Canada in the Changed World Economy
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The Empire Club of Canada Addresses (Toronto, Canada), 4 Dec 1986, p. 162-174
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Dobson, Wendy, Speaker
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Text
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Speeches
Description
The underlying issue to the proposal by Canada's government to negotiate a trade agreement with the United States government: "Canada's ability to respond to the changed global economic environment in ways that ensure future growth in Canadians' living standards." Some of the major changes that have occurred in the world economy. An examination of the adequacy of Canada's institutions and policies to anticipate and respond to those changes. Some of the themes of the annual "Policy Review and Outlook", published by the C.D. Howe Institute. Five key trends influencing what is happening right now. How to respond effectively to changed circumstances. An optimistic view of the economic outlook for 1987. Two major caveats. The importance of Canadian-U.S. trade talks and the Uruguay round of GATT talks. Strategies to manage trade actions and complaints. Reducing the federal deficit. What to expect in the spring budget. An economic course that aims at excellence. Sensible and cooperative leadership needed from industrial sectors and all levels of government.
Date of Original
4 Dec 1986
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English
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The speeches are free of charge but please note that the Empire Club of Canada retains copyright. Neither the speeches themselves nor any part of their content may be used for any purpose other than personal interest or research without the explicit permission of the Empire Club of Canada.
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Full Text
Wendy Dobson, Ph.D. President, C.D. Howe Institute
"CANADA IN THE CHANGED WORLD
ECONOMY"
Chairman: Nona Macdonald President

Introduction:

The prestigious C.D. Howe Institute was created in 1973 and named for a colourful and entrepreneurial Canadian, the late C.D. Howe, who served Canada between 1935-57 in many elected capacities, including that of Minister of Trade and Commerce. Despite his Liberal party connection, the Institute is nonpartisan and nonprofit. It is supported by the private sector, professional associations and trade unions, all 350 of whom seek its direction and counsel-and it seeks to educate to increase public awareness of issues and decisions.

Our speaker today is both President and Executive Director. Wendy Kathleen Dobson came "from out of the West.' She graduated from the University of British Columbia as a public health nurse and moved into management, first with Canadian University Services Overseas and then with the Canadian International Development Agency. Her work focussed on demographics, population control and training personnel, and has taken her to many Developing Countries around the world.

In 1972, she became a consultant to the United Nations Development Program and later to its Department of Economic and Social Affairs. En route she took time out for postgraduate work at Howard's Kennedy School of Government and at Princeton where she received her doctorate in 1979. There is many a nurse who aspires to being a doctor, but few become a Doctor of Economics! She joined the C.D. Howe Institute as an economist in 1979, moving to director of policy analysis and then to President in 1981. She is a governor of Waterloo University, a Public Governor of the Toronto Stock Exchange and a director of the North-South Institute. She is a member of eight important advisory committees-including the Hon. Pat Carney's International Trade Advisory Committee, and the Commission on Public Expectations of Audits. She is a member of both the Canadian and the American Economic Associations. She has published, she has commented, and 1 can vouch for her communication skills by recalling my first encounter with Dr. Dobson at another public affairs forum-a summer Couchiching Conference.

Wendy Dobson

During the past year, Canadians in all parts of the country have participated in important debates about the country's future. One of the catalysts for those debates has been the Federal Government's proposal to negotiate a trade agreement with the United States government.

Today I will focus on the underlying issue: Canada's ability to respond to the changed global economic environment in ways that ensure future growth in Canadians' living standards. I will argue that trade tops the policy agenda, but, regardless of the path we ultimately follow, the underlying issue of anticipating and adjusting to global change is an increasingly urgent one that has to be addressed.

I shall begin by enumerating some of the major changes that have occurred in the world economy. Then I shall examine the adequacy of our institutions and policies to anticipate and respond to those changes. These remarks will draw out some of the themes in the C.D. Howe Institute's annual Policy Review and Outlook, which will be made public on December 10, 1986.

My main conclusion is that the Federal Government has identified the correct policy priorities to respond to the changed world, but it has allowed the list of priorities to become too long. To adjust to global change, some very big issues must head the agenda. They require care and attention to be dealt with well. They are in danger, however, of being crowded out by other items and by unexpected events emanating from outside Canada.

There are five key trends influencing what is going on around us. Some are so pervasive as to have become ubiquitous. Yet all should be central considerations in our economic decisions, whether we are in the public or the private sector. These trends are: disappearing world inflation, rapid technological change, growing interdependence, the rising tide of protectionism, and the dangerous risks of political impatience.

The sharp drop in oil prices in early 1986 has pulled inflation rates down to levels not seen since 1964. A disinflationary world is very different than the one in which inflation was rising. It is a far more competitive, cost and productivityconscious one in which price increases cannot simply be passed on to the customer or the taxpayer.

Closely related to disinflation are the waves of technological change that are sweeping the world, creating a host of opportunities for knowledge-related activities, revolutionizing existing industries, and opening up new modes of production.

Growing interdependence is the third factor. No country any longer is an island unto itself. Almost all economies rely on others as sources of or destinations for capital, goods and services. No country can make economic policies in isolation anymore. The scope for independent domestic policies in a smaller country like Canada is limited by the policies of the large industrial economies, particularly Japan, Europe and the United States.

While world economic growth is slow and unevenly distributed, rapid technical change and growing interdependence are intensifying competitive pressures among countries. In such an environment, the losers tend to voice their discomfort and resistance to change much more loudly than the winners voice the benefits. The resulting political anxiety forces governments to respond in ways that often lead to impatient and ill-advised policy.

One of the most troubling examples of this political anxiety is the trend toward managed trade in sectors in which competitive pressures have intensified, particularly in textiles and clothing, steel, autos, and possibly in softwood lumber. Governments are increasingly involved in regulating trade in those sectors, often using instruments that contravene and undermine the principles of the General Agreement on Tariffs and Trade (GATT).

As a result, protectionism is affecting the current environment in dramatic and unpredictable ways. Our producers of steel, agricultural and forest products are suffering from serious trade distortions and threats of more to come.

The most recent major action to affect Canada occurred on October 16. The International Trade Administration in Washington made a preliminary ruling that Canadian lumber exports are unfairly subsidized by provincial governments and imposed a 15-percent countervailing duty. This decision has put unexpectedly heavy pressure on the industry and governments to agree on an appropriate response. The decision on whether to go to court and the GATT or to negotiate a solution is complicated by the tight timetable called for by U.S. law.

Similar trade actions in other sectors, including autos, can be expected in the months ahead. In the absence of a bilateral treaty-based restraint that might be possible in a bilateral agreement, we are losing our economic independence through the unilateral action of U.S. trade law.

Within the global perspective, the danger of a closing down of the world trading system is a very real and potentially very costly threat to our future standard of living. Recent estimates of the costs of the worldwide protectionist trend show that protection is costing the developed nations one percent of GDP annually; developing nations as a whole, ten percent of GDP; and has slowed world growth by two percent a year!

These five features of the changed world environment contribute to the turbulence and uncertainty we are experiencing. In such an environment, the Canadian economic ship needs to steer a carefully plotted course; with the crew

and captain ready to take advantage of favourable shifts in the wind or to trim the sail and adjust the rudder in anticipation of unpredictable squalls.

Most Canadians can agree that the preferred economic course is one we chart on our own-an independent one that is successful because we are better than the competition. But being better requires that our productivity grow more quickly; that we be the first with new products that others want to buy; that we invest steadily in human resources and productive equipment; that our attitudes and institutions promote reasonably rapid adjustment to new opportunities and accept the necessity of phasing out the obsolete and uncompetitive. Being better requires agreement among the major economic actors-labour, business and government-on the goals.

Unfortunately, however, Canadians have tended to rely on their natural resources, rather than on standards of excellence, to maintain their living standards. Yet in the changed world of low inflation and interdependence, commodity prices are likely to remain at low levels for some time. Indeed, since the deep 1981-82 recession, Canada's term of trade-the prices for our exports (of which more than fifty percent are resource-related) relative, to the prices of our imports-have fallen nearly ten percent. Since the 1980 peak, they have fallen fifteen percent. This means that, as a country, we now must live within reduced means.

Looking beneath the national averages, the implications are more serious. The burden of decline in the terms of trade is being home unevenly across the country. Western Canada, the Atlantic provinces and Northern Ontario are faced with continuing recession while Southern Ontario copes with an industrial boom. This duality in Canada' economy has resurrected the regional tensions that underlie confederation at a time when we must live within reduced means.

As a result, Canada faces the need, not only to respond to the external pressures of a changed world, but also to respond to its internal pressures as well.

How can we respond effectively to these changed circumstances? Through appropriate institutions and policies. The Macdonald Royal Commission, which reported last year, examined our institutions in the light of the need to respond to global economic change. It recommended some fundamental and controversial changes.

A well-known institutional economist, Mancur Olson, has made his life's work the study of social groups and economic change. In his recent book, The Rise and Decline ofNations, he studies the role of special-interest organizations and concludes that, in lobbying for changes that increase their slice of the economic pie, they reduce efficiency and aggregate income in the societies in which they operate. They tend to slow down a society's capacity to adopt new technologies and to reallocate resources in response to changing conditions, thereby reducing economic growth for the country as a whole.

Time is insufficient to make more than this general point. To respond effectively to the rapidly changing economic environment, our institutions, in all sectors of the economy and in all regions of the country, should aim to facilitate, rather than to block, inevitable change.

It is my perception that the 1981-82 recession forced new attitudes and awareness on Canadians that will eventually reshape our institutions in this direction. In parts of the country, Canadians are more open to ideas and anxious to adapt to today's world. They are more outward-looking and aware of the need to be competitive and to earn their way.

The other major vehicle for change is our public policies. I began these remarks by asserting that the Federal Government has adopted appropriate economic priorities. But, as I shall show, the agenda lacks strategic management. New directions in policy require large and complex changes that cannot occur too quickly.

Because of the difficult global environment, unexpected shocks must also be anticipated at any time-from new sources of competition, new technologies, sudden changes in prices, exchange rates or interest rates, and from harsh and abrupt trade actions.

They will cause unexpected changes in priorities. If the agenda is already heavily loaded, policies essential to an effective long-term strategy will be in danger of being overlooked or badly handled.

Our view of the economic outlook for 1987 is moderately optimistic. Few signs exist of inflationary pressures. Unemployment is continuing to decline. Growth momentum is picking up as the effects of lower interest rates, lower oil prices, and currency realignments feed through the world economy.

There are, however, two major caveats. Because of the imbalance in trade and capital flows caused by the propensity of Americans to finance their federal budget deficit by borrowing abroad, serious risks exist of protectionism and of an abrupt rise in U.S. interest rates should the foreign capital dry up. This is why trade policy, budget policy, and policies that promote greater adaptability in the Canadian economy, including tax reform, labour market policy reform, and reshaped industrial policy, must head the policy agenda.

In 1986, major U.S. trade actions were taken against steel tubular product, steel forklifts, carnations, sugar products, shakes and shingles, and softwood lumber. Canada levied its first-ever countervailing duty against U.S. products with a sixty-seven percent duty on U.S. corn imports.

These disturbing events should not be surprising, however. They are predictable outcomes of global disinflation, increased competition, and chaotic U.S. economic policy. The Institute has been warning against them for several years.

Canada's access to the U.S. market is at risk. The world trading system is at risk. Without trade disciplines agreed to among governments, the world is drifting into managed trade in which the strongest voices carve up market to the detriment of consumers, efficient producers, and weaker voices.

The risks of such a trend becoming entrenched were

reduced somewhat by two events in 1986: the initiation of Canadian-U.S. trade talks aimed at creating treaty-based restraint to barriers to trade and investment between the two countries; and the successful launching of the Uruguay round of GATT talks in September.

As a member of the private-sector International Trade Advisory Committee (ITAC) to the Minister of International Trade, l participated in the GATT meeting. I was struck by the reason governments threw their support behind the talks. They need the external source of discipline to tie their hands in ways that allow them to resist domestic pressures for protectionism.

Canada's interests are best served by according both talks the highest priority. Indeed, the two routes are complementary. Many of the trade actions affect the prospects for Canada's already-depressed natural resource industries, and, of course, workers and consumers. Some of our interests, such as those in agriculture, have to be pursued in the 92-member forum at GATT. Others, such as restraining U.S. trade actions, will be most effectively addressed in the bilateral talks.

During the coming year, the bilateral discussions under way since last June can be expected to solidify into packages of demands and concessions on both sides. The talks will have to be completed by next fall, if they are to take advantage of the fast-track authorization process in the United States. It expires in January 1988 and may not be renewed.

Considering the difficulties in the world environment and in the U.S. economy, Canada's long-term economic interests will be severely damaged if we do not augment our access to the U.S. market.

Indeed, as informed Americans are at last beginning to realize, their own long-term interest in a more open world trading environment could be severely damaged if they are unable to make a deal with their closest trading partner.

In the meantime, the barrage of trade actions and complaints has to be managed in a way consistent with long-term interests. Canada's ad hoc reactive approach, witnessed in the softwood lumber case, should be replaced by an anticipatory management strategy. This strategy should be based on the realization that trade actions will continue. Such actions could soon include automobiles, in view of the rapid development of too much productive capacity in North America. This stragegy requires at least four elements:

Better information. Canada faces highly sophisticated lobbies among its antagonists in Washington. Coalitions of consumers and of legislators need to be targeted with far more effective information campaigns about what they stand to lose from successful protectionists lobbying by U.S. industry;

Better anticipation. As we have seen in the softwood lumber case, innocent though we may be, the arbitrary often-political nature of U.S. trade actions can rule against us. We have little recourse, once a judgement is made, except to lengthy and labourious international and legal channels or to ad hoc negotiations where we are at a disadvantage. Surely our own self-interest is best served by finding joint mechanisms to consider complaints as alternatives to trade law actions. The best such joint mechanism for the future may be to find imaginative ways to roll major issues into the bilateral trade negotiations;

Subject the United States to its own game. Though dangerous because it can get of hand, judicious pursuit of complaints against U.S. producers, such as has happened in the case of corn imports, can sensitize U.S. legislators to the costs of their own protectionism;

Streamline our own apparatus. One of Canada's Achilles heels in trade negotiations is the unwieldy federal-provincial apparatus for negotiating and implementing international trade agreements. Quick federal responses, often required in the current environment, risk offending the provinces. Yet lingering long enough over often-public discussions designed to promote consensus reduces the speed and confidentiality often necessary to turn back the tradeaction steamroller.

Before I leave this vital subject, let me add one more comment. Trade talks and trade disputes are likely to demand more and more policy attention. Yet Canada cannot afford to neglect the important opportunities that are opening up with Japan, its second-largest trading partner. Momentous economic changes are under way in Japan that will lead to more open markets for Canadian exports and to Japanese interest in investing in Canada in ways that complement our trade objectives and expand our otherwise-shrinking options. This subject must be accorded high priority.

The second policy priority is to reduce the federal deficit. Many Canadians doubt the federal deficit is under control. Especially since the Federal Government was pushed off course in September 1986 by the necessity of cancelling the PGRT and extending assistance to farmers. These were necessary and useful measures to help those heavily burdened by the sudden and unexpected drop in world prices. Since then, however, it has become increasingly clear that the adversity is not temporary. Governments in Western Canada are recognizing this fact and are "down-sizing" to live within reduced means. The Federal Government is going to have to do the same.

So far, we lack the signs that policy is recognizing this fact. But it is only fair to await the spring budget. In that budget, we should expect, in recognition of the changed world, several changes:

Evidence of a management rule that any new spending commitments must be offset by spending cuts elsewhere in the budget. So far, we have not been informed of where the $1-billion aid for farmers has been found, nor where the new spending promised for regional development programs will come from;

A growth-related deficit reduction plan. While the

medium-term deficit-reduction plan has been pushed off course in 1986, reasonable growth in 1987 will require that the deficit return to its original target. Thus, if growth is three percent or better in 1987, the deficit should be expected to drop to $26 billion as targeted in the February 1986 budget.

These suggestions recognize two hard realities in the world around us. The Canadian fiscal plan is still a hostage to a slowdown in economic growth or an unexpected increase in interest rates. The federal debt continues to accumulate; if interest rates rise unexpectedly, as they could do at any time, sudden Draconian deficit-cutting measures could be required. Unfortunately, the signs in Ottawa and the provincial capitals are that many decisionmakers are motivated by political time horizons rather than by international realities. Signs of discipline and prudence are lacking nearly everywhere but in the Department of Finance.

Nowhere is the lack of discipline more publicly evident than in the conduct of Canada's industrial policy. During the past two years, we have witnessed a series of measures that can be described as bailouts and subsidies on regional development and employment-preserving rationales that are rather dubious.

Ad hoc measures like these run the risk of salvaging Canada's industrial past for engraving on the Canadian Shield, when the same funds could be used to shape the future or reduce the deficit.

We run three risks by continuing to throw money at problems: first, of turning Canada into an industrial museum of costly and antique production facilities; second, of practicing an industrial policy inconsistent with an outward-looking trade policy; third, of frustrating our objective of freer trade by employing grants and subsidies in ways that provoke retaliation.

At the same time, we foreclose opportunities to shift to a policy framework in which the principle is to cushion the losers in declining industries while they find alternatives, and to encourage new industry. By this principle, resources should be channelled to the individual who must bear the burden of adjustment by retraining and moving to new jobs. By this principle as well, more attention would be paid to creating a climate that encourages modernization and growth through deregulation and tax reform and through investing in an infrastructure that educates the skilled labour force and promotes the research and diffusion of research required for the industries of tomorrow.

Time prevents elaboration on other priorities-of tax reform and review of unemployment insurance. The Institute's views on priorities for made-in-Canada tax reform are included in the Policy Review. We look forward to reviewing the Forget Commission report now that it has been made public.

In conclusion, the approaches I have outlined today are not always simple or popular. Yet they are consistent with the unforgiving international environment in which Canada now finds itself. Declining inflation, rapid technological change, and growing interdependence rule out old ways of doing things but also open new opportunities if we shape our national economic agenda in a forward and outward-looking way. Most Canadians agree that the preferred economic course is one aiming at excellence.

The economic course to excellence will be one characterized by leadership and institutions that evoke a broader consensus on the means than we have right now; on a dynamic private sector supported by a public sector whose priorities are carefully chosen and adhered to with discipline.

My remarks have been oriented to the appropriate policy response because I head a policy-research institution. The priorities are clear: to expand access to international markets-this is the only effective and lasting solution to the unpredictable protectionist tide flowing around us; to reduce the vulnerability to slower growth or unexpected interestrate increases posed by the federal deficit; to increase the flexibility of workers' and firms' responses to economic change by ensuring a climate that encourages risk-taking and innovation, that assists individuals to find their ways successfully in the face of change, and that supplies the skills and the innovations that will create tomorrow's new industries.

Sensible and co-operative leadership from all industrial sectors and from all levels of government is essential to an effective national response to the urgent task of responding to the changed global economic environment in ways that protect the future living standards of Canadians.

The appreciation of the meeting was expressed by Robert L. Armstrong, Chairman, Commeration Funds for Canadian Cancer Society (of Ontario); a Past President of The Empire Club of Canada, and a Director of The Empire Club Foundation.

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Canada in the Changed World Economy


The underlying issue to the proposal by Canada's government to negotiate a trade agreement with the United States government: "Canada's ability to respond to the changed global economic environment in ways that ensure future growth in Canadians' living standards." Some of the major changes that have occurred in the world economy. An examination of the adequacy of Canada's institutions and policies to anticipate and respond to those changes. Some of the themes of the annual "Policy Review and Outlook", published by the C.D. Howe Institute. Five key trends influencing what is happening right now. How to respond effectively to changed circumstances. An optimistic view of the economic outlook for 1987. Two major caveats. The importance of Canadian-U.S. trade talks and the Uruguay round of GATT talks. Strategies to manage trade actions and complaints. Reducing the federal deficit. What to expect in the spring budget. An economic course that aims at excellence. Sensible and cooperative leadership needed from industrial sectors and all levels of government.