bout de papier, Vol. 4, No. 1 (1985) — Winter 1985 // Hiver 1985, p. 6
A after years of argument, I think it is now agreed that Canada needs to diversify its economy and that reliance on primary products needs to be balanced by greater competitiveness in the growth sectors of high value-added goods and tradeable services.
But is it true, as some economists and policy makers assert, that, to achieve this diversification, the main tool we need is free (or freer) trade with the United States? I contend that there is little basis for this belief and there is even a danger of achieving exactly the opposite result, depending on how we negotiate. Whatever other good (or ill) freer trade would bring, economic diversification will require a different set of government policies, policies even more vital with free trade than without it!
Some proponents of free trade say that the main thing holding back the creation or expansion of new, knowledge-intensive firms in Canada is the lack of certainty about continued access to the U.S. market. Furthermore, since Canadian firms often seem too timid to tackle Asian and European markets before they have succeeded in the U.S., assured access to the U.S. market, it is said, could lead eventually to diversification of customers as well as products.
Really? This alleged lack of certainty of access hasn’t prevented other countries from moving into higher technology and practically flooding a wide-open U.S. market! Where are all the would-be Canadian entrepreneurs who have supposedly held back because the access, open as it is, is not totally assured?
There are companies such as Algoma Steel which had to curtail expansion plans because of rising U.S. protectionism. Such companies, however, have been operating
• in the traditional sectors of our economy such as steel or lumber, i.e., the sectors at which most U.S. protectionist threats (and actions) have been aimed! This has not generally been the case with advanced technology firms. In conversation with hundreds of business people and would-be business people, I have heard many reasons for avoiding the high-risk, high value-added sector. But I have never heard fears about the certainty of continued access to the U.S. market given as a reason for not going into such a business. What holds them back from these high risk areas has everything to do with Canadian attitudes and business habits and nothing to do with an alleged phobia about possible U.S. protectionism.
It’s true that Canadian high technology companies often expand in the U.S. rather than in Canada and one reason may be to hedge against eventual protectionism. The main reasons for such U.S. expansion, however, are ones that would exist even in a free trade situation, i.e., proximity to customers, access to nearby universities, availability of highly skilled personnel, low wages in the southwest, and so on.
Big Canadian investors choose familiar areas such as oil and gas, real estate, or U.K. newspapers for their investments, but it’s laughable to suggest that they avoid higher technology because they feel that the present access to U.S. markets might be lost in the future!
Might foreign high technology firms locate in Canada once access to the U.S. market was assured? This could happen in a few cases but it is not likely to be a major consequence. If advanced technology firms are mainly interested in the U.S. market, there are usually better reasons to go to the “real United States” rather than to the “near United States. “ This is especially true when the motivation is to acquire U.S.-based technology from university sources or to assuage the wrath of U.S. congressmen regarding the trade deficit. Location in Canada achieves neither of these purposes.
Free trade might help the Canadian economy in certain ways but the argument that it would help diversify the Canadian economy is without foundation. There is even good reason to believe that freer trade could actually impede the diversification process. As rationalization of the North American economy proceeds, continental market forces are far more likely to operate along lines of existing relative strengths. That is to say, in the absence of deliberate Canadian policies to engineer new areas of comparative advantage, Canada will find itself doing what it has been doing in the past, only more so, although with less fear of protectionism against our primary goods. As the U.S. is ahead in most areas of advanced technology, the market will assign those tasks preferentially to that country.
What does this mean for our negotiations? It suggests that there is a possible danger in the deal we strike. Comparative advantages in the knowledge-intensive fields come, in every country, with help from government. In the United States, the defence department is pre-eminent but not alone in this effort. If the possible preferential use of government to engineer such comparative advantage is negotiated away by Canada, then important knowledge-intensive industries will rarely, if ever, develop here. In any agreement, therefore, the following principle must be accepted regarding non-tariff barriers:
Either all U.S. and Canadian governments should give “national treatment” to both U.S. and Canadian firms bidding for all government contracts, research awards, development assistance; or To the extent that the U.S. retains favoritism for its own firms in defence, space or any other area, Canada must be permitted to exercise a proportionately equivalent amount of favoritism via Canadian non-tariff barriers in areas of its own choosing.
Unlike the U.S., we don’t have a defence-driven government procurement policy in Canada. We are still struggling with how best to use government in our free enterprise economy to help create the technological base for a diversified industrial mix. It is not a simple task. We need preferential government purchasing, research arrangements, development grants, and much more. Since the U.S. will probably retain its own preferential systems for defence, we must retain the potential for equivalent systems of our own.
All of this means, if we are serious about diversification of our economy into advanced, knowledge-intensive areas: (a) don’t expect freer trade to do this automatically — there is no reason to believe it will and it may just dig the present ruts a bit deeper; and (b) don’t negotiate away the ability to make some use of Canadian non-tariff barriers; they represent our only real hope of getting advanced technology to play a larger role in the hands of Canadian exporters. A
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Originally published in bout de papier, Vol. 4, No. 1 (1985) — Winter 1985 // Hiver 1985, p. 6. Read the rest of this issue →
