at an average annual rate of just over 5 percent since 1988, only slightly faster than Canadian nominal GDP growth of 4.6 percent over that stretch. While no doubt still a solid growth performance, note that exports to the US rose at a 13 percent annual rate in the 1971-88 period ahead of FTA, versus an average annual increase of 11.3 percent in nominal GDP. Another way to look at the same figures from a different perspective is to consider exports to the US as a share of Canadian nominal GDP. From around 17 percent of GDP just before the FTA, the share surged to a peak of 33.3 percent in 2000, before tumbling back down to below 18 percent in 2009. The share has recovered somewhat in the past few years alongside the tepid recovery in US spending, but is now just a little above 19 percent. Similarly, total Canadian trade with the US (including merchandise exports and imports) rose from just over 31 percent of GDP prior to the FTA, to a peak of 56.7 percent in 2000, but has since receded to only slightly more than 35 percent – coming almost full circle (chart 2).

CHART 1

CHART 12 CHART

A Tale of Two Halves

AUp, Tale of Two Halves then Down

Canada (C$ blns: a.r.)

(%blns of nominal GDP) Canada Canada(C$ : a.r.)

Exports to US

Exports to U.S. Trade with US

no growth

400

no growth

400 60

12% a.r. growth

300

12% a.r. growth

300 50

45 200

2000

1994

100

0 85

Start of NAFTA 1989

Start of FTA 80

1994

100 30

Start of NAFTA 1989

However, perhaps less well-advertised is the fact that Canadian exports to the US have since flattened; and, in fact, they have actually been below the 2000 peak in the latest 12-month period, even with a significant recovery from the 2009 depths. There are a variety of reasons for the shift from rapid acceleration to a lengthy lull. Sales were hit hard by the tech bust from 2000-2002, but also by a thickening of the border in the wake of 9/11 and the increased security measures. The latter effect has become semi-permanent, even with some initiatives to improve the flow of goods. But, just as exports of goods and services were beginning to make some headway again, they were then restrained by the persistent strength in the Canadian dollar (especially in 2006/07), and then heavily undercut by the global Great Recession in 2008/09. Export volumes are still struggling to recoup those recession losses, remaining below the 2007 peak, and are even further below the earlier highs hit in 2000 at the apex of the tech boom. Taking the two extremely different periods together, Cana-

56.7

200 40

35.4

31.3

Start of FTA 1988

0 20 80 75

85 80

8590

90 95

05 05

1010

Does the retreat in trade with the US in the past decade cast doubt on the success of the FTA? Not really. The split personality of Canadian exports to the US in the past quarter century says as much about the wild swings in the Canadian dollar and the significant adjustments in the US economy as they do about the underlying strength of trade. So, does the retreat in trade with the US in the past decade cast doubt on the success of the FTA? Not really. The split personality of Canadian exports to the US in the past quarter century says as much about the wild swings in the Canadian dollar and the significant adjustments in the US economy as they do about the underlying strength of trade. Recall that the trade data are reported in current Canadian dollar terms,

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

and the currency at one point rose by more than 75 percent in the short space of six years from early 2002 to late 2007. Since Canada is largely a “price taker”, and its exports are thus priced in US dollars, sharp swings in the exchange rate will readily translate into sharp swings in the Canadian dollar value of exports. In a nutshell, the apparent export surge in the 1990s was flattered by a plunge in the loonie, while the flattening out of exports over the past decade was exacerbated by the loonie’s historic sprint.

CHART 3

The C$-Effect Canada ($ blns) Exports to US 35 30 25

C$-terms

20 15

Since Canada is largely a “price taker”, and its exports are thus priced in US dollars, sharp swings in the exchange rate will readily translate into sharp swings in the Canadian dollar value of exports.

US$-terms

1989

Start of FTA

0 83

US recession

CHART 4

Solid Progress Comparing the Canadian dollar value of exports to the US with the US dollar value provides a very different picture of the past 25 years. The progress appears much steadier over the first 20 years, aside from the pullback during the tech wreck in 2001 (chart 3). While the deep downturn during the Global Financial Crisis in 2008/09 is similar by both measures, the overall pattern in US dollar terms is consistent with solid gains over the entire period. Taking it a step further, and adjusting Canadian exports for inflation, reinforces the point. From this perspective of real exports in US dollar terms, Canadian sales have expanded steadily, pushed above the long-term trend, at first by the tech boom and then by the commodity boom, and pulled below trend by the recent deep recession (chart 4). From the US perspective, imports from Canada have expanded from 3.0 percent of US GDP prior to the start of the FTA, to an initial peak of 4.1 percent at the height of the tech boom in 2000 (chart 5). The share then slipped during the tech wreck, but regained steam and reached an all-time high of 4.3 percent just before the onset of the Great Recession, after which it declined to 3 percent. The share has since partially recovered to 4.0 percent of US GDP, an increase of 1 percentage point from pre-FTA levels. In other words, despite all the wild gyrations in the loonie, global commodity prices, and two deep downturns, Canadian exports have increased their standing as a share of the US economy over the past 25 years. While the gains are nowhere near as dramatic as the initial surge in exports seemed to imply, there has been unquestionable steady progress over the period.

Despite all the wild gyrations in the loonie, global commodity prices, and two deep downturns, Canadian exports have increased their standing as a share of the US economy over matic as the initial surge in exports seemed to imply, there the past 25 years. has been unquestionable steady progress over the period.

Canada (US$ blns: real terms) Exports to US Commodity Boom

16 14

Tech Boom

12 10 8

Financial Crisis

6 1989

Start of FTA US recession

2 81

CHART 5

Canada’s Steady Gains United States (% of US GDP) Trade with Canada 4.4 4.0

4.0 3.6 4.1

2000

3.2 2.8

4.3

3.0

2008

1989 2.4 81

However, it is worthwhile pointing out that these gains came against a backdrop of persistent import penetration into the US economy. In fact, Canada’s share of US imports has declined in the past quarter century. From 18.5 percent of US imports prior to the FTA, Canada’s share has since receded to 14.3 percent in the most recent 12 months (table 1 and chart

Special Issue – October 2012

6). That’s the glass-half-empty perspective. The glass-half-full view would note that all industrialized economies saw large import share losses in the US since 1988, with Japan’s plunging more than 14 percentage points, the European Union’s falling almost 5 points and the Asian tigers losing nearly 9 points. Those combined losses were almost entirely taken by gains in two emerging economies – China (up 16 points) and Mexico (up 7 points). Given the enormous strides by these two, and other developing economies, the fact that Canada has largely held its own in the hyper-competitive US market should be viewed as an accomplishment.

eyond increasing trade, the FTA and NAFTA were also aimed at strengthening and improving the environment for cross-border investment, especially foreign direct investment. While there have been some highprofile squabbles in the past 25 years, overall the FTA should be judged a success on this front. Foreign direct investment from the US into Canada averaged just $1.7 billion annually in the six years prior to the FTA, $4.7 billion per year in the first six years of FTA (and just prior to NAFTA), but then has shot up to $19.8 billion per year since 1995 (chart 7). As a share of GDP, those figures are 0.3 percent, 0.7 percent, and then all the way up to 1.6 percent. A little bit more than half of the inflows since 1995 have been in the resource and financial services sectors.

TABLE 1

Tough Competition in the US United States (% of total imports) Imports by Country/Region 1998

2011/ 12

Canada

18.5

14.3

Mexico

5.2

21.2

16.6

-4.6

Japan

20.3

6.2

-14.1

Asian Tigers

14.3

5.4

-8.9

26.3

12.0

-4.2

+2.6

+6.8

OPEC

5.2

8.6

+3.4

China

1.9

18.2

+16.3

Other

13.4

18.7

+5.3

CHART 6

Shifting Sands United States

(% of total)

Imports 25

1989

1994

Start of FTA Start of NAFTA

Canada

Japan Eurozone

Asian Tigers

Beyond increasing trade, the FTA and NAFTA were also aimed at strengthening and improving the environment for cross-border investment, especially foreign direct investment. While there have been some high-profile squabbles in the past 25 years, overall the FTA should be judged a success on this front.

23.7

Change

Mexico 5

China

0 85

CHART 7

FDI: Upswing ($ blns: 6-yr avg.) 300

On the flip side, Canadian FDI into the US has also picked up notably, rising from an average outflow of $3.8 billion per year in the 1983-88 period and just $2.6 billion annually from 1989-94, to $22.3 billion per year since that point – even larger than the net inflows into Canada. The outbound investment from Canada and into the US has been dominated by the financial services sector, which alone has absorbed half of the total investment since 1995. The above figures represent the annual flows between the two countries. Looking instead at the total existing stock of direct investment, US direct investment in Canada has jumped from $76 billion at the end of 1988 to $326 billion by the end of 2011. That represents an average annual growth rate of 6.5 percent, more than 2 percentage points faster than nominal GDP growth. The share of US FDI in Canada has thus risen from just over 1 percent of Canadian GDP before the FTA to almost 19 percent now. On the flip side, the stock of Canadian FDI in the US has risen from $51 billion to $276 billion, or from 8.3 percent of Canadian GDP just before FTA to 16.0 percent now.

250 200

US Investment in Canada

150 100

Canadian Investment in US

50 0 60

t was almost an article of faith that the FTA and NAF TA would lead to greater specialization in the Canadian economy, as smaller, less-efficient firms and sectors got squeezed out and larger and more efficient firms increased the size of operations. However, the scale of Canadian enterprises has not changed materially since 1997. Even with plenty of consolidation in the early years after NAFTA

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CHART 8

Sectoral Shifts: Subtle Canada (% of total) Export Composition

Import Composition

60 Machinery/ Industrial

Machinery/ Industrial

Resources

Autos

Consumer Goods

0 1980s

1990s

2000s

2010-11

Autos Resources Consumer Goods

0 1980s

1990s

2000s

2010-11

CHART 9

Exports by Sector Canada (% chng: a.r.) Exports to US

2000-2011

1995-2000

xports in the auto industry have been scaled down, with both economic conditions and relative cost issues playing crucial roles. Export growth averaged 10 percent annually from 1989 to 2000, and then fell at a 4.5 percent average from 2000 to 2011 (chart 9). Specifically, the engine and transmission component pushed ahead at full throttle with average annual growth of 18 percent after tariffs were lifted (only completed cars were exempt under the Auto Pact) from 1994 to 2000, before idling from 2000 to 2011. The auto sector portion of total Canadian merchandise exports has recently recovered to about 16 percent after sliding below 12 percent in 2009, but remains far below the 23 percent average share in the 1980s and 1990s. An even more dramatic shift in the transportation sector can be found in aerospace, where shipments soared at an average annual pace of 24 percent from 1994 to 2000, but have since stabilized, slipping 0.2 percent per year on average since 2000. Similar to autos, the machinery industry has seen exports to the US dip in the past decade, after double-digit growth in the 1990s.

Mining (except Oil & Gas) Oil & Gas

CHART 10

Chemicals

Trade Growth by Decade

TOTAL

Merchandise Exports â&#x20AC;&#x201C; Canada (% of GDP)

Primary Metals

To the World

Agriculture Machinery Motor Vehicle Parts Forestry & Logging -15

-10

-5

and the dissolution of smaller, less efficient, enterprises, the share of Canadians working at small, medium, and large companies remains nearly unchanged over the period at 66 percent, 21 percent, and 13 percent respectively. This is certainly not a mark against the FTA or NAFTA, as many smaller enterprises have sprung up in recent years, especially in services, amid the broad sectoral shifts in the economy over the past quarter century. There have been some very significant differences between the export growth for certain sectors before and after the start of the run-up in commodity prices (and the coincident surge in the Canadian dollar), which began just over a decade ago (chart 8). Even with marked changes in relative prices and profound cyclical shifts, it appears that overall the FTA and NAFTA heavily supported export growth in the commodity sector (partly thanks to more affordable capital goods and increased investment in the sector) and in highly regulated niche industries (pharmaceutical products in particular). At the same time, cost-sensitive industries in the manufacturing sector have, in some cases, seen reversals of earlier gains in the American market (notably textiles and lumber), due to weakness in US demand and/or strength in the Canadian dollar.

To the US

1980s

1990s

2000s 2010-11

1980s

1990s

2000s 2010-11

Merchandise Imports â&#x20AC;&#x201C; Canada (% of GDP) To the World

To the US

1980s

1990s

2000s 2010-11

1980s

1990s

2000s 2010-11

In the resource sector, the picture has been dominated by the massive swings in commodity prices, which largely masks underlying shifts. Still, oil and gas exports to the US increased at an annual pace of more than 20 percent from 1995 to 2000,

Special Issue â&#x20AC;&#x201C; October 2012

even amid relatively weak oil prices, but the higher dollar and falling gas sales restrained receipts from 2000 to 2011 to an average growth rate of 6.8 percent. The forestry and logging industry has managed to stave off weak US demand and quotas by shipping to China. However, sales to the US in this industry have braked from a 20 percent pace before 2000 to double-digit declines since that point (see sidebar on lumber). The mining sector has seen the strongest growth since 2000 with average gains of better than 7 percent, after barely moving in the prior six years, although the swings are dominated by price changes. Agriculture exports to the world grew by nearly 7 percent on average annually from 2000 to 2011, after holding steady from 1994 to 2000, although most of the appreciation stems from an increase in prices as sales gains to the US have been much more muted (averaging 5 percent in the past 20 years). The share of trade in GDP to the world, and specifically to the US, are detailed in chart 10.

SOFTWOOD LUMBER The sector was left out of the FTA, largely due to irreconcilable differences at the time, and proved to be a trade flashpoint over the years. Finally, a side deal was struck in 2006. Here is how the Department of Foreign Affairs and International Trade sees it: To move beyond these disputes, Canada and the United States signed the 2006 Softwood Lumber Agreement (SLA) on September 12, 2006. The SLA, which came into force on October 12, 2006 for an initial seven-year term, saw the return of more than $5 billion in duty deposits by US authorities to Canadian companies. The Agreement has promoted a stable trade environment for the softwood lumber industry and has maximized benefits to Canadian industry, its workers and their communities. With the strong support of industry and provinces, Canada and the United States agreed to extend the SLA for an additional two years, to October 2015. This agreement was signed by Minister Ed Fast and United States Trade Representative Ron Kirk on January 23, 2012, and was ratified by both countries on April 20, 2012. Total Canadian lumber exports are now little more than $5 billion per annum, or barely 1 percent of all merchandise exports, compared with a 4-5 percent share of total exports in the late 1980s and early 1990s, with the steep drop largely owing to the deep downturn in US housing, not a fundamental trade problem.

uring the hotly contested and FTA-driven 1988 Canadian federal election, there were significant divergences among regions on support for free trade. Quebec and Alberta were by far the biggest supporters of the FTA, for very different reasons, and these two provinces voted overwhelmingly in favour of the deal. Note that the only other province where the Progressive Conservatives led in the popular vote was Manitoba, and the opposition parties combined to win more seats than the ruling party in almost all other provinces. CHART 11

Long-term Winners and Losers Canada by Province (% chng since 1988: a.r.) Employment Growth

Real GDP Alta

Alta BC

Canada

Nfld

Ont

Sask

PEI

Que

Canada

Man

Ont

Man

Sask

Que

Nfld

NS 0

Over a 25-year period that saw many structural shifts, it is nearly impossible to pinpoint the regional impact of the trade deal. However, there is little doubt that Alberta has been the relative economic winner over that time period, posting both the strongest employment and real GDP growth of all the provinces since 1988 (chart 11). Of course, the rebound in oil prices from very weak levels in the years preceding the FTA and the development of the oil sands have together provided the fuel for the longstanding boom in Alberta. But, there is also little doubt that the generous treatment of energy in the FTA played a highly supportive role for investment and production in the sector as well, providing a sustained boost to Alberta’s performance. While some specific industry sectors in Quebec certainly benefited from the FTA, notably pharmaceuticals and aerospace, the province has seen slightly below-average job growth over the past quarter century and well-below average GDP growth. As noted earlier, the Canadian dollar has run the gamut of emotions and levels in the 25 years since the FTA deal was signed. Broadly speaking, it appreciated steadily in the first few years of the deal, plunged consistently over the 1990s, but then came roaring back in the 2000s (chart 12). Since the record high in late 2007, it has been largely driven by events far beyond Canada’s borders, with the currency tied to all other so-called “risk assets” (global stock markets, commodity prices, and other resource-driven currencies). But through all the gyrations over the past three decades, commodity prices have been the single most important factor.

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

the associated attempt to rid the economy of double-digit inflation. That process was further advanced by the tight monetary policy in the late 1980s and early 1990s, as well as the adoption of inflation targeting in 1991. And, in the past 10 years, the strong Canadian dollar has acted as another powerful inflation suppressor.

CHART 12

The Loonie’s Long and Winding Road (C$/US$)

Canadian Dollar 1.10 Parity

1.00 0.90 0.80 0.70 0.60 55

There was some speculation early on that there had been some kind of unspoken or secret arrangement on the currency in the FTA negotiations. But history suggests that the Canadian dollar has consistently followed its commodity price lead. While monetary policy was unusually tight in the early days of the FTA, especially compared with the US, this was largely driven by the Bank of Canada’s intense determination to bring slightly higher Canadian inflation down to 2 percent or lower (which later became enshrined in inflation targeting in 1991). CHART 13

Inflation Turnabout (25-yr % chng: a.r.)

In other words, there are a wide variety of factors that have helped keep inflation much lower since FTA than in the prior decades. The pace of the past 25 years (2.3 percent) is right in line with the average pace in the 50 years up to the oil shock in the early 1970s. So, the outlier appears to be the 1973-82 period on the inflation front. However, it is fair to say that the FTA did help grease the slide of inflation in the early 1990s, contributing to the intense anti-inflation thrust of the Bank of Canada at the time. Notably, average US CPI inflation has been 0.5 percentage points higher than in Canada in the past 25 years (2.8 percent versus 2.3 percent), while it was 0.6 percentage points lower in the prior 25 years before the FTA agreement (chart 13). While there are a number of factors that could help explain this turnabout of more than 1 percentage point in relative inflation performance, the FTA no doubt played a constructive role.

Consumer Price Index 7

Canada

+0.6 ppts

4 -0.5 ppts

3 2 70

One of the primary positives cited for the initial FTA was that it would serve as a vehicle to help bring down the prices of many goods for Canadians as tariffs fell and competition increased. Also, the rationalization of production was seen as a means to help clip inflation. While there is absolutely no debate that inflation has been considerably lower in the past 25 years, averaging just 2.3 percent versus more than 6 percent in the previous 25-year period, there are many factors that have driven inflation lower. The average inflation rate had already dipped to just over 4 percent in the five years prior to the FTA, reflecting the deep recession in the early 1980s and

The overall conclusion is that the FTA, and then NAFTA, were critical ingredients in helping modernize the Canadian economy, and have ultimately played a big role in transforming Canada from a relative underachiever among industrial world economies to a relative overachiever. Of course, there have been a number of reforms Canada has taken over the years, but in many respects the FTA paved the way for future tough decisions. While the FTA debate was highly contentious in 1988, it did fully engage Canadians in economic and trade matters. The deal also sharply clarified trade and investment rules within North America, and likely helped avert serious protectionist measures from arising within the region during the steep economic downturns of the past decade. Some of the purported benefits of FTA may have been overstated – average unemployment rates and productivity growth since 1988 have been amazingly similar to the prior two decades, for instance – but there has been a net strengthening in North American trade and foreign investment flows, and the deal helped grease the slide for Canadian inflation. Douglas Porter (douglas.porter@bmo.com) is Deputy Chief Economist of BMO Capital Markets.

Special Issue – October 2012

Canada’s Challenge – From Good to Great A CHANGING WORLD, IN TRANSFORMING TIMES Kevin Lynch

“Canada’s challenge,” writes Kevin Lynch, “is going from good to great.” The fundamentals of the Canadian economy, our fiscal frameworks, and our financial system are among the strongest in the entire world. But Canada also faces challenges on productivity, R&D, and diversifying markets beyond the United States, notably to Asia, which within a decade will account for half the world’s output. « Les perspectives du Canada varient de bonnes à excellentes », écrit Kevin Lynch, pour qui les éléments fondamentaux de notre économie, nos cadres bud-

gétaires et notre système financier sont parmi les plus solides du monde. Mais le Canada doit aussi relever d’importants défis en termes de productivité, de R-D et de

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

diversification des marchés. Par-delà les États-Unis, il doit surtout se tourner vers l’Asie, qui comptera dans 10 ans pour la moitié de la production mondiale.

hree decades ago, like today, the mantra was that the world was changing, and so must we in Canada to compete and thrive. But what a different world today, and what a transformed Canada. It is timely to remind ourselves of the early 1980s. The United States was far and away the world’s dominant economy and, with the crumbling of the Union of Soviet Socialist Republics, was equally becoming preeminent in global political and military affairs. The Organisation for Economic Co-operation and Development (OECD) club of rich nations were beset with slowing growth, large government sectors, rising public debt, inflationary cycles, and constricted markets. The impetus for change largely came from within, and was heavily policy driven. At its core, this “new agenda for growth” in OECD countries was based on the view that we needed to rebalance our economies towards the private sector and away from a government sector with excessive rules and regulations stifling entrepreneurship; government corporations providing not just public services but also commercial services, and poorly; endless deficits, increasing taxes, and rising debt crowding out private sector financing; and too many barriers to competition, both inside countries and between countries.

But 25 years on, the world is changing again, profoundly. We are entering a new global normal, a structural change, not a cyclical episode, and things will not be as they were. The centre of global economic gravity is shifting to Asia and other dynamic emerging economies.

This rebalancing proceeded in different ways and at different paces in the OECD countries, but everywhere it amounted to a sea change in how markets work, how governments operate, and where we look for sustained job creation and growth. The transformation of the Canadian economy over this period was quite remarkable. Gone are endless structural fiscal deficits, replaced by the lowest net public debt in the G7. Gone is a swath of government corporations ranging from national airlines to national oil companies to national railways. Gone are high and volatile inflation expectations, anchored by explicit monetary inflation targets. Gone are high corporate tax rates and decrepit manufacturing and sales taxes that hindered our competitiveness, replaced by a corporate tax rate that is now 12 percentage points below the US and a national GST system that is harmonized with most provinces. Gone are tariffs and many trade barriers with the US and Mexico, replaced by the Canada-US Free Trade Agreement (FTA) and the North American Free Trade Agreement (NAFTA). Not gone sufficiently are internal trade barriers, restrictions on competition and corporate attitudes to productivity and innovation. And gone for good, particularly among younger Canadians, is any sense of global inferiority. The

FTA had a profound impact on attitudes – a new sense that we could win without protective trade barriers. In short, policy matters.

Globalization is challenging our traditional notions of markets, consumers, and comparative advantage, and the Information Revolution is shattering them. The digital universe is transforming what markets mean and how social interaction and communication take place. But 25 years on, the world is changing again, profoundly. We are entering a new global normal, a structural change, not a cyclical episode, and things will not be as they were. The centre of global economic gravity is shifting to Asia and other dynamic emerging economies. In the coming decade, Asia will account for 50 percent of global GDP, the Chinese economy will surpass that of the US, and a two-speed world will emerge in which the dynamic non-OECD economies will set the global growth tempo and many OECD economies will be stuck in the slow lane.

lobalization is challenging our traditional notions of markets, consumers, and comparative advantage, and the Information Revolution is shattering them. The digital universe is transforming what markets mean and how social interaction and communication take place. And then there are the seismic demographic trends. We are aging collectively in most OECD countries (and even in some non-OECD countries such as China and Russia) for the first time in modern times, and the implications are enormous. Canada is entering a period where declining proportions of the population are working and, as this continues, the availability of skilled labour will become a significant constraint on growth. Labour market policies must switch away from yesterday’s challenge of excess labour chasing too few jobs to tomorrow’s reality of too many jobs desperately seeking skilled knowledge workers. In this changing world, the drivers of success are also shifting. A truly global marketplace requires an international perspective and a capacity to serve markets that transcends traditional boundaries in order to succeed. The ability to attract and retain talent globally is vital, and that is why immigration is so important – one quarter of all the new high technology companies started in the US over the last decade had a foreign-born founder. Driving competitiveness through stronger productivity and faster innovation is crucial to competing with high scale, low cost competitors. And, in a more volatile and uncertain world, stable and trusted institutions and sound fundamentals create competitive advantage. Now, in this profoundly changing world, Canada has a good story to tell. We withstood the financial crisis better than most countries, and our recovery from the global recession has been faster and stronger than many G7 countries, par-

Special Issue – October 2012

ticularly the US. Our relative global strengths include: solid macroeconomic policies; robust natural resources; a sound financial system; a resilient, diversified economy; and strong civic institutions which adhere to the rule of law.

Driving competitiveness through stronger productivity and faster innovation is crucial to competing with high scale, low cost competitors. And, in a more volatile and uncertain world, stable and trusted institutions and sound fundamentals create competitive advantage.

But these strengths are platforms upon which to build, to adapt, and to transform in response to today’s changing world. They are not reasons for complacency nor excuses to embrace the status quo and hold to the way things were. The FTA was an enormous pivot in Canadians’ thinking about competitive markets and our capabilities. We are at a similar inflexion point now, where the winds of change are global not local, and the adjustments are more complex because they are less policy levers to be pulled than attitudes to be altered. Canada is a sophisticated economy, with a well-educated and multicultural workforce, and a very high standard of living. But the global marketplace we operate in is dynamic, not static. The “rise of the rest”, in Fareed Zakaria’s evocative phrase, is changing the competitiveness model of “the rich”. In this changing world we are a high wage economy and a chronic underperformer in innovation and productivity. Canada simply cannot sustain above-average living standards and belowaverage innovation investment and productivity growth.

• Canada’s business spending on R&D is 1.0 percent of GDP, well below the OECD average of 1.6 percent, and half that of US business. Canadian business has the dubious distinction of ranking 20th in the OECD in research. • Canadian business spends less than 55 percent as much as US business on ICT (information and communications technologies) and less than 75 percent as much on leading edge machinery and equipment – both instrumental to productivity growth. • Canada’s trade is highly concentrated with the US (over 72 percent of Canada’s exports), and no dynamic emerging economy accounts for more than 1 percent of Canada’s exports (except for China, which is only 4 percent). • Canada leads the OECD in the proportion of the population with some post-secondary education, but we rank 8th in undergraduate degrees, 24th in new doctoral graduation rates, and lack effective apprenticeship training.

imply put, in this changing world, there are pressing transformations that we need to get our minds around, and act upon with the speed, flexibility, and creativity that the new global reality demands. First, we need BUSINESS SECTOR R&D EXPENDITURES, OECD COUNTRIES (PERCENT OF GDP)

Israel Finland Sweden Korea Japan Switzerland USA Denmark Austria

The “rise of the rest”, in Fareed Zakaria’s evocative phrase, is changing the competitiveness model of “the rich”. In this changing world we are a high wage economy and a chronic underperformer in innovation and productivity. Canada simply cannot sustain above-average living standards and below-average innovation investment and productivity growth.

Germany Iceland France Australia Belgium China Luxemborg Slovenia

The transformational challenge facing Canada today is that we are wedged between a changing global reality and an economy that has not stressed productivity, innovation, and diversification. Consider a few, rather telling, facts: • Canada’s business productivity levels are only 72 percent of US business on average, and we no longer have a low dollar to subsidize poor productivity.

Ireland UK Canada %

1.5

2.5

3.5

SOURCE: OECD, Main Science and Technology Indicators Database, June 2011.

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

to diversify again, this time to the dynamic emerging economies in Asia, South America, and elsewhere. Second, we need to reorient our competitiveness approach to one based on productivity and innovation – continually turning new ideas into new, commercially viable goods and services, and selling them around the world. And third, we need a relentless focus on talent in a demographically challenged world. While all this may sound daunting, the positive news is that we don’t have the fiscal challenges of many OECD countries (including the US), we are blessed with abundant natural resources, and we appeal to the global talent pool as a great place to study, live, and work. • C anada needs to diversify its trading partners, its foreign investment links, its exportable goods and services, and its exporters. Too much of our trade is concentrated with the US, still the world’s richest market but now a more slowly growing and mature economy, and too little with the rapidly growing and increasingly large dynamic emerging economies in Asia, South America, and elsewhere. Too ICT INVESTMENT BY ASSET IN OECD COUNTRIES, 2009 PERCENTAGE OF NON-RESIDENTIAL GROSS FIXED CAPITAL FORMATION, TOTAL ECONOMY, OECD PRODUCTIVITY DATABASE, MAY 2011

few Canadian small and medium sized enterprises (SMEs) are engaged in trade beyond our borders, let alone outside the NAFTA region, and this impedes their ability to sharpen their competiveness skills and build new marketing networks and constrains Canada’s ability to grow and create jobs. Too little of our exports of goods and services to these dynamic emerging economies are innovative, value-added, or designed for the huge middle class markets GRADUATION RATES AT DOCTORATE LEVEL, 2009 AS A PERCENTAGE OF POPULATION IN REFERENCE AGE COHORT Switzerland Sweden Portugal Finland Germany Slovak Republic United Kingdom Austria Australia Netherlands Denmark

United States

Norway United States

Sweden

Slovenia

Denmark

OECD

United Kingdom New Zealand

France New Zealand Greece

Belgium

Czech Republic

Netherlands

Canada

Ireland Russian Federation Israel

France

Belgium

Switzerland

Italy

Australia

Canada

Japan

Korea

Portugal

Japan

Finland

Spain

Germany

Hungary Estonia

Austria

Poland

Spain

Iceland

Korea

Brazil

Italy

Turkey

Ireland

Mexico

SOFTWARE IT EQUIPMENT

COMMUNICATION EQUIPMENT

SOURCE: OECD Science, Technology and Industry Scoreboard 2011

Chile Indonesia % 0

SOURCE: OECD (2011), Education at a Glance 2011: OECD Indicators and (2009) Education at a Glance 2009: OECD Indicators, OECD, Paris.

Special Issue – October 2012

The skyline of downtown Toronto, capital of Canada’s financial services industry. The strength of Canada’s banks, ranked the strongest in the world for the last five years by the World Economic Forum, is one of the reasons for Canada’s comparative advantage on the international stage. Photo courtesy BMO Financial Group.

developing in these countries. To achieve this diversification, we will need new and targeted strategic trade agreements, better alignment between governments, business and the education system to tackle these markets in a cohesive and long term manner, and a major push to make Canada both a global trading nation and a nation of successful global traders. • T he new global competitiveness in advanced economies with high standards of living is driven by innovation and productivity. It is based less on standardized products, low costs, and massive scale, and more on creativity, flexibility, and continual innovation in products, services, distribution, and production. It is more about capacity, ideas, and the ability to turn them rapidly into commercially-viable new goods and services than about geography. In the words of New York Times columnist Tom Friedman, in a hyper-connected world the mantra for an innovationdriven global corporation is “imagined here, designed there, manufactured elsewhere, sold everywhere”. Canada needs a much greater innovation and productivity focus in our business strategies, and governments need to find the right balance between pressure for change and

Canada’s challenge is going from good to great. This underscores the importance of attracting skilled immigrants, of entrepreneurship in all our educational curriculums, of language and culture training, of more graduates with PhDs in engineering and sciences, of more women in the natural sciences, of better collaboration between business and applied researchers in our universities, and updated apprenticeship training for high tech manufacturing.

support to change, in their programs and incentives to encourage firms to innovate. We also need more ambitious innovation and productivity objectives. Are we really going to be globally competitive over the next five years if we don’t double our private sector R&D spending (as a percentage of GDP), bringing Canada from well below the OECD average to above it, and cut in half our private sector productivity deficit with the US? • A key element to help make such diversification and innovation happen, firm-by-firm, and sector-by-sector, is talent – a well-educated, entrepreneurial, outward-looking, multicultural, and multilingual workforce for a changing world. Here, Canada’s challenge is going from good to great. This underscores the importance of attracting skilled immigrants, of entrepreneurship in all our educational curriculums, of language and culture training, of more graduates with PhDs in engineering and sciences, of more women in the natural sciences, of better collaboration between business and applied researchers in our universities, and updated apprenticeship training for high tech manufacturing. Over the last quarter century, Canada has demonstrated an impressive capacity to adapt well to a changing world, anchored by the FTA that changed our mindsets even more than our tariff schedules. Going forward, Canada needs to adjust again in response to a changing world. There is no reason why Canada cannot diversify its trade, improve its innovation and productivity performance, and be a world leader in talent. But it will take change, it will require leadership, and it will necessitate public engagement. Our ongoing public dialogue in Canada must include this question: “what will it take for Canada to be more global, more innovative, and more productive and why is it so vital to our future and that of our children?” Contributing Writer Kevin Lynch, former Clerk of the Privy Council, is Vice-Chair, BMO Financial Group.

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

The 1988 Free Trade Election A CAMPAIGN FOR THE AGES Robin V. Sears

“I believe you have sold us out.” The defining moment of the 1988 leaders’ debate on free trade in which John Turner accused Brian Mulroney of selling out Canada to the United States. As Robin Sears writes, it was the most consequential campaign of the modern era. Montreal Gazette archives

Robin Sears saw the famous 1988 campaign through the prism of the opposition, as national director of the NDP and a top campaign strategist for party leader Ed Broadbent. “The choice could not have been more fateful,” he writes. “It literally decided the fate of the nation for a generation.” And with hindsight, he writes, Brian Mulroney was right, and the opponents of free trade were wrong. C’est dans le camp de l’opposition que Robin Sears a participé à la célèbre campagne électorale de 1998 sur le libreéchange. « Un scrutin d’autant

plus fatidique qu’il a littéralement façonné le destin du pays pour la génération suivante », écrit celui qui était alors stratège de campagne et directeur nation-

ampaigns that hinge on adolescent insult and Fam ily Packs, ‘invisible crime waves’ and Le Bon Jack’s cane are what Canadians get in elections today. Strange that the political marketing geniuses who devise these tortures don’t seem bothered that every year they clearly irritate us more as fewer and fewer of us even vote. Canadians without grey hair might be astonished to learn that nearly 25 years ago we held an election about big issues, one that seized national attention for months, that was

al du NPD dirigé par Ed Broadbent. Et qui avoue rétrospectivement que Brian Mulroney avait raison contre tous les opposants du libre-échange.

fought with passion and seriousness, and incredibly, with respect for voters’ intelligence. The choice could not have been more fateful. It literally decided the fate of the nation for a generation. And more than three out of four Canadians voted, among the highest turnouts in our history – compared with the bare 60 percent of us who engage today. The 1988 federal election campaign was almost a year long, from preliminary sparring until the final aftershocks died

Special Issue – October 2012

The choice could not have been more fateful. It literally decided the fate of the nation for a generation. And more than three out of four Canadians voted, among the highest turnouts in our history – compared with the bare 60 percent of us who engage today.

away. The campaign period itself was much longer than today, running for seven weeks through October and November of that year. If recent Canadian history were any guide it should have been yet another campaign about our perennial constitutional rows. The premiers agreed on the Meech Lake Accord just five months before the draft of the Free Trade Agreement (FTA) on October 3, 1987. But despite its wrenching impact on Canadian politics later, it was the FTA that came to dominate the media and politics throughout the winter and the whole of 1988.

canning old newspapers from the campaign, it is stunning how much greater the dominance of federal politics was then in every news organization’s allocation of resources, space, and time. Today, few media companies staff every leader for a whole campaign; then, many had more than two reporters on each campaign bus. Then, a front page headline or the lead in a TV newscast was almost always related to the campaign. The CBC’s long gone news analysis and interview show The Journal – still missed by news and political junkies two decades later – devoted ten-minute slots to campaign profiles and even longer panel discussions on the free trade issue throughout the campaign. In a foretaste of the role of PACs and super PACs in American politics a decade later, the business community and friends of the Mulroney government had mobilized an independent free trade support coalition to defend the deal. The opponents attempted to match them, organizing a similar anti-

coalition, and mobilizing huge public rallies against the deal, but it was never an even contest. The pro-FTA forces had money, access to the media, and even to their own employees through corporate communications, far beyond anything the NDP, Liberal, labour movement, and arts community were ever able to marshal. Each side nonetheless did extensive advertising, printing pamphlets and bumper stickers by the hundreds of thousands. The propaganda efforts fueled debates that divided families and friends, and in some cases scarred relationships for years. The issue of relations between Canada and the United States has run like a bitter bright line through Canadian politics since Confederation. The 1988 battle was even more fierce and hard fought than the previous effort to create a continental marketplace, the Laurier-Borden election of 1911. That round, following similar battles over lesser tariff deals between Laurier and Sir John A. Macdonald, was won by the anti-forces led by Robert Borden, bringing Laurier’s 15-year reign to an abrupt halt. It also led to the creation of one of the precursors of the Bloc and the Parti Québecois, Henri Bourassa’s Nationalists, founder of Le Devoir.

Broadbent tried hard to introduce parallel messages and alternative perspectives, but by the closing weeks the A or B choice was killing New Democrat momentum. The party dropped half a dozen points in popularity in the final 10 days. Given that history, the 1988 fight was replete with political irony. The inventor of the modern dream of a border-free North American economy was Donald S. Macdonald, Liberal finance minister, giant of Bay Street, and progressive liberal.

Prime Minister Mulroney introduces the free trade implementing legislation in the House of Commons in December 1988, following the November 21 election which returned a Conservative majority. PMO photo

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

His Royal Commission on the Economy advocated “a leap of faith” in favour of free trade, and gave Brian Mulroney, a former critic of such a deal, the political room to advance the issue, despite the Tory history of deep opposition to “continentalism”. Mulroney’s hero, Sir John A., had seen the issue in much the same terms as critics today: from economic integration it is a fast slide to political takeover. The Liberal Party, champions of the 1911 deal, were rhetorically opposed in 1988, even if a large number of prominent business Liberals – Jim Peterson, Roy MacLaren, and Don Johnston among them – were quiet supporters told to keep their mouths shut. Quebec Premier Robert Bourassa was a bulwark of support for the deal, as was Quebec Inc. Despite the opposition of their forefathers – Henri Bourassa and the Nationalist Party – Jacques Parizeau and the PQ were limp and vacillating opponents of the deal. The NDP was nominally more united in its opposition though there were several former NDP premiers who muttered privately that there were benefits to the deal for a resource-producing Western Canada. They were right, as key beneficiaries, according to economic impact studies done on the 10th and 25th anniversaries of the deal, demonstrate clearly that it was BC, Alberta, and Saskatchewan who got the earliest and biggest economic bump. The labour movement, most of academe, the arts community, the churches, and most of the international development world were vehement in their opposition – at least in English-speaking Canada. The rhetoric was overblown on all sides, as it tends to be in major policy battles, but the choice was real enough. Each side painted horrific portraits of a Canadian future following their opponent’s victory. The NDP opposed the deal on ideological grounds, the Liberals fought for purely partisan ones.

The FTA gamble was, despite that uncertainty, we were better off with some framework of agreement when those fights erupted. With the passage of time, like many of its opponents I have come to recognize that was the right bet.

n 1988, I served Ed Broadbent as co-national cam paign director with Saskatchewan veteran Bill Knight. For the federal NDP this issue became a painful dilemma as events unfolded. In a “light switch” election, fought over one issue, it is brutal to be the third party. Voters are driven by the logic of the fight into choosing “A” or “B”. C’s challenge is merely to stay in the game, never an easy task strategically. In that campaign, Broadbent tried hard to introduce parallel messages and alternative perspectives, but by the closing weeks the A or B choice was killing New Democrat momentum. The party dropped half a dozen points in popularity in the final 10 days.

Although my lens then was that of a typical English-speaking Canadian progressive economic nationalist in opposing the deal, my three o’clock in the morning sleepless doubts were spurred by having spent several years working in European politics. The social democratic governments of the day were fighting for greater free trade, as a means of anchoring social market policies on health, pensions, training, and so forth in every corner of the European Union. It was right-wing nationalist conservatives in the UK and France who were in opposition. And, even more disturbingly, it was the smallest EU countries who were the hottest on greater openness to the biggest markets. The hypocrisy and simple inaccuracy of the anti-deal speeches claiming that economic integration was clearly an ideological, and even traitorous evil, would spiral in an endless loop on those nights. Like many Canadians who had worked with Americans, I was also keenly aware that our ability to enforce any form of trade or legal agenda, if the US Congress was roiling with protectionist anger, was mostly fantasy. The FTA gamble was, despite that uncertainty, we were better off with some framework of agreement when those fights erupted. With the passage of time, like many of its opponents I have come to recognize that was the right bet. Indeed, the inevitability of such bilateral economic partnerships in the 21st century for every advanced economy is now incontrovertible. Despite that, it seems from early signals that the same players will line up on the same sides for this generation’s free trade battles as they did in 1988. The issue, then and now, could be characterized as follows, though these sub-texts were never shouted out loud by either side: “Do you want to gamble your children’s future that the United States [In 2012 read: China] will continue to be our largest and most important trading partner, given the rise of protectionism, the Asian tigers, and a unified European community, without guarantees of access to future jobs and investment. How naïve are you?!” Or: “Do you really believe that if we drop our cultural and economic protections as a small trading neighbour of the world’s giant economy that American-owned plants here won’t be shut down and shipped south, and that American companies will not run all over every Canadian competitor in every Canadian town and industry within a decade? How naïve!” Exactly a quarter century after the deal was negotiated, on October 3, 1987 – it’s clear that neither side’s horror story would have played out as predicted, and though the benefits to Canada overall are manifest, the initial costs for some sectors and some regions was heavy. The FTA did not suspend the laws of political gravity: American corporations still do use their political muscle to batter Canadian competitors when they feel they have no better alternative. The most frustrating and infamous example is the Softwood Lumber Agree-

Special Issue – October 2012

ment, which took several governments and another two decades to resolve. The infamous FTA Chapter 11 was a powerful rhetorical club for the opponents of the deal in the 1988 campaign. This was the “perfidious sell-out” of Canadian governmental authority to the whims of American capitalists, their high priced lawyers, and Congress. It permits American companies to seek to overturn Canadian governmental decisions that do not meet the test of “fair and equitable treatment” set against Canadian competitors. The fear raised by the deal opponents was that Crown corporations, public auto insurance, and even Canada’s medicare system could be overturned by litigious American health insurers and others.

The claim that Medicare was at risk was, after all, another suspension of political gravity – on both sides. No Canadian politician – unless they were tired of living – would ever be party to an attack on Canada’s sacred healthcare system.

It has turned out to be a bit of damp squib. The few cases that have been successfully prosecuted under Chapter 11 have had a mixed, but decidedly not pro-American or pro-corporate, bias. The disputes tribunals appeared to function well. There is little point in pushing a legal case further, as no American court is ever likely to allow a Canadian corporation to win advantage over an American competitor claiming US federal and state law discriminated against them – as the one Canadian firm that tried, painfully discovered. Nor were Canadian courts likely to permit attacks on institutions as core to Canadian sovereignty as public healthcare. The claim that Medicare was at risk was, after all, another suspension of political gravity – on both sides. No Canadian politician – unless they were tired of living – would ever be party to an attack on Canada’s sacred healthcare system. Justice Emmett Hall, a Saskatchewan icon and one of the fathers of Canada’s health care system, was brought out in midcampaign to attack the critics’ claims. Some American health insurers did flirt with ramming their way into the Canadian market under Chapter 11. Wiser heads prevailed.

dvocates of the deal did not say much in public about the real intent of such a painfully negotiated and complex deal between nations. Trade was always a secondary target. Tariffs, even non-tariff trade barriers, had been falling year over year since the Second World War under existing global arrangements in the old General Agreement on Tariffs and Trade (GATT) structure, replaced in time by today’s World Trade Organization (WTO). Few voters realized that the real point of these agreements was to impact investment not trade; local production and therefore exports. In other words, if an American company

can buy out a Canadian competitor, move its production to Mexico, and sell the much more cheaply produced product in each of the three countries, there are large profits to be made. Opponents tried to make the case, but it was challenging to prove that such an outcome was likely as a future hypothetical in the face of constant denials. A study by Douglas Porter for the Bank of Montreal, on the occasion of this 25th anniversary, makes the case clearly. Trade did go up, way up, during the 1990s but then it flat lined and finally fell during the 2008 recession until today. Was the rise due to the FTA and NAFTA, or to the economic boom of the period, or both? The flat line was clearly driven by the rise of the dollar more than anything else. The decline in trade volumes was the product of exchange rate parity since the economic crash. Canada had a stock of investment in the US of less than $5 billion dollars in 1970, less than $25 billion in 1990. It is approaching $275 billion today. American investment in Canada has grown from $50 billion on the eve of the FTA to more than $325 billion today. Each economy is now far more integrated in almost every sector than every before.

But on the investment side the picture is far sharper and impossible to challenge. Canada had a stock of investment in the US of less than $5 billion dollars in 1970, less than $25 billion in 1990. It is approaching $275 billion today. American investment in Canada has grown from $50 billion on the eve of the FTA to more than $325 billion today. Each economy is now far more integrated in almost every sector than every before.

Political takeover, not so much. For that matter, the economic differences remain important and wide as well. Americans are getting understandably grumpy about Canadians bragging about our fiscal health, better banks, and stronger employment numbers. If the logic of the FTA critics had prevailed, not only should those differences not have emerged, we should by now have seen evidence of creeping political takeover. The 1988 campaign was perhaps the last pre-modern election in Canada. Strange as it may seem to young political activists today, those working on selling political messages, and those reporting them had to function without email, cell phones, or Twitter. Oh, there were mobile phones, but like the laptop computers of that era they were a pain to operate and very heavy to lug around. Cell signal coverage consisted of spotty, expensive service in cities connected by thin lines. Email systems existed but they were similarly clunky and usually existed within walled corporate gardens.

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

The campaigns had surprisingly little to work with in comparison with the feedback tools of today. Each party was doing overnight polling, but with the exception of the Conservatives, it was primitive by comparison with today. No one had access to the type of deep qualitative research, broken down by gender, age, and region that every party today uses to test messages in advance, check impact afterward, and plan tweaks to correct for opponents’ responses.

apart from the FTA battle. For example, John Turner was allegedly the victim of an attempted coup mid-campaign and Ed Broadbent was deliberately sabotaged by a group of his own Quebec candidates in the final days! For a brilliant, page-turning account of one of the most fascinating elections in Canadian history, find a copy of Graham Fraser’s excellent book, Playing for Keeps.

Allan Gregg, the pioneering young Tory political researcher, had pushed his party masters to allow him to do intensive riding research on a rolling basis, as well as broader issue and regional polls. It proved to offer the Conservatives a devastating strategic advantage. On election night, I sat for hours in a network television green room, between pundit moments, writhing with envy as Gregg would carefully check the latest reported riding vote totals against his massive binder of riding poll results, and nod muttering, “Yup, nailed that one...”

I hope that it is not merely a veteran’s nostalgic gaze through the golden mists of history that makes 1988 appear to be the last great election. Some campaigns are epochal by their conduct, impact, and players. In the UK there was Thatcher in 1979 and Blair in 1997. In the US, the 1960, 1968, 1980, 1992, and 2008 campaigns changed the course of American and world history. In Canada, the great free trade election ranks with the most important in our history; up there with the early battles over Confederation itself, the conscription fights in both wars, and the Trudeau victory in 1968.

Unlike today, there were only two political message windows: one in the early morning, and one in the evening. The Broadbent, Mulroney, and Turner campaigns would fling our message of the day, what we called “Gainesburgers” – after an offensive precooked dog food popular at the time – to the waiting journalists in the morning, before everyone trooped onto a campaign plane for several hours of isolation from the world until the next stop. Midday we would do a process event of a plant or school, and each evening saw a more partisan event. Toward the end of the campaign there were even old-time political rallies with hundreds and sometimes thousands of Canadians being bellowed at about the horrors/ joys of the free trade hell/nirvana.

The 1988 campaign was marked by respect. Respect for the intelligence of voters, respect for the integrity of one’s opponents, respect for the importance of the process and the decision to be taken, and most importantly, respect for the importance of civility in a democratic contest.

he arc of the campaign was marked first by the ‘phony war’ period of any election, the early days when lines are being tested, leaders are finding their campaign legs, and attention is low. It was followed by a series of TV debates that framed the issues, the status of the leaders, and the closing arguments. Despite excruciating back pain from an old injury, John Turner performed higher than expected when flailing Prime Minister Mulroney for “selling out Canada”. Ed Broadbent competed effectively, but as number three he was forced to the sidelines nonetheless. Momentum appeared to be shifting to the Liberals, before Allan Gregg, the Tories brilliant young researcher, found what he believed was a way to counterattack in his intensive riding polling. He argued for a “bomb the bridge” ad campaign twist, to attack the connection between John Turner’s credibility as “Captain Canada” and the anxiety that the anti-deal coalition had managed to plant in the minds of a majority of Canadians.

eyond the somewhat antiquated manner by which it was fought and the windy speeches and platforms that drove it – at least in comparison with today’s nearhysterical frenzy and nearly content-free messaging – it was the last great election for another reason as well. The 1988 campaign was marked by respect. Respect for the intelligence of voters, respect for the integrity of one’s opponents, respect for the importance of the process and the decision to be taken, and most importantly, respect for the importance of civility in a democratic contest. Sure, there were angry taunts and insults; and yes, there were deeply passionate disagreements but no one then would have dared to use the thinly veiled racist messaging of several recent provincial campaigns. It was unthinkable to flirt with humiliating a leader’s family problems as in recent whispered attacks. It would have been insulting and, in any event counter-productive, to dumb down a party’s social policy commitments to a beer commercial Family Pack.

It worked. The Liberals won 31 percent of the popular vote in 1988, the NDP elected the greatest number of MPs in its history with 20 percent of the vote, but Mulroney held on to his majority with 43 percent of the vote and nearly 170 seats. And the FTA was enacted in a short first session of the next Parliament, and implemented on January 1, 1989.

Perhaps most tellingly, when it was over, Ed Broadbent, John Turner, and Brian Mulroney were more respected by Canadians, by partisan opponents and supporters alike, than has been the fate of any three leaders since.

This small snapshot of the election does little justice to the side issues, firestorms, and the fascinating second-tier players that made it a breathtaking and career-ruining campaign

Contributing Writer Robin V. Sears (robin@earnscliffe.ca), former national director of the NDP, is a principal of the Earnscliffe Strategy Group.

Special Issue – October 2012

Prime Minister Mulroney speaks to a Joint Session of the US Congress on free trade in April 1988. Looking on are Vice-President George Bush and House Speaker Jim Wright. PMO photo

The Ghost of Elections Past: 1988 and 1911 Patrice Dutil and David MacKenzie The 1988 election was in many respects a replay of the famed 1911 contest that pitted Wilfrid Laurier against Robert Borden, except for the final result: The (now Progressive) Conservative party in 1988 won on a platform favouring free trade, with the full-throated support of the business community. In 1911, Borden had won the fight against Reciprocity, again with the carriage of the business sector. In both cases, people voted against free trade. What changed? L’élection de 1988 ressemblait à maints égards au célèbre scrutin de 1911 qui opposait Wilfrid Laurier et Robert Borden, sauf pour son dénouement. C’est avec une plate-forme favor-

able au libre-échange que les conservateurs (devenus progressistes-conservateurs) l’ont emporté en 1988 avec le plein appui des milieux d’affaires. En 1911, les conservateurs de

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

Borden l’avaient aussi emporté avec le soutien des milieux d’affaires, mais en s’opposant à l’entente de réciprocité avec les États-Unis. Qu’est-ce qui a changé dans l’intervalle ?

uring the general election of 1988, Canadians were presented with an issue they had scrupulously avoided since the divisive election of 1911: free trade with the United States. The old campaign was evoked a few times, mostly by people who were opposed to the deal, but the memories of that contest were too blurred to be symbolically meaningful. In 1911 the country found itself, to use the words of imperial poet and novelist Rudyard Kipling (who ardently opposed the deal, as did other notables like Stephen Leacock), considering a “parting of the ways” in its relationship with the Great Britain. In 1988 the opponents of the deal wished for a “parting of the ways” with the US.

ree trade with the United States was not an easy idea to sell to Canadians in either 1911 or 1988. In both cases, many Canadians believed that the agreement was unnecessary. By 1911, Canada had experienced more than a decade of prosperity and significant economic growth over the 30 years since the implementation of the National Policy (notwithstanding the depression of the 1890s). In 1988, Canada was also in a strong position: the economy had rebounded after the deep recession of 1981-82, employment was at record highs, real estate values were rocketing upwards, and a new sense of destiny prevailed. Canadians did not seem to need freer trade with their most important trading partner.

The age of Laurier was, to be sure, very different. Disputes over religion and denominational education still created headlines, and Western settlement and railway expansion were at the heart of national development policies. This was an age when the memory of Sir John A. Macdonald could still be raised to good political effect, when government correspondence could be mostly administered via the prime minister’s jacket pockets, and when calling someone an “imperialist” could still be a compliment. Despite the vast differences between the elections of 1911 and 1988, Canadians confronted the same issues and understood them in much the same way. In both cases, they voted mostly for parties that stood against free trade, but accepted living with different results.

For both Mulroney and Laurier, it was a cause to fight for and a way to shift attention away from the controversies that had marked their administrations and the growing regional divisions within the country. Without it, both governments would have had to run on their records. It was a daring move for both prime ministers.

If Macdonald had been the “Moses” of continental trade in his early career, Laurier now presented himself as the “Joshua” who could actually deliver the goods to the people.

Early in 1911, the Liberal government of Sir Wilfrid Laurier announced that, after decades of wandering in the wilderness of economic protectionism and at the behest of the American government, it had negotiated a reciprocity, or free trade, agreement with the US on most Canadian natural products. If Macdonald had been the “Moses” of continental trade in his early career, Laurier now presented himself as the “Joshua” who could actually deliver the goods to the people. Laurier confidently called an early election and focused his campaign on this one crucial issue. Brian Mulroney followed a similar game plan 77 years later. It was an important political decision in both cases: the issue of free trade has always been a divisive wedge in Canadian politics and it, more than any other issue, distinguished the Liberal and Conservative parties. For both Mulroney and Laurier, it was a cause to fight for and a way to shift attention away from the controversies that had marked their administrations and the growing regional divisions within the country. Without it, both governments would have had to run on their records. It was a daring move for both prime ministers.

There were many striking similarities between the elections of 1988 and 1911. In both cases much of the debate focused on what the agreement meant rather than what it said. For many Canadians, the 1988 version of free trade seemed like an attack on Canadian nationhood. The FTA was the “thin edge of the wedge” of economic and political integration, the “slippery slope”, the “disappearing border”. It promised a loss of control over environmental matters and working conditions and, perhaps, even the loss of the country. Canadians of 1911would have understood this position very well: in their day the Reciprocity Agreement was portrayed as threatening integration with a republic that was hostile to British values, a melting pot of raw capitalist energy that cared nothing for King and culture. Anti-Americanism was healthy in both elections.

For many Canadians, the 1988 version of free trade seemed like an attack on Canadian nationhood. The FTA was the “thin edge of the wedge” of economic and political integration, the “slippery slope”, the “disappearing border”. It promised a loss of control over environmental matters and working conditions and, perhaps, even the loss of the country.

The Conservative opposition, led by Robert Borden, stuck to the traditional script and treated reciprocity as an assault on imperial loyalty and a direct challenge to the whole thrust

Special Issue – October 2012

of the National Policy. Sir John A. Macdonald’s vision of the country, they argued, was of a transcontinental British nation founded on an east-west transportation network and strong inter-provincial trade. Under reciprocity Canadian trade would succumb to geography and east-west trade would start flowing north-south. In other words, the element of nationbuilding in the protective tariff would be destroyed by reciprocity. Brian Mulroney would not have agreed.

From the moment Laurier announced the new deal, business leaders, who had for 15 years supported him with their votes and their money, ideas, and networks, turned their backs on the Liberal Party and mobilized against him.

There were also similarities in how the parties approached voters. Like Robert Borden, Brian Mulroney fashioned an alliance between some western Conservatives, the business community in Ontario, and Quebec nationalists to defeat the Liberals. And for both Borden and Mulroney, the cohesion of that alliance quickly evaporated after the election victory. Like Borden’s party, the Mulroney Conservatives were soon divided amongst themselves and ultimately almost destroyed from within.

The biggest contrast between the two elections was the position of the Canadian business community: it opposed free trade in 1911, but supported it in 1988. From the moment Laurier announced the new deal, business leaders, who had for 15 years supported him with their votes and their money, ideas, and networks, turned their backs on the Liberal Party and mobilized against him. There was both sentiment and business to consider and, for most manufacturers, bankers, and retailers, love of Empire and the protection of their business interests were two sides of the same coin. While Liberals fanned the hope that reciprocity would bring the cost of living down, the business class argued that reciprocity would take away jobs.

group of prominent Toronto Liberal businessmen issued a scathing manifesto denouncing both reciprocity and the Liberal government. This group, immediately dubbed the “Toronto Eighteen”, comprised a who’s who of Toronto’s financial elite. It was led by Sir Byron Edmund Walker, one of the country’s leading businessmen and president of the Canadian Bank of Commerce. His friend and neighbour, Joseph Flavelle, was easily convinced to fight the deal. One of the richest men in Canada, he had made his money in the meatpacking business, one of the industries that would be most affected by the Reciprocity Agreement because it would open the doors to American competition. From that moment, the business community used its influ-

Courtesy, Archives of Ontario

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

the minds of those who negotiated it. The most important difference, however, was that in 1911 there were only two parties in the election campaign and Canadians faced a stark choice. In 1988 there were three, with two (the Liberals and New Democrats) opposed to the agreement. This triangular race enabled the Mulroney Conservatives to win the most seats even though more Canadians voted for parties opposed to the agreement. A final difference, and one that was barely acknowledged in 1988, was how little the connection to Great Britain (let alone the British Empire) factored into the election campaign. What for most English-Canadians resonated at the very heart of their identity in 1911 mattered little in 1988. Nobody talked about it and nobody cared.

Courtesy, Archives of Ontario

ence and financial clout to save the country – and itself – from free trade and the Liberal government. The anti-reciprocity and frankly anti-American message quickly radiated across the country; organizations were established, rallies were held to condemn the agreement, Boards of Trade passed resolutions opposing free trade, and workers were taken aside and told what they should think about the trade deal – if they wanted to keep their jobs. In 1988 the business community – more mature and self-confident – had lost its fear of American competition and now craved continental markets. Arguments over a distinct cultural identity were washed away by the steady tide of American music, film, literature, and television that addicted Canadians.

There were, of course, other important differences between 1911 and 1988. The 1988 agreement was much longer and less read by Canadians (the 1911 agreement consisted of only a few pages), and the thought of exempting “cultural industries” from the 1911 agreement would never have crossed the minds of those who negotiated it.

he defeat of free trade in 1911 took the issue off the agenda for decades. In the 1930s the two countries, mired in depression, turned once again to mutual trading arrangements and a series of agreements were negotiated between Canada, the US, and Great Britain, but war broke out before they could have much effect. After the war, Mackenzie King oversaw the secret negotiation of a free trade agreement but at the last minute – haunted by the spectre of ending his career like his beloved hero Sir Wilfrid Laurier – scuttled the deal. From that moment, trade negotiations of a different and multilateral sort continued, via the General Agreement on Tariffs and Trade or on particular sectors of the economy such as automobile manufacturing. Only in the 1980s, following a Royal Commission that advocated greater trade with the US, did the two sides return to the negotiating table, but this time at the behest of the Canadians. It is worth remembering that many of the larger issues of 1911 were still with us in 1988: concern over the economic impact of the United States on Canada, the fear of cultural annexation, and questions over the place of Quebec in Canadian politics. The Canada of 1911 was a very different place: women did not vote, the “media” consisted primarily of daily newspapers and a few magazines, and Canadians did not crisscross the continent in jets but, rather, followed a few railroad tracks. Still, it is worth remembering that many of the larger issues of 1911 were still with us in 1988: concern over the economic impact of the United States on Canada, the fear of cultural annexation, and questions over the place of Quebec in Canadian politics. There will never be complete agreement as to what exactly happened in 1911 or 1988 and many different interpretations have been offered to explain why Canadians voted as they did. There is no doubt, however, that these elections set the future direction of not just the Borden and Mulroney governments but of the whole country. Canadians might not have realized it at the time, but both 1911 and 1988 were turning points in our political, intellectual, and economic history. Patrice Dutil and David MacKenzie are professors at Ryerson University. Their book Canada 1911: The Decisive Election that Shaped the Country, was published by Dundurn Press in 2011.

Special Issue – October 2012

Great Prime Ministers Have Big Ideas Martin Goldfarb A former pollster and strategist for the Liberal Party, Martin Goldfarb writes that transformational prime ministers propose big ideas that engage Canadians and change the country. He proposes a short list of four PMs who transformed Canada: Sir John A. Macdonald, Sir Wilfrid Laurier, Pierre Trudeau, and Brian Mulroney. Selon Martin Goldfarb, expert et pionnier des études de marché, les premiers ministres transformateurs proposent de grandes

idées qui galvanisent la population et font évoluer le pays. À ses yeux, quatre premiers ministres canadiens répondent à ce critère :

Elections give our leaders an opportunity to demonstrate a path to where they want to take us, because if you do not know where you want to end up you will never get there. The 1988 campaign on free trade was such an election.

ou need big ideas to win elec tions. These ideas change the direction of a country. Elections are a time of renewal. They allow politicians the time to engage the electorate, and in so doing, create affinity to themselves and their party.

ecently in the United States, for example, the Republican and Democratic national conventions offered platitudes and rhetoric.

They challenge is how we think of ourselves globally, domestically, and locally. What is it we want out of life? What do we expect our country to do for us and what can we do as individuals for the collective? Elections challenge the very nature of citizenship and what we as voters can do to make our country a better place – not just for ourselves, but for our neighbours as well.

sir John A. Macdonald, sir Wilfrid Laurier, Pierre Trudeau et Brian Mulroney.

Sir John A. Macdonald

But no big ideas were advanced that could change the fortunes and directions of America. There is clearly an absence of, and a need for, bold new thinking as both parties acknowledge the monumental tasks the US faces.

Deciding who to vote for is complicated, because big ideas engage us in issues that may not be popular but intellectually challenge how we think practically, morally, ethically, and economically. It is an opportunity for politicians to be brave and put themselves second and their country first.

Neither US party is offering a big idea or a bold agenda. No one is proposing what Donald S. Macdonald called “a leap of faith”, in recommending that Canada undertake free talks with the US. And in terms of continuity, it is very much worth noting that the Macdonald Commission was appointed by the Trudeau Liberal government, but acted upon by the Mulroney Conservative government.

I worked for the Liberal Party of Canada for 20 years as a pollster and election strategist and experienced elections where we won because of big ideas and where we lost because Conservatives had the big ideas.

During an election, affinity is created for a party that promises a new direction for the country; a direction where people see a path to a goal.

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

Mulroney believed in a more prosperous Canada and implemented big ideas to get us there. For him, elections were a time to challenge the electorate and he did so brilliantly. For me, it always seemed that he loved not just campaigning – but debating ideas.

e in Canada have been fortunate to have had leaders who changed not only what we thought of ourselves but how we conducted our daily business. Sir John A. Macdonald led the charge for a continental railway and Sir Wilfrid Laurier brought his country into the 20th century and sought to inspire his people to greatness. In the 1970s and 1980s, Pierre Trudeau and Brian Mulroney won elections with big ideas that transformed the country. Trudeau’s big ideas included multiculturalism, patriation of the Constitution, and the National Energy Program (NEP), which resulted in the creation of Petro-Canada.

Sir Wilfrid Laurier

Though the NEP was obviously unpopular in Alberta and the west, Petro-Canada led to the development of the offshore in Atlantic Canada, and again in terms of continuity, a development advanced by the Mulroney government’s 1988 Atlantic Accord. Thanks to which, Newfoundland and Labrador is now a “have” rather than a “have not” province. Somewhere my friend Joe Smallwood must be dancing. Brian Mulroney won big by taking advice from Don Macdonald. He pursued free trade with the US. It was an extremely brave move and resulted in the restructuring of many manufacturing industries, especially in Ontario. Free trade changed our way of thinking and doing business and ultimately contributed to enormous wealth generation.

Both Trudeau and Mulroney won majority governments because they promised major changes in the daily lives of Canadians. Canadians bought into those changes.

Pierre Trudeau Monteal Gazette archives

Canadians understood the benefits and voted for them, but neither were loved for these actions. Both men had convictions. Both believed in their ideas. They were respected and in some ways admired. Canadians did not love either of them when they retired. But both changed our country. Both made it a better country. Both gave Canadians confidence in themselves. And both, I firmly believe, will go down in history as advocates for a better Canada. Like Macdonald and Laurier, both were great prime ministers who thought in very different ways.

Free trade changed our way of thinking and doing business and ultimately contributed to enormous wealth generation. It demonstrated to subsequent prime ministers that it was beneficial to pursue more free trade agreements as Prime Minister Harper is currently doing.

Brian Mulroney

Similarly, on the GST, Mulroney proposed it, and the opposition fought against it. While it was not a central campaign issue in 1988, it was a big issue in the 1993 election, in which Liberal leader Jean Chrétien famously proposed to “ax the tax”, along with repealing NAFTA. Fortunately for Canada, he did neither. International trade, mainly the Canada-US Free Trade Agreement and NAFTA, according to his own Trade minister, Pierre Pettigrew, created 80 percent of the new jobs in Canada between 1993 and 2000. And the GST changed the revenue base for Ottawa. It was the precursor that subsequently allowed Paul Martin to achieve balanced budgets. This put Canada on a stable financial footing and gave business confidence to invest. International trade and the GST are among the main reasons Canada enjoys the strongest fiscal framework in the G7.

There is no question that Brian Mulroney and Pierre Trudeau were great prime ministers whose big ideas made our country and our people more just, more prosperous, and more confident.

Both Trudeau and Mulroney had big, bold agendas. Both leaders had the ability to attract brilliant staff. You can tell a great leader by the quality of the people he attracts to work for him. Legacy in politics is vital. It’s the “Vision Thing” that separates the great leaders from good leaders. And there is no question that Brian Mulroney and Pierre Trudeau were great prime ministers whose big ideas made our country and our people more just, more prosperous, and more confident. Martin Goldfarb (mgoldfarb@goldfarbmarketing.com), who for 20 years was the pollster and a strategist for the Liberal Party of Canada, is principal of Goldfarb Intelligence Marketing in Toronto.

Special Issue – October 2012

From Baie-Comeau to Chicago DEFENDING CANADIAN CULTURAL SOVEREIGNTY Jeremy Kinsman

Prime Minister Mulroney and President Reagan in the Rose Garden of the White House in 1984. Mulroney’s special relationship with Reagan, writes Jeremy Kinsman, was one reason Canada secured the cultural exemption in the FTA. White House photo

Even before the free trade talks began in 1986, the Mulroney government defended Canadian cultural sovereignty in areas such as the Baie Comeau Policy on book publishing. In a major 1985 speech in Chicago, Brian Mulroney himself warned the Americans: “In Canada, we cast the net of cultural sovereignty more widely than you.” Both of Mulroney’s Communications ministers in that period, Flora MacDonald and Marcel Masse, were strong promoters of Canadian cultural industries. Jeremy Kinsman, who then served as assistant deputy minister in that department, recalls how Mulroney finessed the issue with the Reagan administration and within his own government. Avant même le début des pourparlers sur le libreéchange, en 1986, le gouvernement Mulroney défendait la souveraineté culturelle du Canada dans des domaines comme l'édition, protégée par la politique de Baie-Comeau. Et dès 1985, dans un

important discours prononcé à Chicago, Brian Mulroney lui-même prévenait ainsi les Américains : « Au Canada, la souveraineté culturelle a une plus grande portée que chez vous. » Ses deux ministres des Communications, Flora MacDonald et Marcel Masse,

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

étaient aussi de grands promoteurs des industries culturelles canadiennes. Jeremy Kinsman, alors sous-ministre adjoint de ce ministère, décrit comment Brian Mulroney a subtilement imposé la question à l'administration Reagan et à son propre gouvernement.

lora MacDonald cancelled appointments and walked the beach alone in PEI. It was the summer of 1987 and the minister of Communications had gone to Charlottetown to try to rescue another Canadian cultural institution on the ropes. But that wasn’t what was troubling this red Tory and Canadian nationalist. It was her fear that in integrating the Canadian and US economies via the proposed Free Trade Agreement, Simon Reisman and his gang of continentalists would give in to US counterparts and sink Canadian culture, and with it, Canadian identity. So, the night before, she had phoned Prime Minister Mulroney and tried to resign. Brian Mulroney hadn’t got to be PM by not listening. Anyway, MacDonald was pushing against a mostly open door. The trade bureaucrats didn’t get it, but Mulroney’s political instincts had, from the start. As early as December 1985, he had told a University of Chicago audience at a conference hosted by Time magazine, “You will have to understand that what we call cultural sovereignty is as vital to our national life as political sovereignty. In the United States you cast the net of national security over more areas than we; in Canada, we cast the net of cultural sovereignty more widely than you.” It’s not that Mulroney was a culture maven himself. It’s because he knew he would not find support for a Canada-US Free Trade Agreement in vastly influential Toronto cultural industry/media circles if they figured it would sink Canadian identity. Cultural sovereignty was overwhelmingly an English Canadian issue. In Quebec, they already had it. People watched homegrown TV and bought local music by recognized Quebec stars because the French language channeled it to a ready-made audience. In English-speaking Canada, it was hard for our TV networks to compete with the production values of the ubiquitous US entertainment industry, though at least the cable system permitted simulcasting for Canadian holders of rights for our own market, and protection of their ad revenue entitlement from border TV station raptors.

In publishing, the Baie Comeau Policy in 1985 became a stand-out exception to the otherwise much more permissive investorfriendly regime Mulroney introduced for foreign takeovers of Canadian companies to replace FIRA reviews and restrictions.

here was no such Canadian rights market for pub lishing or film. Entitlements to distribute to Canadian film audiences and readers foreign product which dominated our market were owned by US film distribution and publishing giants as part of “North American” rights. While Canadian publishers and film distributors were the only ones likely to invest in the development of Canadian talent, they couldn’t earn enough revenue from the foreign-owned marketplace to do so.

MacDonald’s predecessor as minister of Communications, the fiery and fiercely independent Quebec nationalist, Marcel Masse, had been determined to help English Canadians do something about it. His solution wasn’t eternal subsidies for our feeble cultural producers but the creation of healthy cultural industries able to compete in an identifiable market for rights so as to have the means to re-invest in Canadians.

he Mulroney government’s own inclusive culture could not have been more different than that of the current top-down Canadian government culture whose almost invisible ministers are trusted only with a “send” button for PMO messaging outward. Twenty-five years ago, ministers were strong, visible, and on “receive”, expected to bring to Cabinet debate the views of their portfolio constituencies. Masse and MacDonald spoke for the cultural community. Ultimately, the Prime Minister came down one way or another, but not before there was a thrashing out of opposing positions. There were huge fights in Cabinet Committee over the policy proposals from ministers of Communications to shore up the health of the identity-rich cultural industries. In publishing, the Baie Comeau Policy in 1985 became a stand-out exception to the otherwise much more permissive investor-friendly regime Mulroney introduced for foreign takeovers of Canadian companies to replace FIRA reviews and restrictions. The policy exception startled US mega-publishers who were used to treating Canada as a minor territory they owned. They rattled Congress and the White House, which rattled the nerves of the Canadian ambassador in Washington, Allan Gotlieb, who railed against it to the PMO.

The notion of creating a separate but fair competitive Canadian market for film distribution policies drove Hollywood studio executives nuts: they saw it as the thin edge of a wedge against the American brand’s most effective export and national promotion asset.

That was just the beginning. The notion of creating a separate but fair competitive Canadian market for film distribution policies drove Hollywood studio executives nuts: they saw it as the thin edge of a wedge against the American brand’s most effective export and national promotion asset. This meant that Jack Valenti and company from the Motion Picture Association of America had front-door entrée to the White House of Hollywood’s very own president. After much heat and little light, Ronald Reagan delegated US negotiations on the toxic issue to Gulf and Western, owners of Paramount. To placate them, Mulroney took the file from the dangerous Department of Communications people and handed it to cautious careerists in the Privy Council Office.

Special Issue – October 2012

President Reagan and Prime Minister Mulroney at the Citadel in Quebec City at the conclusion of the Shamrock Summit in 1985. Montreal Gazette archives

Some kind of compromise was worked out. But a strong Canadian cultural sovereignty point had been made over this issue and was generally politically defended.

t was much less important than the biggest fight of all, MacDonald’s “fight of her life”, over the fate of Canada’s right to have such policies under a Canada-US Free Trade Agreement. The US side said no. Our own bureaucratic trade negotiators couldn’t themselves see any difference between cultural producers and manufacturing. But MacDonald knew their importance for Canadian identity and wanted exemption for the cultural industries or she would be gone. John Turner called opposing the FTA in the 1988 election the fight of his life. But Mulroney sided with MacDonald on cultural sovereignty, blunted Turner’s argument, and won a second majority. Outcomes? Flora MacDonald lost her parliamentary seat in Kingston where her heroic defence of Canadian identity had no sway over an Eastern Ontario political backlash for local reasons. She was replaced as minister by her predecessor, Marcel Masse, who continued to agitate and annoy on culture’s behalf. The film distribution policy died on the order paper in the next Parliament. Cynics concluded pro-culture policies were being dumped now the election and the FTA were in the bag. But overall, the Mulroney government, back when Conservatives could also be progressive, was the most generous in our history to culture and the arts, and committed to positioning Canadian creators in a better place to earn a living. The Canadian economy got a steroid shot of benefit from the FTA, as long as the US economy was thriving. Competition made many of our companies stronger and paradoxically better able to compete internationally. We were forced to produce drinkable wine. Today, of course, some Canadians figure we put too many eggs in the US basket. The goal is global diversification of

our interests, which Mulroney, who functioned on the world stage as a real leader, would have welcomed doing more of. Cultural industries? Overall, they are sounder. Lawyers can split hairs over whether cultural policies are actually in every sense “exempted” because US interests are still entitled to “compensation” for restrictions they may face in Canada, but it isn’t an issue. The US seems to get what Mulroney was saying in Chicago in 1985 about cultural sovereignty.

Back when Conservatives could also be progressive, the Mulroney government was the most generous in our history to culture and the arts, and committed to positioning Canadian creators in a better place to earn a living. The centrepiece of the Mulroney Government’s cultural industry policy, the Broadcasting Bill introduced by Flora MacDonald in June 1988 (passed by the next Parliament), strengthened the private networks and should have strengthened CBC as the mandated central instrument to “inform, enlighten, and entertain” Canadians but a lot of things went wrong there and what we have now is a pallid mediocrity as public broadcaster. Too bad. But Canadian identity? Like what it looks like these days or not, at least it’s never been stronger! Contributing Writer Jeremy Kinsman served on loan from the Foreign Service as Assistant Deputy Minister of Communications for Cultural Affairs and Broadcasting from 1985-89. From 1992-2006 he was back in the Foreign Service as Canada’s Head of Mission in Moscow, Rome, London, and Brussels (EU). He now directs a democracy development project for the Community of Democracies and has positions at the University of California, Berkeley, and Ryerson University.

Inside Policy ~ The Magazine of The Macdonald-Laurier Institute

The NAFTA Region A WORK IN PROGRESS

How do you get to North America? Practise, practise, practise

Stephen Blank and Jennifer Jeffs Mexican President Carlos Salinas, US President George Bush and Prime Minister Brian Mulroney watch as trade ministers Jaime Serra Puche, Carla Hills, and Michael Wilson sign the NAFTA for their three countries in San Antonio, Texas in September 1992. Courtesy of the George Bush Presidential Library

An out-of-towner asks a New Yorker, “How do I get to Carnegie Hall?” The New Yorker answers, “Practise, practise, practise.” The same goes for North America.

How North American nations will confront huge, continent-wide issues of energy, infrastructure, competitiveness, and the environment requires significant innovation in governance. A single, “NAFTA II” approach won’t work. Instead, we should look for North American solutions to individual problems. Launching separate, parallel initiatives dealing with different issues such as energy, transportation, infrastructure, demographic change, and climate change is, we feel, the approach that offers the best chance to re-start the North American movement. Pour relever les vastes défis qui les attendent à l’échelle du continent en matière d’énergie, d’infrastructure, de compétitivité et d’en-vironnement, les pays d’Amér-ique du Nord doivent adopter une gouver-

nance vraiment innovante. Car une approche « ALENA II » ne suffira pas à la tâche. Au lieu de relancer des négociations « tout compris », mieux vaudrait mener parallèlement des initiatives distinctes sur une série d’enjeux

(énergie, transports, infrastructures, évolution démographique, changement climatique, etc.), suivant une démarche qui offre de bien meilleures chances de dynamiser le mouvement nordaméricain.

Special Issue – October 2012

he North American Free Trade Agreement (NAFTA) is often used to refer to a North American trade bloc made up of Canada, the United States (US), and Mexico. NAFTA is one element of what might be called the North American “Reality”, a continent-wide network of economic, social, and policy connections. The 20th anniversary of NAFTA is coming upon us at a moment of deep concern and uncertainty about the future of North American collaboration. An all-in Big Idea, NAFTA II approach will not get off the ground in this political environment. Instead we need a strategy to build a strong base of informed constituencies around North American solutions to key problems that face our nations today.

Former US President George Bush and former Prime Minister Mulroney at a McGill University symposium on free trade in 1999. Photo, McGill University

Negotiations on a North American free trade agreement opened in 1992, but the story of NAFTA really began in 1982 with the collapse of world oil prices. After the first oil crisis in 1973, Canada and Mexico – both energy producers – sought to use windfall profits from soaring oil prices to distance themselves from the US by supporting national economic development. Under the leadership of Prime Minister Pierre Trudeau and President José López Portillo, Canada and Mexico both followed an economic nationalist course, enacting limits on foreign investment and concentrating more state resources on national energy programs. When the oil bubble burst in 1982, both countries, having borrowed heavily against future oil revenues, faced enormous international debt. Mexico’s inability to repay its debt set off the worst global financial crisis since the 1930s. Faced with a debt crisis of its own, Trudeau’s government reversed itself and sought to launch talks with Washington on a “sectoral” free trade arrangement. President Ronald Reagan’s

government was initially uninterested. Brian Mulroney, the leader of a new Canadian government, had opposed the idea of a bilateral trade agreement in the 1984 election, but now, confronting rising levels of US protectionism, pushed the free trade idea again. Washington, for its own strategic reasons, now saw the advantages of negotiating a bilateral deal with Canada. Negotiations began in 1986 and, following the 1988 Canadian election that focused on the issue, the Canada-US Free Trade Agreement (FTA) went into effect on January 1, 1989. In Mexico, the long-ruling Institutional Revolutionary Party (PRI) government opted to open Mexico’s closed economy in an attempt to regain popular support in the economic maelstrom. After a brief and unsuccessful attempt to negotiate a trade deal with Europe, President Carlos Salinas de Gortari sought to replicate Canada’s Free Trade Agreement with the US. Washington was interested, and Ottawa wagered that a three-way deal, rather than two separate bilateral agreements, would be the best course of action for Canada. Negotiations concluded in 1992, and after the new Clinton administration negotiated side deals on the environment and labour, NAFTA came into effect on January 1, 1994.

Perceptions of NAFTA differed in the three nations. For many Canadians, NAFTA simply extended the FTA, bringing Mexico into a much more open trading system. For Americans, NAFTA ignited deep political conflict over trade and sovereignty. From Mexico’s perspective, NAFTA provided a seal of approval for its policy of economic opening and hopefully guaranteed access to foreign investment funds.

he North American Free Trade Agreement is viewed by most trade specialists as an innovative and important trade agreement, although much of the heavy lifting had already been done in the Canada-US Free Trade Agreement (FTA), including agreements on services and the creation of the new dispute resolution mechanism. In some ways, NAFTA was the prototype for the General Agreement on Tariffs and Trade (GATT) Uruguay Round of 1995, which constructed the new World Trade Organization (WTO). It created the largest trading community in the world, aimed at providing the opportunity for a large developing nation to play in the developed league, and assured North American (and foreign) investors that the steps they had taken to build more deeply integrated continental production and distribution systems could be expanded without fear of government intervention. Perceptions of NAFTA differed in the three nations. For many Canadians, NAFTA simply extended the FTA, bringing Mexico into a much more open trading system. For Americans,

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NAFTA ignited deep political conflict over trade and sovereignty. From Mexico’s perspective, NAFTA provided a seal of approval for its policy of economic opening and hopefully guaranteed access to foreign investment funds. NAFTA’s core purpose was to lower and ultimately eliminate most of the tariffs on goods produced in and traded among the three North American nations. Its architects in the public sector and its supporters in the private sector saw the accord as a trade agreement, not as the foundation of an integration scheme with economic and political coordination goals. The counterpoint to NAFTA-1994 was Europe-1992, the creation of a single European market. Experience (and liberal economic theory then in the ascendant) seemed to confirm that in the more entrepreneurial North American context, government involvement was unnecessary and that markets and individual firms could be relied upon to create necessary arrangements. NAFTA did not establish a common customs territory. There is no common currency and no provisions for the free movement of labour or for the ability of citizens to travel across borders freely as in Europe’s Schengen accord. NAFTA did not envision any “cohesion funds”, the model used by Europe to bridge development gaps between member states. NAFTA has not lacked critics over the past 20 years. But most experts agree that NAFTA’s impact on the three national economies was positive, if less than had been promised. The most reliable assessments highlight NAFTA’s successes in accelerating in trade and foreign direct investment (FDI) flows, while pointing out its limitations and its disappointments. The volume of goods moving across North America’s borders increased significantly in the 1980s and even more rapidly after 1994. NAFTA’s time table for reducing or eliminating tariffs was actually shortened several times. From 1993 to 2007, trade among the NAFTA nations more than tripled, from $297 billion to $930 billion (including shipments among establishments within the same company). The US, Canada, and Mexico were each other’s top export destinations.

hat is remarkable, however, is not simply the increase in trade, if by that we mean the cross border exchange of raw materials and finished goods, but rather the striking increase in the movement of parts and components across the borders that took place in this period. This “trade in inputs” underlines the changing structure of the North American economy. Increasingly, we “make things together.” Integration is much broader than the movement of parts and components. North Americans share highly integrated energy markets; service the same customers with an array of financial services; use the same roads and railroads to transport jointly-made products to market; fly on the same integrated airline networks; and increasingly meet the same or similar standards of professional practice. The North American economy can thus be visualized as a deeply integrated continental system of supply chains structured by networks linking production centres and distribution hubs across the continent.

The emergence of this North American system encouraged the emergence of stronger regional identities. The reason is clear. Lower trade barriers and the creation of new continental supply chains have enhanced cross-border economic integration and promoted the emergence of cross-border economic regions. It is not surprising that as trade barriers decline, Canadian provinces and the states of Northern Mexico reach out to larger markets across the border – often to and in cooperation with communities with whom they share long histories.

What is remarkable, however, is not simply the increase in trade, if by that we mean the cross border exchange of raw materials and finished goods, but rather the striking increase in the movement of parts and components across the borders that took place in this period.

The key players in these regional and trade corridor organizations are entrepreneurs and officials from municipal governments. They seek to make connections among dots on the map that business will see as an efficient route for trade and transportation. Those who connect production and distribution centres most compellingly expect to reap a rich harvest of market growth. Trade corridors illustrate an exchange between firms seeking to build greater efficiencies into their production systems and supply chains and groups of local business and metropolitan government leaders offering solutions to help capture these efficiencies. As supply chains become more expansive, looking from Mexico to the US and Canada, more local leaders seek to construct alliances that will support these new business arrangements and, in doing so, leverage local economic development. No one planned any of these developments. The most powerful drivers of change were corporate strategies and structures. The direction of change was largely “bottom-up” rather than “top-down” government decisions. Governments removed barriers but did not lay out plans. Yet the resulting degree of collaboration and complementarity between countries was unprecedented. The movement of goods increasingly consisted of intermediate rather than finished products, as parts and components were transported along supply chains that crossed our borders. This is what economists call “deep” or structural integration: we do not just sell goods to each other; we make them together. One can think of several maps of North America – not only three nations, but also maps of North America as regions (based on history, geography, or shared economic interests), shared values, supply chains, and trade corridors. Without doubt, there is a North American reality. Many of the problems and concerns the citizens of Canada, the US, and Mexico will face in the coming years are continental in

Special Issue – October 2012

scope and must be resolved by continental solutions. Groups in business, state/provincial, and municipal governments, in NGOs, and in the research community all work away on North American issues in their own backyards, even if they do not see these as North American issues. For most, North America is the background to the more pressing tasks, for example, of getting parts on to loading docks, keeping oil and gas pipelines flowing and matching electrical demand and supply, considering how weather variations might affect water flows in the next months and tracking threatening invasive species. What we suffer from is not a lack of resources, but rather a failure of communication.

ity boom inflated the value of Canadian dollar, threatening Central Canada’s manufacturing industry. (This has become a matter of some contention. See No Dutch Treat: Oil and Gas Wealth Benefits All of Canada, an MLI Commentary by Robert P. Murphy and Brian Lee Crowley.) NAFTA did not transform North America into anything like the European Union. But while North America is not Europe, neither is it three autonomous countries simply engaged in a trade bloc. The three North American nations are deeply interconnected and interdependent, with an unprecedented degree of collaboration among them. Efforts to force this North American system into standard economic integration paradigms confuse more than they illuminate. Much work on Canada-US relations, for example, draws conclusions based on economic integration as trade theory understands it – that is, as led by trade liberalization and harmonization, moving progressively from free trade area to customs union to a common market. But North America is already very much a single market without having passed through these subsequent stages. This has less to do with treaties than, as John F. Kennedy said, with geography and history – and increasingly, with technology and global competition. North American interconnection and interdependence will almost surely increase in the foreseeable future, despite NAFTA’s shortcomings. Many of the most serious issues we face are continental, not national, in scope. And continental issues require continental solutions. North America needs a new approach to building continental policies under a trilateral mandate.

W George Bush has said that America never had a better ally and he never had a better friend in politics than Brian Mulroney as Prime Minister of Canada. McGill University photo

North American economic integration was shaped largely by markets and by corporate strategies, without heavy governmental involvement. Structural integration in North America increased dramatically in the 1980s and 1990s. By the turn of the century, however, sharp limits to bottom-up growth were evident. Several reasons are obvious. Post-9/11 security policies led to “thickened” borders, but security concerns were not the only, nor even the most important reason for the slow-down. Initial gains from tariff reduction had been internalized and the further rationalization of production systems moved more slowly. The economic crisis of 2008 dramatically reduced cross border activities, especially in the auto industry. The erosion of critical transportation and energy infrastructure due to aging and deferred maintenance, growing congestion at key choke points, and inadequate border facilities stressed integrated production systems. Rapidly rising global commodity prices drew Canadian attention and, as a collateral factor, pushed up the value of the loonie undermining manufacturing exports. More recently, the global commod-

e should not think of North America as a goal. Instead, we should search for North American solutions to solve particular pressing problems. Rather than trying to recreate an all-in NAFTA II negotiation, the best approach to re-start the North American movement is launching separate, parallel initiatives dealing with different issues such as energy, transportation, infrastructure, demographic change, and climate change. In North America now and for tomorrow, large issues must be confronted, and dealing with them will lead to substantial changes in our lives. Without a solid underpinning of public understanding and support, there is no way to make any of this happen. Our goal has to be to build informed and active constituencies for these approaches. The model we must have in mind is less a trade negotiation than a political campaign. We must understand that we are creating a process, not a product. We don’t need more one-shot commissioned reports. What is needed instead is much more institutionalization of discussion and learning. The aim should be three-fold: first, generate new ideas; second, extend interest widely, improve public understanding, and heighten involvement; and third, put in place political strategies to transform ideas into policies. This process cannot be limited to experts but must involve communities of interest in which policy makers, business leaders, researchers, teachers, and journalists are all linked.

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Initiatives might be launched (or deepened) from a continental perspective in these areas: ENERGY: Energy trade among the three countries goes in all directions. Several Canadian provinces are net importers of electricity from the US, while others are net exporters; the US is now a consistent net exporter of gas to Mexico. What has changed recently in North America is that we are now energy-rich – particularly given our wealth of unconventional gas and oil. Increasingly, the main energy issue for North America today is to determine an energy mix that optimizes availability, cost, and sustainability for the next generations. There can be no doubt that the future, with regard to energy, is North America. Joe Dukert, one of the few truly continental energy specialists, suggests a starting point: “The time has come for objective analysts within the private sector to develop at least an initial North American Energy Outlook (NAEO) to illuminate the difficult path that lies ahead.” The Outlook must be continental in design, transcending the three-country parallelism of the North American Energy Working Group. CLIMATE CHANGE: Climate change cannot be discussed as three separate national issues. Neither the 49th parallel nor the Rio Grande River matters to climate change. Collaboration among environmental groups is probably greater than in most other sectors but still far too modest in terms both of public education and policy making. We must continue to search for means to mitigate GHG emissions, but we must also look realistically at prospects for adaptation. The North American Commission on Environmental Cooperation (CEC) has accomplished a good deal on a very modest budget, but it has not connected sufficiently with many of the groups that share interests. Can the CEC build an on-going, networked, coherent conversation on key environmental matters? It should improve its role in public education, particularly providing a clearer overview of issues, options, arguments and data. COMPETITIVENESS – GLOBAL VALUE CHAINS: In an increasingly competitive global economy, many Canadian, US, and Mexican firms depend on integrated production and distribution systems – on continental systems that enable firms to site units in the most efficient locations and link them with a highly efficient logistics-transportation system. Our service industries depend on the same kind of continental networks and linkages. Yet it is remarkable how little is known about all of this. The result is that we depend deeply on something we know very little about. We need to focus serious attention on learning more about how North America works, more about what factors drive and inhibit our competitive advantage, and more about what a globally competitive North America might look like in the next half century. INFRASTRUCTURE: Competitiveness rests on infrastructure and North Americans face a tremendous infrastructure crisis. Transportation of goods and people is limited throughout North America by collapsing infrastructure; pipelines, water systems, and electric wires are weakening; broadband carriers are reaching capacity; and seaports and airports are falling behind international competitors. Insufficient investment has been made in maintaining the roads that connect the three countries. The recent Canada-US Beyond the Border plan commits to investment in shared infrastructure along the Canada-US border, but in ignoring Mexico, the plan also does

not recognize infrastructure failings North Americans face across the continent. SECURITY: Federal governments remain responsible for national security. The events of 9/11 underlined the reality of the North American economic system and also clearly showed some of its fundamental weaknesses. We learned quickly that many jobs and businesses depend on easy border crossings. Security can best be enhanced by North American cooperation by sharing intelligence on threats, collaborating in the search for threats at foreign ports before dangerous materials might begin a voyage to North America, and limiting congestion at our borders and along trade corridors. Flows of contraband drugs, guns, and cash are bi-national – and increasingly continental – businesses; to control them will require North American cooperation. DEMOGRAPHIC CHANGE AND POPULATION MOVEMENTS: Changing demographics create hard limits on policies for economic growth and fiscal balance while population movements in North America have been the source of great political, economic, and social concern. Immigration, worker “guest” programs, and retirement are all linked issues. We should begin now to think about the relationship among local-regional, national, and continental responses to these changes. Clearly, too, metropolitan regions will be the 800-pound gorillas in emerging North America (as they are elsewhere in the world). We should be thinking about how these changes will affect our political systems and about deepening cross border relationships among metro areas in North America. HEALTH CARE: Demographic change and population movements are closely linked to health care. The numbers of Canadian and US retirees living in Mexico is reason enough for these two countries to work with Mexico to improve its national health care. Successful initiatives in exporting health care plans from developed to under-developed countries would be extremely valuable worldwide. FOOD SECURITY: Lack of food security is a growing global threat that necessitates investment in agricultural research. The rising price of corn has created a food crisis in Mexico, as it contributes to poverty and political unrest. Canada and the US should work with Mexico to stabilize these prices, and there are various ways in which they could do this. In addition to researching climate change, a principle cause of the food crisis, Canada and Mexico could collaborate in innovating convenient, accessible, healthy, and sustainable products, drawing on US expertise to do so. FINANCIAL STABILITY: International differences in levels of financial development account largely for international differences in growth rates of economies. Canada and the US have a clear interest in strengthening Mexico’s financial system: in times of economic instability, a more financially secure Mexico would mitigate the pressure put on the rest of the continent. While a North American securities body seems well out of reach, and while Canada and the US have a clear advantage over Mexico in their financial systems, all three countries could learn from each other’s financial situations. Canada is strong in corporate governance; the US is exceptionally strong in insurance and securitization activity; Mexico is stable in that it has no threat of a real estate bubble, though its banking system is disproportionately weak.

Special Issue – October 2012

erhaps above all, we should be thinking about gover nance – about how we together make decisions on these and similarly vital issues. The Keystone XL pipeline and the second Detroit-Windsor bridge are clear examples of our inability to make decisions on urgent matters. NAFTA veered away from institutional innovation and the impetus for integration was largely bottom-up through the 1990s, driven by changes in corporate structure and strategy. We must begin thinking now, together, about decision-making and implementation at various levels, including relations between centres and peripheries – between national capitals and states-provinces and emerging urban centres. Instead of compressing the wide range of distinct issues into a single negotiation, discussions should involve many participants – in think-tanks, universities, expert commissions, groups of “wise people”, and government agencies across the continent. It should involve perspectives from different regions, different economic and social sectors, and those who oppose as well as support integration. It should anticipate, given the regional architecture of North America and our federal systems of government that proposed solutions might differ from region to region. But they would share a similar mandate: to anticipate problems that arise from deepening integration, the impact of new technologies and changes in the international economy, and to examine options and suggest alternative solutions.

that drive efforts to maintain open borders and to increase the efficient operation of the North American economy. Universities, research centres, and foundations might play a central role in starting these initiatives but this is not a call for the construction of new brick and mortar edifices. We should seek to mobilize existing resources in the business, research, and university communities. Governments must be involved but not take the lead. We might start with a working group of university chancellors and presidents, heads of foundations and think-tanks, and business metro-state/provincial-federal government leaders whose goal would be to ask how to encourage informed conversations about North America in the 21st century.

Perhaps above all, we should be thinking about governance – about how we together make decisions on these and similarly vital issues. The Keystone XL pipeline and the second Detroit-Windsor bridge are clear examples of our inability to make decisions on urgent matters.

Jean Monnet, the “father of the European Community,” felt that people could only unite behind a vision they shared. In North America, constituencies already exist. They consist of companies that run continental production, supply, and marketing systems; cities where jobs depend upon efficient North American transportation and logistics networks; and communities living on the borders. Most of their leaders understand how these systems and networks operate. The task is to mobilize these groups to educate their representatives in state and national capitals about the impact of North American economic integration on jobs and economic development in their own communities.

Prime Minister Stephen Harper and US President Barack Obama at a G20 summit in 2012. The Trans-Pacific Partnership (TPP) talks are top of the PM’s agenda with the US. PMO photo

The process would serve another valuable purpose. It would accustom leaders and publics to think in terms of North American answers to critical economic and social issues, and to legitimize the notion that key issues that affect communities throughout the US can be resolved best by North American solutions. It is vital to identify key leadership constituencies

There is a North American reality – a complex North American system, many sectors of which are characterized by deep structural integration – that is deeply misunderstood. Canadians, Mexicans, and Americans, too, depend profoundly on this system. After a decade of rapid growth, however, and in the wake of the events of 9/11, we see evidence that integration has slowed and that the North American economic system is becoming more fragile. Reinvigorating the process of integration requires the mobilization of informed and active constituencies that will press the three NAFTA governments to take new, constructive steps forward. This article is excerpted from a paper presented at the Canadian Political Science Association Annual Conference, Edmonton, June 2012. Stephen Blank is the 2012-13 Fulbright Research Chair in Governance and Public Administration at the University of Ottawa and senior fellow of the Macdonald-Laurier Institute. Jennifer Jeffs is the President and CEO of the Canadian International Council.

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