Canada-U.S. Trade: A Time for Decision

Introduction:

The American Humourist, Ogden Nash, wrote: "O, money, money, money!

I'm not necessarily one

Of those who think thee holy But I often stop to wonder How thou canst go out so fast When thou comest in so slowly."

Nash went on to say: "Bankers are just like anybody else-except richer:'

The banker here today is not like anybody else but he is rich in talent and accomplishment. Before becoming the President and Chief Operating Officer of the Bank of Montreal, Canada's oldest and second-largest bank, his career has included leadership in Academe and government and his honours are numerous.

He is an officer of the Order of Canada. He holds honorary degrees from Wilfrid Laurier and Simon Fraser Universities as well as from his own alma mater, the University of Western Ontario, where between 1957 and 1978 he was successively Professor, Dean, Vice-President and Provost.

In addition, he has acted as chairman of the Canadian Economics Association, chairman of the Ontario Economics Council, and was elected

Fellow of the Royal Society of Canada in 1972. He is also Chairman of the C.D. Howe Institute and a Director of Sun Life Insurance Company of Canada and of the Institute of International Finance of Harris Bank Corp, and he is a Governor of the Stratford Festival.

How did someone from Mildmay, Ontario, prepare himself for such onerous responsibilities? Well,it isn't surprising to note that after receiving this Honours BA. degree from Western, he went to that economist's Mecca, Harvard University, where he received both a Master's degree and a Doctorate in Economics, sandwiching in a year of research at Cambridge University in England.

He has published numerous articles on various aspects of the national and international economy. I first met Mr. Reuber when he was Deputy Minister of Finance for Canada, speaking to the Couchiching Institute on Public Affairs at the 1979 summer conference. I welcome him again.

His subject today is "Canada-US. Trade: A Time for Decision." Let us welcome Grant L. Reuber, President and Chief Operating Officer of the Bank of Montreal.

Grant L. Reuber

Trade negotiations between Canada and the United States are coming to a head. If they are to succeed, an agreement will probably have to be initialled by about the first of October-six months from now.

This timetable is influenced by several factors. First and foremost is the deadline imposed by the "fast-track" process in the U.S. whereby the agreement is referred to Congress on an all-or-nothing basis for approval. Other factors favouring a resolution of the issue this fall are the pre-election activities starting in 1988 in both the US. and Canada, the moderate but positive outlook for the North American economies for the next few years and the pressure in both countries for increased long-run economic growth.

In plain words, the time for decision is upon us. Negotiations are now entering that crucial stage marked by closeddoor sessions, "no comments" from the principal negotiators, inspired "leaks" and behind-the-scenes horse trading. Special-interest groups are out in force in both countries, making it even more difficult to predict the outcome.

From the welter of polling results available, it appears that more Canadians favour substantially-free trade with the U.S. than oppose it. Even in the traditional heartland of protection in Canada, Ontario, the polls suggest nearly as many favour an agreement as oppose it.

For some time now, the air has been full of predictions on what would really happen if and when an agreement is reached. These range from disaster to Nirvana. Some of you may recall the negotiation of the Auto Pact in the mid-'60s. Then, as now, there were predictions of substantial job loss, a surrender of political independence, an implicit Governmentproducer conspiracy to create a monopoly, and widespread hardship during a difficult period of adjustment.

In retrospect, it is clear that these pessimistic views were wildly off the mark and that the Auto Pact has, in fact, been a positive factor in this country. Indeed, the Auto Pact has become so sacrosanct in the public's mind that one of the concerns now heard about a general free trade arrangement is that in some way it might impair the Auto Pact.

Similar concerns about adjustment problems arose in connection with the Tokyo Round of trade liberalisation. Again the worries proved overdone.

Another perspective is that a trade agreement is more likely to assist in promoting global trade liberalisation than to hamper it. What's more, if and when it occurs, Canada will be in a stronger position to take advantage of worldwide liberalisation if it has already adapted to strong competition within North America.

As Rene Levesque (former Quebec Premier) recently put it in his Memoirs.

"The future development of this country is going to depend more and more on our ability to meet the competition, wherever it raises its head. For a people whose home market absorbs barely half its production, the rule is to sell and export, or die on the vine. What we need are skates good enough so we can get out on the rink and learn to play with the Gretzkys of world trade."

What is being considered is, in fact, very much a continuation of a policy of lowering trade barriers that began in 1947 and has stood us in very good stead over the years. Today, by far the larger part of trade between Canada and the U.S. moves free of duties. What is at issue is the remaining tariffs, largely - covering manufactured products. Even more important, rationalising and reducing the many nontariff barriers would prove highly beneficial.

Such nontariff barriers have proliferated on both sides of the border in recent years and now probably are a more important impediment to trade than tariffs. But perhaps the greatest benefit of an agreement, in my view, would be in establishing a more secure trading arrangement than we now have. Agreement on a code governing subsidies, nontariff barriers and a dispute-settlement mechanism to deal with such matters as countervail duties and dumping would represent a major advance in relations between the two countries.

In the next few months, we will be weighing in the balance the future growth and prosperity of this country as well as its political, social and cultural development. This is not a sectoral or regional or class issue: we are all in the same boat together.

Most independent studies indicate that free trade with the U.S. would increase Canada's real income by five percent or more. Employment would increase by three percent or more. How these gains are distributed for cultural, social and other purposes and among various parts of the country is a matter that will be decided independently in this country by and for Canadians.

Discussions become confused when consideration of the gain from trade for Canada as a whole is mixed up with consideration of how this gain should be distributed among Canadian citizens-and this is a question that remains fully within our own hands to decide.

Granting all this, I believe the main concerns about an agreement arise from the general uncertainty that any major policy entails and from fears about possible difficulties of adjustment for particular industries and communities.

But we must not forget that what is contemplated is a very slow process: a gradual reduction in trade barriers over the next decade or so resulting in essentially-free trade by about the year 2000.

This is similar to the pattern we have followed since World War II in removing trade barriers. Experience suggests that expected problems of adjustment tend to be exaggerated. If the process is stretched out over a decade or so, adjustment can be handled without much difficulty. Moreover, as further reassurance, the Government may wish to buttress an agreement with policies, as suggested by the Macdonald commission, to facilitate adjustment and to support those who may be adversely affected in the short run.

I'm aware that much of what I've said up to now will be familiar to many of you. Some of you may even agree. At this point, I'd like to stand the usual discussion on its head and raise the question of what is likely to happen if an agreement is not reached.

Four points I believe are immediately clear. First, as already mentioned, we can expect to have a lower standard of living-lower by five percent or more-and a lower level of employment. Secondly, we do not face a national calamity if no agreement is reached, even though it means we will have to do with less. Thirdly, the status quo in our trading relationships as well as in the economy is unlikely to be sustainable over the next decade. And finally, we will face a host of the same problems in this country whether an agreement is reached or not.

What about our trading relationships in the absence of an agreement? Presumably, we will continue to press for multilateral trade liberalisation, but this process has been moving very slowly and the outcome is highly uncertain.

Conceivably, we might also try to work out sectoral trade agreements with the U.S. and others. Not only is this possibility doubtful on economic and political grounds, but also there is no reason to believe that the U.S. or others have much interest in pursuing it. This option reminds one of the "third option" heralded with great fanfare a decade ago but yielding negligible benefits.

Still another option would be to meet increased protection abroad with increased protection in Canada, thereby denying ourselves access to world markets and access to world prices for our imports-a recipe that would carry a very high price for the country.

Realistically, the only alternative to having an agreement with the U.S. is continuing with our present arrangements. But, under present arrangements, we will remain subject to the full impact of protectionist pressures in the world and particularly in our most important market, the U.S. Protectionist pressures in the U.S. are not new. They have, however, become much stronger in recent years in response to the bulging U.S. trade deficit and the election of a Democratic majority in both Houses of Congress.

Aside from any generally restrictive trade legislation that might be passed in the U.S., further applications of countervailing duties and other trade "remedies" are quite possible-such measures as were applied, for example, in the case of lumber. The future of the Auto Pact could itself be called into question, if only because of its contribution to the size of the U.S. trade deficit and the treatment accorded by Canada to non-American auto companies. Indeed, the chances of maintaining the advantages of the Auto Pact arrangements in my view are higher if we conclude a general free trade arrangement than if we do not.

Finally, Canada is less likely to benefit from the spillover effects from U.S. efforts to work out trade problems bilaterally with other countries such as Japan and those in Western Europe. Without an agreement, we would clearly be on our own, on the periphery and without much clout in a trading world that is likely to be anything but benign.

In these circumstances, the degree of uncertainty and adjustment to be faced is likely to be at least as great without an agreement as with it. We certainly will be just as exposed to external policies and pressures and no less vulnerable to their impact.

Indeed, one of the main purposes of an agreement, as already noted, is to firm up and secure trading arrangements with our largest trading partner. This said, one must also add that no one should expect that, because we have an agreement with the U.S., all problems of trade relations will disappear. What one can expect is that these problems will be reduced and rendered somewhat more manageable.

With or without an agreement, Canada faces substantial economic adjustments in the years ahead, as it has during the past several decades. In part, these adjustments will be driven by a variety of domestic factors such as demographic changes, changes in consumption patterns, changes in the size and scope of government, resource discoveries and so forth.

More important, however, are likely to be the adjustments required by overwhelming international forces. Foremost among these are technological changes, changes in international demand for goods and services, changes in trading policies and arrangements among foreign countries; changes in the international competitive position of supplies to world markets, changes in the structure and organisation of international enterprises; the list goes on.

We live, in short, in a highly dynamic, rapidly changing world. Nothing can shelter Canada from this wave of change. And our future prosperity depends heavily upon how readily and effectively we adapt.

My own industry provides a graphic illustration. In recent decades, Canadian banking has had to adjust to enormous changes in technology, financial instruments, and ways of doing business at home and abroad. We have had to adjust to the addition of more than fifty foreign banks-the Schedule "B"s-to the Canadian market. Various other financial institutions have infringed more and more on the traditional business of banking. International competition has become extremely stiff.

In response, Canadian banks have had to adapt on a major scale. This has entailed heavy investment in technology and in people, in upgrading the skills and expertise of existing employees through retraining, in developing and promoting new products, in changing the way we do business with our commercial and personal customers, in reorganising and streamlining our internal structures, in reassessing our priorities and focussing on these areas and activities that are seen as most promising, and so on.

Changes during the next decade are likely to be even greater. As you are aware, the regulatory framework governing Canadian financial institutions is about to be fundamentally changed. This will remove most of the barriers that in the past have delineated the activities of banks, trust companies, insurance companies, and investment dealers.

Financial institutions over time will infringe more and more upon each other's traditional turf, competition will increase, and consumers will gain better service at less cost. No doubt, there will be some pain and some casualties along the way. This process, under way in most industrial countries, is inescapable in a modern and growing economy.

I've talked about banking because that is the industry I'm most familiar with. But the same phenomenon of change and adaptation is, I dare say, common to virtually every industry in this country. This process will persist whether or not we have a trade agreement with the U.S. The question is whether this adaptation is likely to be more effective and less painful with or without an agreement.

Answers to this question will differ. My own answer is that an agreement will facilitate and ease the process of adjustment primarily for three reasons.

First, because of increased competition, the process will proceed more quickly, thereby avoiding some of the unnecessary difficulties and costs of a slow start and a grudging response. Moreover, with more secure trading relations, adaptation can be undertaken with greater confidence in the stability of the trading system.

Secondly, as a richer, faster-growing society because of the agreement, we will have more resources available and more capacity to help facilitate adaptation and assist those adversely affected by it.

And finally, an agreement is likely to induce closer harmonisation of trade-related federal and provincial policies, in the process making Canada itself more of a national market with a freer flow of goods and services within our own borders.

Gaining provincial government acceptance of an agreement and a willingness to implement those aspects within provincial jurisdiction pose a special complication for the federal Government in reaching an agreement with the U.S. A permanent committee of federal and provincial officials has been established to provide full consultation as the negotiations proceed.

In addition, First Ministers meet every three months to review progress in the discussions with the U.S. and there has been general agreement on the broad parameters for the negotiating mandate. All this helps to keep everyone informed, to build a consensus and to shape an agreement that reflects provincial interests.

The crunch will come if and when an agreement has been reached, not all aspects of which are likely to be completely to the liking of every provincial government. At that point, Canadian governments will have to confront long-standing issues of provincial trade barriers and of weighing the larger national interest against the regional interests of the province.

The outcome will be a test, for all the world to see, of national unity and of how strong we are as a nation. In my view, if the negotiations founder on this rock, the cause of Canadian nationalism will not be well served, nor will the world's confidence in Canada's future be encouraged.

There remain the controversial issues of political independence and the viability of Canadian culture if an agreement is concluded. Canada has, of course, always been closely knit into the international economy and, over the years, has become ever more so. Moreover, over time, the Canadian economy has become fully integrated into the North

American economy for a variety of fairly obvious reasons.

I see little evidence that we have become any less politically or culturally independent because of these stronger economic links. Nor am I aware of any evidence from other countries-for instance from European experience with trade blocs-that would suggest that a free trade arrangement with the U.S. would result in a loss of political independence and in cultural decline.

There are two major reasons for expecting exactly the opposite.

First, as already emphasised, by nailing down and securing our trading relationships with the U.S., we would make ourselves less vulnerable to the vagaries of U.S. policy. In effect, we would be reducing the scope for political interference by the U.S. in Canadian affairs.

Secondly, because of a substantially higher standard of liing and more rapid economic growth, more resources would be available, if we choose to use them for these purposes, to pursue independent national policies and to support Canadian culture.

I simply find it implausible to believe that we will have greater political independence and a more highly developed culture if we are poorer rather than richer, and if our trading relationships with the U.S. are less, rather than more, secure.

There is another important consideration, Canada's cultural and social development, its political cohesion and its independence as well as its economic prosperity, in my view, depend substantially upon limiting the gap in per-capita income between Canada and the U.S. That gap had been narrowing up to 1976. Since then, it has been widening. And now it is roughly the same as in the early 1950s.

This growing gap encourages a net exodus of human capital in the form of able, well-trained and enterprising Canadians as well as of other forms of capital investment.

The negative economic, social, cultural and political effects of such an out-migration of people and investment capital are considerable. I believe they will substantially outweigh the negative consequences of a trade agreement that serves to reverse the current trend and narrows the gap in real incomes between the two countries.

There is, of course, much more to be said on this subject. No doubt you will be relieved to hear that I do not intend to say it here. We can agree, I'm sure, that, over the next few months, Canadians face one of the great national decisions of this century. Many of the questions that arise are difficult and controversial and the answers are far from clear.

Earlier this month the Prime Minister summarised Canada's principal demands for a trade agreement:

Changes in U.S. trade remedy laws, such as those applying countervailing duties to lumber;

Reduction and elimination of tariffs; Removal of nontariff barriers.

Whether it will be possible to arrive at an agreement along these lines that is acceptable to both governments remains to be seen. It will not be an easy task.

If an agreement is reached, no one can be sure exactly what the outcome will be. In the end, accepting an agreement will require, in the words of Don MacDonald, "A leap of faith." What is less apparent, and what I've tried to emphasise in my remarks, is that saying "no" to an agreement will also require at least as great a "leap of faith:"

The world will not stand still; the status quo has no future; substantial change will inevitably occur; and, one way or another, we will be affected. Few believe that an agreement will be an unmixed blessing. The question is whether Canada will not fare better or worse with an agreement or without.

The appreciation of the meeting was expressed by Catherine Charlton, MA., a Past President of The Empire Club of Canada.