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Who will bear the price as we reorient our economy?
This article was originally published in The Gazette.
Donald Trump seems intent on swinging the cudgel of ruinous tariffs whenever he wants something from friend or foe alike. No country, save Mexico, is as economically vulnerable as we are. How did we get into this position and what do we do now?
Continental economic integration has a long history, but it has taken different forms.
Canada industrialized thanks to the economic nationalism of Prime Minister Sir John A. Macdonald. In broad brush strokes, his national policy of 1878 was premised on the formation of a protected national market, thanks to mass immigration and a transcontinental railway connecting the country’s far-flung communities, surrounded by a high tariff wall to give space for homegrown manufacturers to emerge. Notably, Indigenous dispossession and containment were an integral part of the process.
Eventually, Macdonald’s tariff wall forced American companies to build branch plants here. By 1970, fully two-thirds of Canada’s top 100 manufacturers were foreign owned. In this regard, Canada was an outlier in the industrialized north, as its rate of foreign direct investment resembled that of Argentina and Sri Lanka rather than the U.S. or the U.K.
Concerned about being economically dependent on the U.S., a new generation of nationalists raised concerns about the branch plant economy in the 1960s and ‘70s. They pointed out that important corporate decisions were almost always made outside the country, and that the design and engineering functions of multinational corporations were located elsewhere. In fact, Canadian subsidiaries were mostly barred from the export market. Branch plants were therefore smaller in size and produced a wide range of products for the domestic market rather than benefiting from the economies of scale.
If economically inefficient, Canada’s branch plant economy wasn’t all bad. It offered union wages and a measure of job security for workers in diversified factories, and employers could not easily move production across borders. Governments could also regulate without fear of scaring off foreign investors. The benefits of economic growth were therefore shared to an unprecedented degree. It is one of the reasons why the postwar decades were so prosperous for so many Canadians.
The auto sector was exceptional in so far as it was integrated with the U.S. early on with the 1965 Auto Pact. It enabled the Big 3 automakers to rationalize production for maximum efficiency. However, Canada managed to win a guarantee that as many cars and trucks would be built in Canada as sold here.
Public policy does matter. When bankrupt Chrysler got bailed out, the U.S. Congress made it conditional on steep union concessions. By contrast, Canada smartly tied its bailout to massive new corporate investments in Canada. As a result, the 1980s saw the expansion of Canada’s automotive sector at a time when it was in free fall south of the border.
With global trade liberalization under the General Agreement on Tariffs and Trade (GATT) advancing to the point that low-cost imports were displacing thousands of Canadian workers, Canada was forced to make some difficult choices. Brian Mulroney’s negotiation of the Canada-U.S. Free Trade Agreement in 1987, and his defeat of economic nationalism in the federal election the next year, represents a watershed moment in Canadian history.
Almost overnight, Canada’s branch plant economy was made redundant. Multinationals restructured their operations for maximum efficiency and pit political jurisdictions against each other for new investments. Fully 300,000 workers in Ontario lost their jobs between 1989 and 1992. And the extension of free trade to Mexico in 1992 further shook things up.
Working-class communities bore the full brunt of industrial restructuring. There was nothing “just” about it. The federal Tories and Liberals restricted eligibility for unemployment insurance and reduced benefits. Many people were thrown onto provincial welfare rolls. Sadly, politicians of all stripes treated poverty as a moral failing rather than something structural.
So here we are, a generation later, faced with some tough choices and yet another wave of economic change. We need to ask ourselves who will bear the price as we reorient our economy? Already, we are hearing a rising chorus of voices telling us that we need to reduce wages, taxes and red tape to compete globally. It is an old refrain and one that has produced ever more extreme income inequality. If Ronald Reagan had not reduced the highest rate of income tax from 70 per cent to 28 per cent, we would not have billionaires running amok today.
Steven High is professor of history at Concordia University and author of The Left in Power: Bob Rae’s NDP and the Working Class.
