The U.S.-Canadian Free Trade Area

Ronald Goodall

In the beginning there was reciprocity, but in 1866 the Reciprocity Agreement between Canada and the United States was terminated. Reciprocity, however, continued to be of interest. In 1904, repeating to The Empire Club an address previously delivered in the United States, Cyrus Birge, former president of the Canadian Manufacturers' Association, held: "But, Sir, there is another question regarding the relations of Canada to the United States that is receiving considerable attention, and that is the much-talked-of one, reciprocity with Canada. I mean much talked of in the United States, for I want to tell you that the cry fails utterly to find a responsive chord in Canada:"

We read in the clubs' yearbooks of the preferential tariff and loyalty to the British flag. Reciprocity was a hot topic in our two clubs in 1911. In fact, the pursuit of reciprocity contributed to the defeat of Sir Wilfrid Laurier's government in Ottawa in 1911.

In the 1920s and '30s, any discussion on trade seemed to emphasize United Kingdom/Canada trade and the imperial preference. In 1930, before a Canadian Club audience, economist G.E.G. Catlin summarized current thought: "Instead of old-fashioned free trade there is Empire free trade; instead of old-fashioned tariff reform there is Empire protection."

In 1947-48 terms of a free trade pact were negotiated in some secrecy. But fears of political repercussions appear to have prevented its ratification by Mackenzie King in Canada. Today, 40 years later, or perhaps 121 years later, a free trade pact is before us with the expected proponents and opponents; and some of their arguments today ring familiar to the historian. Perhaps we should heed the words of Edmund Burke in the 1770s: "It is the nature of all greatness not to be exact, and great trade will always be attended with considerable abuses."

Ambassador Yeutter was sworn in as United States Trade Representative on July 1, 1985. As a member of President Reagan's cabinet, Ambassador Yeutter is responsible for the development and execution of American trade policy. He has the challenging task of coordinating a U.S. negotiating position on all trade issues of importance to his country.

Prior to joining the Reagan Administration, Ambassador Yeutter served as president and chief executive officer of the Chicago Mercantile Exchange, the world's second-largest futures market. During Ambassador Yeutter's tenure, the Merc. was one of the fastest growing, most dynamic private sector organizations in the United States.

During the early 1970s, Ambassador Yeutter served in three sub-cabinet posts during the Nixon and Ford administrations. The first was assistant secretary of agriculture for marketing and consumer services, where he had charge of the nation's major agricultural and food programs. He then served for a time as assistant secretary for international affairs and commodity programs, and finally, as deputy special trade representative during the Tokyo Round of multilateral trade negotiations.

Ambassador Yeutter holds a doctorate in agricultural economics as well as a law degree and went from high school to the doctorate without ever having a course grade below an A.

Ambassador Yeutter and his wife, Jeanne, have four children and are presently dividing their time between residences in Virginia and Lincoln, Nebraska.

Ladies and gentlemen, it is my pleasure to introduce to you Ambassador Yeutter, United States Trade Representative, to address us on "The U.S. Canadian Free Trade Area."

Ambassador Yeutter

It's a pleasure to be here in Toronto. I want to thank The Empire Club for providing me with this opportunity to address the issue of the proposed U.S. Canadian free trade area. When I accepted your invitation, I didn't know if we would be celebrating the dawn of a new era or performing a post-mortem on lost opportunities. Believe me, it's a lot more fun to celebrate!

We in the United States are pleased with the agreement concluded last Saturday. It culminated 16 months of gruelling negotiations. President Reagan and Prime Minister Mulroney played active roles throughout the process, first by providing the vision and then by demonstrating the political leadership necessary to keep the negotiations on track. Both our governments spent many long hours setting negotiating objectives and devising negotiating strategies. And in the final days of the talks, we met nearly around the clock to complete the agreement.

It is not surprising that many details had to be settled at the political level in the final days; that is the nature of negotiations. But it is important to remember that skilled and dedicated negotiators on both sides laid the groundwork during the previous 16 months. This agreement was not cobbled together at the last minute.

The United States government devoted an enormous amount of time and effort to this negotiation because Canada is our best friend, closest ally and biggest trading partner. We know that our economic health and national security are inextricably bound up with the people of Canada. There is nothing in the world equivalent to the political "open border" between the United States and Canada. Now we are hopefully on the way to an open economic border as well. That would be a truly remarkable achievement for both countries, and each will be far stronger as a result.

President Reagan has been and remains America's leading advocate of closer ties with Canada. The need to strengthen U.S. economic relationships with our North American neighbours was a major theme in his 1980 presidential campaign. As President, he made the U.S.-Canada free trade arrangement a cornerstone of his trade policy. He knows this agreement will be one of the major legacies of his presidency.

It is not just geography that has brought the U.S. and Canada together. We both went through the institutionbuilding experience, carving a democratic civilization out of the wilderness. We are both nations of immigrants, descended from people seeking freedom and economic opportunity. We share a commitment to individual rights, a respect for property and a fierce sense of patriotism. It is only natural that our destinies should be linked.

Yet despite our political and economic closeness, both countries retain their distinctive national identities. This will surely continue-and it should continue-even as our commercial ties grow closer. Patriotism will remain deep on both sides of the border, and that is as it should be. European nations offer reassurance in this area; they have been commercially bound together for decades yet their cultural heritages and national identities are as strong as ever.

Notwithstanding our satisfaction with the successful outcome of these talks, I am not minimizing the difficulties of the past 16 months. These negotiations were characterized by hard bargaining and difficult compromises. That is to be expected and it must be kept in perspective. One cannot change the rules on billions of dollars of trade without controversy. But controversy is not the same as conflict. Throughout the negotiation there may have been hot words and public posturing, but when these historic agreements are ratified our relationships will be stronger and friendlier than ever.

This agreement is not home free, of course. It will be carefully scrutinized by the U.S. Congress and the Canadian Parliament, and it will inevitably generate criticism by both. That is the democratic process. A great deal of information needs to be absorbed, and it will take time for our respective private sectors to evaluate what we have achieved.

During this process, some will try to determine whether Canada or the U.S. came out the winner. That would be a sterile exercise. It is the wrong question because it assumes a "zero sum" solution. In this instance the sum will be far greater than zero and both sides will win.

We must emphasize this over and over again. It would be tragic to evaluate this agreement on the basis of its impact on particular firms, industries or even states or provinces. We must resist the temptation of thinking small, thinking parochially, or thinking short-term. Here in Toronto the proper question is, "Will this agreement make Canada a better and more prosperous nation than would otherwise be the case half a century from now?" I am confident the answer to that question is a resounding "Yes," and I would respond identically for the United States.

In the Rush-Bagot Treaty of 1818, which established the principle of an undefended U.S.-Canadian border, both sides also won: we each strengthened our national security because we were able to create a common defence. Similarly with the free trade area, both sides win because we will share an immense market. That will not only provide Canadian and American companies with profit opportunities not now available to them, but it will also enhance their international competitiveness.

I'd like now to review a few highlights of the agreement. Tariffs. Until recent years, the reduction and elimination of tariffs would have been the sole objective of a free trade area. And although critically important non-tariff issues were incorporated into this negotiation, tariff issues are still of great relevance. We negotiated an end to all bilateral tariffs within 10 years, beginning January 1, 1989. Some will be eliminated immediately, while others will be phased out in five- or 10-year periods. Although Canadian tariffs, on average, are now higher than U.S. tariffs, over $19 billion of Canadian exports to the U.S. are not dutiable compared to $13.5 billion of U.S. exports to Canada. With free and clear access to the U.S. market, Canadian producers will receive enormous benefits once this agreement is implemented. This element alone should make it worthwhile from the Canadian perspective. When in your history have you ever had the opportunity to secure market access of this magnitude through a single negotiation?

Energy. Free and open energy trade is an essential component of the FTA because it enhances the energy security and increases the industrial competitiveness of both countries. Both sides have agreed to prohibit restrictions on imports or exports, including quotas, taxes, minimum import or export price requirements or any other equivalent measure, subject to very limited exceptions. Considering the economic and political disruptions that energy shortages and surpluses have caused over the past 15 years, eliminating barriers to energy trade will significantly improve the economic wellbeing and peace of mind of our people.

Automobiles. I know that here in Ontario trade in automobiles was one of the most significant concerns in negotiation. So it was with us. Yet we were able to address these concerns in a balanced manner. At Canada's insistence, the Auto Pact was retained. But to address U.S. concerns we eliminated many of the trade distortions in this industry that have emerged in recent years. We also created a new 50 per cent North American (U.S. and Canada) rule of origin based on direct cost of manufacturing. This will stimulate increased use of U.S. and Canadian automotive parts and materials. We also agreed to create a blue ribbon commission to make sure that our automobile industries remain competitive as changes in the world automotive market occur. I fully agree with the Toronto Globe and Mail, which has concluded that the agreement "does not threaten the automobile industry. In fact, the essential feature of the Auto Pact-duty-free access to the U.S.-will be more secure in a comprehensive deal that also stiffens North American content requirements."

Agriculture. At a time when global trade in agriculture is in disarray, the U.S. and Canada agreed to a number of liberalizing policies that will ease trade distortions for our farmers. The agreement offers crop, livestock and horticultural producers on both sides of the border the opportunity to market their products with fewer disruptions from trade barriers. All agricultural tariffs will be removed, each country will be exempt from the other's meat import laws and there will be a limit on the future use of U.S. import quotas on products with less than 10 per cent sugar.

We can't solve all our agricultural problems in a bilateral agreement-the crisis in agriculture is a multilateral one and the global aspects must be addressed at the Uruguay Round. If the two of us were to take significant bilateral action before global reforms are implemented, we would each suffer from the trade-distorting practices of our trading partners. Yet this is still a sound agreement for U.S. and Canadian farmers considering the global nature of many of these problems.

Services. Since U.S. and Canadian jobs are being created in service industries faster than in any other sector of either economy, trade in services has become an important commercial issue in both countries. Under this agreement, each side will treat the citizens of the other side as favourably as it does its own citizens with respect to all new measures affecting services. In addition, the agreement provides separate undertakings covering enhanced telecommunications and computer services, tourism and architects, as well as an annex concerning the transportation sectors. This section on services is also important because it provides momentum for concluding a services agreement at the GATT Uruguay Round negotiations. Both our countries, as major providers of services, will benefit if we can establish multilateral rules in this area similar to those we have just agreed upon bilaterally.

Personnel Movements. The special trading relationship created by the free trade area made it desirable to establish clear procedures for temporary entry by business travellers. Both countries have agreed to ensure easier border crossing for business personnel, including traders and investors.

Government Procurement. Restrictive buying practices of national governments can distort trade flows. Under the agreement, the U.S. and Canada will eliminate many "buy national" restrictions by lowering from $171,000 to $25,000 the threshold at which open and competitive procedures, as set out in the GATT Government Procurement Code, must be followed. Since the United States government is the largest single customer in the free world, this additional access will provide significant opportunities for Canadian suppliers.

Temporary Import Protection (Safeguards). GATT rules allow governments to provide temporary protection or "safeguards" for domestic industries damaged by import surges. Under the agreement, both sides will exempt the other from these actions unless its imports are substantial and are found to "contribute importantly" to the injury.

Culture. The United States recognized the importance to Canada of maintaining its cultural identity. As a result, we agreed that certain cultural areas are not subject to the specific provisions of the agreement. For its part, Canada agreed that future cultural measures will not impair the benefits the U.S. would otherwise expect from the agreement.

Dispute Settlement and Subsidies and Dumping. The question of how to apply countervailing duty and antidumping laws was the most difficult one to answer. Both parties have agreed to retain existing national laws and procedures dealing with subsidies and dumping. But both parties agreed that national antidumping and countervailing duty laws may be appealed to binational dispute settlement panels. These panels will be selected from rosters of fair and impartial Canadian and American experts. The panels will review decisions by U.S. and Canadian authorities to ensure that the laws of each country have been faithfully and correctly applied. This compromise should satisfy the major Canadian concern-that it not be victimized by the arbitrary application of American laws.

I haven't even mentioned the most significant benefit of this agreement. Politicians tend to think that the only ones who benefit from increased trade are exporters, but the big ,winners will be consumers. The increased competition that this agreement provides will eventually lead to lower prices and greater consumer choice on both sides of the border.

Having sung the praises of this free trade area, l should add that it is not a panacea. It will reduce, but not end, trade friction. It will minimize, but not eliminate, trade distortions. There is no heaven on earth-not yet anyway and certainly not in trade policy-but this agreement offers a method of containing potential disputes that is a vast improvement over the prevailing situation.

None of us can yet fully understand what we accomplished last weekend. It will probably be another generation before the true significance of this agreement can be appreciated.

For over 100 years Americans and Canadians have struggled to create a free trade area, to bring to our economic relationship what already exists politically and emotionally-trust, cooperation and deep friendship. Our children will certainly wonder why it took so long to reach this point. All of us would have had a higher quality of life today had we developed such an arrangement years ago. But better now than 100 years from now.

Over the next few months the people of Canada and the U.S. will have to evaluate the benefits and drawbacks of this agreement. I hope I can speak for all the negotiators when I say that what we ask is that it be considered fairly and on its merits. As you review the agreement, ask yourself, "is this in the overall economic interest of my country?" An opportunity like this comes along once in a century.

The United States and Canada have always been beacons of hope around the globe. Other nations look to us for leadership and guidance. Their eyes are on us now because what we do with this free trade area will set an important precedent for the rest of the world. If two best friends cannot liberalize trade, if we retreat behind our borders and raise trade barriers, then hopes for multilateral trade liberalization will be dealt a severe blow. Yet if we overcome the obstacles, if we reach deep within ourselves for courage and self-confidence, we will give hope to all those who are fighting international protectionism.

Nothing is certain in our two dynamic economies except that change is inevitable, the status quo cannot remain. The choice then is whether to control and direct our destiny, or to cling to the status quo and hope that the winds of change will not be intolerable.

Our ancestors did not create these two great nations through timidity. They seized opportunity with enthusiasm and eagerly anticipated the future. This free trade area is good for the United States; it is good for Canada. Let's bequeath to future generations the same legacy of hope and opportunity that was left to us. That is what leadership is all about!

Sonja Sinclair

A nightmare that haunts presidents of clubs such as ours is the possibility that the guest speaker will fail to turn up. It's a nightmare that has occasionally come true: blizzards, important parliamentary votes, even a bomb threat, have at times prevented our guest speakers from fulfilling their engagements.

Over the past two weeks, as we watched and listened to the news about the on-again off-again free trade negotiations between our two countries, I am sure both Ron Goodall and I wondered more than once if this was going to be another such occasion. Given the demands of those negotiations I am sure our guest speaker must have been tempted to cancel, or perhaps to appoint some underling to turn up in his place. So first of all, Mr. Yeutter, I want to thank you for resisting that temptation.

I understand you are catching a flight to Boston and I therefore believe I can best express our collective gratitude by being brief. On behalf of all of us, thank you for giving us such a thoughtful and first-hand report on the free trade agreement. I am sure I express the feelings of the entire audience when I say that I hope this agreement marks the beginning of increasingly cordial and fruitful relations between your country and ours.

Your visit to Canada today has been inevitably brief. We do hope you'll come again soon and stay a little longer. For now, we wish you a pleasant, uneventful flight and a relaxing weekend.