Canada and the United States celebrated their birthdays last week. A belated gift exchange would make both countries - especially Canada - more competitive and prosperous. Specifically, Canada needs a second phase of the Free Trade Agreement to re-energize its productivity levels and economic performance.
A trade accord that completes the unfinished business from the 1989 agreement is required to address the remarkable, continuing contradiction in Canada's economic performance. The macroeconomic outlook is positive, despite the negative impact of a stronger Canadian dollar on manufacturing exports. Economic growth remains solid, inflation is well contained and unemployment levels are at a 33-year low. Canada is the only G8 country to enjoy both a twin fiscal and current account surplus.
But Canada's microeconomy - those factors that affect individual firms and consumers - is cause for serious concern. Canada's relative ranking on income per capita, which is an important measure of a country's standard of living, has been steadily slipping. Among Organization for Economic Co-operation and Development (OECD) countries, Canada has dropped from fifth place in 1990 to 10th in 2005.
Weak growth in productivity and incomes over many years has resulted in a large income gap between Canada and the United States, the reference point Canadians use most frequently. A recent Statistics Canada report showed that the income gap between Canada and the U.S. has narrowed slightly since 2000. However, Canadians have had to work more hours in order to reduce the income gap, since Canadian productivity relative to that in the U.S. has continued to decline. In essence, the figures confirm that in order to grow their real incomes, Canadians are working longer, not smarter.
Bilateral economic integration between Canada and the U.S. has grown since the free-trade agreement (FTA) came into force in 1989, but the FTA is now a mature, fully implemented agreement that has reached the limit of its influence on economic structural change. Original research recently published by the Conference Board, Canada's Changing Role in Global Supply Chains, confirms that development of more integrated North American supply chains essentially ended after 2000.
If we have reached the limits of the original FTA, what might be done to re-energize the Canada-U.S. economic relationship and enhance Canada's competitiveness? The Conference Board believes action is required on three fronts.
First, to become more internationally competitive, Canada needs to tackle the vast web of regulatory and other barriers that currently pervade the Canadian economy, and to reduce barriers to competition in specific sectors. Often these regulations and barriers are legitimately intended to serve the public good, but collectively they contribute to lagging productivity by raising the costs of doing business and by sheltering Canadian industry from domestic and international competition.
Second, Canada needs to show renewed trade leadership by seeking an "FTA II" that reduces the remaining bilateral barriers to the American market. Specifically, the remaining differences in Canada-U.S. tariffs should be eliminated. There should be greater co-operation or even harmonization in the complex areas of regulations and non-tariff barriers, and rules of origin requirements need simplification or elimination. Liberalization of trade-related services is a must, with transportation as the priority. Finally, major investments are required at Canada-U.S. border crossings.
Third, the time has come for Canada to consider the advantages of seeking a more common, regional approach to free trade and investment with countries and regions outside North America. There will be political and economic challenges in trying to advance this approach. However, Canada has made little progress on bilateral free trade over the past decade, signing only four bilateral deals, while the U.S. has signed 14. The time has come to examine an alternative approach, especially with renewed European interest in freer trade with the U.S. and with rumbles of a free trade area in the Asia-Pacific region.
In short, Canada's mediocre productivity performance over the past two decades, combined with a need for greater clarity regarding our next steps in our trade relationship with the United States, present an opportunity to refocus the Canadian economic and trade policy agenda.
BACKGROUND READING
"The Canadian economy ranks among the best in the world; however, we are stalling or losing ground in areas critical to our ability to compete in a rapidly changing global economy."
Mission Possible: Stellar Canadian Performance in the Global Economy, The Conference Board of Canada (January, 2007), by Glen Hodgson and Anne Park Shannon
"Politicians at all levels tend to invest heavily in trade and investment missions, fairs, and negotiations abroad. However, the evidence suggests that changes to Canadian policies are likelier to result in better global economic outcomes for Canada."
If We Can Fix It Here, We'll Make It Anywhere: Effective Policies at Home to Boost Canada's Global Success, The Conference Board of Canada, by Danielle Goldfarb, March, 2007.