By Jennifer Bonder, University of Toronto |
The last few weeks have been an exciting, maddening, “blast” from the past for observers of Canada-U.S. relations as tariff threats – no longer just threats – are being used to put pressure on the ongoing North American Free Trade Agreement (NAFTA) negotiations. But Canada and the United States have been trading with each other for a long time – officially with rules since 1854 – and using tariffs to nation-build for even longer. And by the start of the 1920s it was clear on which one market Canada would depend: Canadians were exporting more to the United States than to Great Britain, and Americans had outpaced the Brits as Canada’s main source of foreign investment. With such an extensive history, maybe there are other relevant lessons from our past outside the NAFTA bubble?
Canada has weathered waves of America First protectionism from the 1860s on, most notably in the beggar-thy neighbour attitudes of the 1890s, 1900s, 1920s and 1930s, each with its own special tariff designed to protect and grow local American economies without any regard for international neighbours. Moments of sanity – or of “common sense” in the parlance of Justin Trudeau – were few, the Revenue Act of 1913 that cut tariffs by almost half being the most memorable.
U.S. trade legislation seemed to be working in ten-year cycles, spiralling downward into the Great Depression. Nearly a decade after the trade liberalization of the Revenue Act, to protect factories and farms, the Fordney-McCumber Tariff of 1922 completely reversed the trend and dealt a harsh blow to Canada. Exports to the United States fell by hundreds of millions. Throughout the 1920s Canada benefitted from bootlegging into prohibition markets and even invited the Americans to negotiate another reciprocal trade agreement, but there was no response.
Then came the Great Crash. It was followed in 1930 by the Smoot-Hawley Tariff Act, which is nearly unanimously seen to have deepened and prolonged the Depression and has become synonymous with protectionism. Duties were raised to record levels on hundreds of imports to protect American industry and agriculture from competition. In response, many of America’s trading partners – Canada first – raised their own tariffs, perpetuating a cycle of protectionism that significantly collapsed world trade. At this point in American history, there was no framework for the international negotiations used today, and trade policy was unilaterally set by Congress.
After Smoot-Hawley, less than half of all Canadian exports went to the U.S. It exposed Canada’s vulnerability, and so Prime Minister R.B. Bennett pushed for the 1932 Imperial Economic Conference to offset damage from these harsh American policies. He pledged to “blast a way” into international markets instead. There was a lot of distrust – the British even accused the Canadians of having their telephones tapped – and the Ottawa Agreements, as they are called, are remembered foremost for extreme discomfort, bad tempers, and sweaty summer days. But they also introduced an empire-wide system of preferences and discriminated against foreign trade. The agreements fell far short of economic integration, but Canada obtained tariff arrangements with Britain, as well as Australia and New Zealand. Preferential-trade treatment for the imperial bloc became the doctrine and law of the British empire: to raise tariffs against the outside and shut out the U.S. Two years later, to better manage the buying and selling of gold and other foreign monies, the Bank of Canada was established.
The U.S. and the world learned a lesson from this experience. If Congress was responding with protectionist policies, then the president needed the authority to overcome special interests and negotiate. The 1934 Reciprocal Tariff Act granted the president the power to lower or raise tariffs up to 50 percent from existing levels in bilateral negotiations with other countries. With this power, President Franklin D. Roosevelt reached tariff reduction agreements with many foreign governments, simultaneously liberating trade policy and making it more global and strategic. He even reached an agreement with R.B. Bennett, but Bennett passed from office before it could be ratified or implemented.
The Canada-U.S. agreement of 1936 – signed under Bennett’s successor, William Lyon Mackenzie King – was a first step, followed by a subsequent agreement two years later that made it easier to export commodities and equipment to the U.S., while Canada reduced some of its barriers to imports. These were the first successfully concluded trade agreements between the two countries in roughly 80 years. They began a trend, or a commitment rather, to stimulate cross-border trade. And they ended the high tariffs of the National Policy era, which had endured for more than half a century.
This new, more outward-looking and mutual approach was institutionalized at the international level with the creation of the General Agreement on Tariffs and Trade in 1948 (the World Trade Organization replaced GATT in 1995). At its core, the basic tenet of these agreements is reciprocity: each country will agree to liberalize its trade to the extent that other countries liberalize theirs. It came on the heels of Bretton Woods, which codified an economic system led by the United States. Before even the Marshall Plan or the North Atlantic Treaty Organization, it signified American leadership in the postwar world.
The Great Depression and its aftermath proved compromise was possible, recognized trade as a global phenomenon, and found middle ground between international economic integration and the preservation of national policy independence. It took such a cataclysmic event to rock the foundations of the tariff walls and give leaders the impetus to experiment with a new way of doing business –– a way beyond protectionism.
Pundits continue to brandish Smooth-Hawley and call this latest round of Trump tariffs the worst decision since then. But the experience of Canada under Smoot-Hawley is one that is repeated throughout the country’s economic history. It highlights two perennial facts about Canadian trade policy and economic strategy. First, that it is reactionary; Imperial Preference was a direct response to Smoot-Hawley. And second, it shows that Canada looks to trade diversification as a means of reducing its vulnerability to U.S. policies and pressures. The Nixon Shock of 1971 led Pierre Trudeau’s government to push for the Third Option – the idea of diversifying into Asian and European markets.