sleeping with an elephant - a canadian defence against 21st century u.s. protectionism

7/28/2019 Sleeping With an Elephant - A Canadian Defence Against 21st Century U.S. Protectionism

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SLEEPING WITH AN ELEPHANT:

A Canadian Defence Against 21st

Century U.S. Protectionism

Matthew Thomas Simpson

Hobart and William Smith Colleges

April 6, 2004

Matthew Thomas Simpson, 2004


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Living next to you is in some ways like sleeping

with an elephant. No matter how friendly and

even-tempered is the beast, if I can call it that,

one is affected by every twitch and grunt.*

Canadian Prime Minister Pierre Elliott Trudeau,

March 26, 1969

* This was said at a time of heightened nationalistic sentiment in Canada which gaverise to one of the most prolonged periods of protectionism in Canadas history.

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TABLE OF CONTENTS

CHAPTER I INTRODUCTION........................................................................... 6

CHAPTER II FREE TRADE ..............................................................................8

Twentieth Century Challenges to Free Trade...........................................................................................13

...........................................................................................................................14The Free Trade Response

.........................................................................................................................17Contemporary Free Trade

CHAPTER III HISTORICAL UNDERPINNINGS OF CANADAU.S. TRADE

RELATIONS....................................................................................................... 19

CHAPTER IV NAFTA...................................................................................... 23

.......................................................................................................................................23History of NAFTA

........................................................................................24Factors Influencing the Negotiation of NAFTA................................................................................................................................24Asymmetry of Power

....................................................................................25Political Institutions and Domestic Environments...........................................................................................................................................................25U.S.

......................................................................................................................................................26Canada

............................................................................................................................27Key Elements of NAFTA.....................................................................................................................................27Tariff Elimination....................................................................................................................................28Non-tariff Barriers

.........................................................................................................................................28Rules of Origin................................................................................................................................................28Safeguards................................................................................................................................................29Investment

.............................................................................................................................................29Environment

........................................................................................................................................29Impact of NAFTA.........................................................................................................................................................29Trade

...........................................................................................................................................................30Jobs

....................................................................................................................................................30Conclusion

CHAPTER V U.S. PROTECTIONISM............................................................. 32

............................................................................................................................................33Steel Industry ......................................................................................................34Global Response to U.S. Steel Tariffs.....................................................................................................................................36Softwood Lumber

.................................................................................36Global Response to U.S. Softwood Lumber Duties.........................................................................................................................................38Farm Subsidies

.............................................................................................................39Global Response to the Farm Bill..............................................................................................................................40The Byrd Amendment

...............................................................................................41Global Response to the Byrd Amendment

.....................................................................................................................................43Trade Issues Today

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CHAPTER VI CASE STUDY KYOTO PROTOCOL..................................... 45

..................................................................................................................................................45Background

................................................................47Canadian Domestic Politics Surrounding the Kyoto Protocol........................................................................................................................................49Canadian Media

..........................................................................................................................50Canadian Public Opinion

.................................................................................................................................51Canada U.S. Politics

...............................................................................................................................52U.S. Rejection of Kyoto

Responses to U.S. Rejection of the Kyoto Protocol...................................................................................53

..........................................54Impact of the U.S. Rejection of the Kyoto Protocol on Canadian Investors...................................................................................................55Canadian Energy and Chemical Sectors

CHAPTER VII ANALYSIS............................................................................... 60

..................................................................................................................................60The Two Conclusions................................................................................................................60Canada is in A Unique Position

.......................................64U.S. Protectionism is in Opposition to the Spirit of International Agreements.

........................................................................................................67Availability of Recourse and Remedy.....................................................................................................................................67NAFTA or WTO?

.....................................................................67NAFTA Chapter 11 Investor to State Dispute Resolution...........................................................................................................67NAFTA Chapter 11 Background

......................................................................................................................................................68Outline......................................................................70Protectionism as Expropriation under NAFTA Chapter 11

......................................73Proposed Amendment to NAFTA Chapter 11 to Include Domestic Investors

......................................76Applicability of the Proposed Amendment to the Kyoto Protocol Case Study

CHAPTER VIII CONCLUSION........................................................................ 77

WORKS CITED..................................................................................................80

APPENDIX I GENERAL COUNTRY DATA .................................................... 90

APPENDIX II ECONOMIC RATIONALE OF FREE TRADE........................... 91

APPENDIX III TRADE DATA..........................................................................94

APPENDIX IV NAFTA JOB LOSS..................................................................98

APPENDIX V U.S. PROTECTIONIST TREND................................................ 99

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ACKNOWLEDGEMENTS

I would first like to thank my Honours Advisor, Professor Christopher E. Gunn.

His thoughtful criticism and scholarly vision broadened the scope of my work, and his

subtle, yet effective encouragement kept me on-time and well motivated.

I have also benefited greatly from conversations with several faculty members of

Hobart and William Smith Colleges including, but not limited to: Tom Drennan; Judith

McKinney; Paul A. Passavant; and JoBeth Mertens who inspired me to a deeper level of

analysis. Lastly, I am truly indebted to Feisal Khan and Jennifer Tessendorf whose

advice and faith have both been indispensable.

I wish to thank my family and friends. Discussions with Steven Higgins have

challenged my ideas while Nancy Pattersons skilful editing has clarified my arguments

and improved my vocabulary. Tara Van De Mark deserves true recognition for tolerating

late night discussions of economic theory and fragmented ideas, all the while supporting

my hopes and dreams for this paper, not once wavering in her dedication.

Finally I thank both my Father, Tom Simpson, whose support of my dreams never

shone as brightly as in the editing stage of this work, and my Nan, Rosalys Lawrason,

whose unwavering love guides and motivates me each and everyday. To them, I dedicate

this paper with love.

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CHAPTER IINTRODUCTION

The colourful description by former Prime Minister Pierre Elliott Trudeau to an

American audience in 1969 is reflective of the reality of the relationship between Canada

and the United States (U.S.). The interconnectedness and the interdependence of Canada

and the U.S. reflect one of the longest-standing peaceful relationships in modern history.

Canada and the U.S. have become each others largest trading partners, a relationship

built out of proximity, raw materials, labour and respect. The relationship has been

successful despite the large asymmetry of power that exists. This asymmetry, alluded to

by Prime Minister Trudeau, has caused great difficulty for Canadian firms some thirty

years later the twitch and grunt can be felt and heard today in the protectionist

policies of the U.S. in the 21st century.

On March 29, 2001, the elephant twitched and passed gas when President George

W. Bush withdrew the U.S. from the Kyoto Protocol.

On March 22, 2002, the elephant trumpeted through the Canadian forest when the

U.S. Department of Commerce imposed an average 29 percent tariff on Canadian

softwood lumber products and producers.

These protectionist actions, as well as several others, have adversely affected the

global community in general, and Canada, a party to the North American Free Trade

Agreement (NAFTA), specifically.

It is the purpose of this paper to address the protectionist actions of the United

States in the 21st

century, analyze their effect on Canadian investors, and review the

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iavailable remedies. I will assert that U.S. protectionism is in direct contravention to the

spirit and intent of NAFTA, and that protectionist action should be considered

tantamount to expropriation, thereby justifying the use by Canadian investors of NAFTA

Chapter 11, as found and as amended, as a method of recourse.

In order to do this I will establish the need for qualified free trade and identify the

importance of a fresh discussion of Canada-U.S. trade. ii I will then highlight recent cases

of U.S. protectionist actions, followed by a more detailed discussion of my primary case

example, the U.S. withdrawal from the Kyoto Protocol.

Finally, I will argue for a more aggressive use of NAFTA Chapter 11 in its

present form and with a proposed amendment to include domestic investors. By

providing domestic investors the opportunity for compensation for the protectionist

action of a NAFTA partner, this amendment will act not only as a mechanism for

recourse, protecting those adversely-affected investors, but ultimately, as a deterrent to

NAFTA partners from protectionist conduct.

i According to NAFTA Chapter 11, a foreign investor is defined as any person or company who makes aninvestment into another NAFTA Party. Investments are broadly defined and include the traditional FDI, aswell as all types of financial investments, shareholding, secured debts and so on (Mann 9)ii Protectionist actions should not be eliminated totally, as there are fundamental political and social goalsthat may be achieved through conduct deemed by others as protectionist. As an alternative, I argue forqualified free trade which allows for certain protectionist acts and provides for remedy for those adverselyaffected by such acts.

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CHAPTER IIFREE TRADE

The foundation of international free trade theory is the concept of comparative

advantage as first described by David Ricardo in 1817 during the era of classical political

economy. In general, the theory states that although one country may be more productive

in every agricultural and industrial activity, trade will still take place if the internal

production cost ratios are different from country to country (Rutherford 84). Thus, a

country has a comparative advantage over another country in the production of a good if

it can produce that good at a lower opportunity cost than another country (Kennedy 393). i

Critical to Ricardos development of the concept of comparative advantage was

the work of scholars such as Thomas Mun (1664) and Adam Smith (1776), who were the

first to discuss the existence of benefits to trade based on concepts of cost advantage.

These works attacked the then current mode of economic thinking, mercantilism.

According to the mercantilists, protectionist policies were necessary, as the bringing

about and maintaining an excess of exports over importswas the only way for a country

without gold and silver mines to increase its stock in the precious metals (Kuhn 322).

The free trade theorists found this protectionist approach wanting, and advanced the free

trade theory that would eventually displace the mercantilist paradigm.

Arguing against the mercantilists, Thomas Mun wrote of the value of free trade

and the negative result of government intervention in the market. Mun argued that free

markets on their own generate efficiency and that any attempt to interfere with the natural

i In a two good market the opportunity cost of production is defined as the amount of good B that must begiven up in order to produce one more unit of good A (Kennedy 393).

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working of the market, notwithstanding potential short-run benefits, would be devastating

in the long-run:

The sum of all that hath been spoken, concerning the

enriching of the Kingdom, and th encrease of our treasureby commerce with strangers, is briefly thus so muchtreasure will only be brought in and carried out of aCommonwealth, as the Foraign Trade doth over or underbalance in value. And this must come to pass by aNecessity beyond all resistance. So that all other courses(which tend not to this end) howsoever they may seem toforce money into a Kingdom for a time, yet are they (in theend) not only fruitless but also hurtful: they are like theviolent flouds which bear down their banks, and suddenlyremain dry again for want of waters (Mun 87-88).

For Mun, the balance of trade exists as a natural, optimal equilibrium, and any attempt to

alter that equilibrium in the search of a surplus in the balance of trade will prove to be

hurtful in the end.

Like Mun, Adam Smith, in his treatiseAn Inquiry into the Nature and Cause of

the Wealth of Nations, wrote of the benefits of a free market and the natural correction

mechanisms that are in place within that market. These mechanisms ensure that global

demand will be met with adequate supply, independent of government interaction:

We trust with perfect security that the freedom of trade,without any attention of government, will always supply uswith the wine which we have occasion for: and we maytrust, with equal security that it will always supply us withall the gold and silver we can afford to purchase or toemploy (Smith 404).

Smith argued that under perfect competition the market will self-adjust to a point

of equilibrium, aided only by what Smith referred to as the invisible hand. In light of

such an equalizing force, Smith was adamant that any attempt by a government to

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interfere with the market would be ineffectual or worse, detrimental to the well-being of

those involved.

Smith used this concept to attack the mercantilist theories that the restriction of

trade is necessary to ensure a balance of trade surplus. According to Smith, when the

quantity [of gold and silver]exceeds the effectual demand, no vigilance of government

can prevent their exportation (404). Smith added that it would be equally impossible to

prevent their importation if the supply fell short of the effectual demand (404-5). Thus

Smith concluded that the mercantilists efforts to control the market through government

intervention were futile; naturally equalizing forces of the market would operate without

regard for any attempt to tilt the field one way or another.

Smith also established the absolute advantage principle to demonstrate that

there were gains from trade. By extending the concept of the division of labour between

men to a division of labour between countries, Smith argued that a country should only

import those goods for which the foreign country has an absolute advantage, and

therefore can produce at a lower cost.

Following Smith, David Ricardo formulated the theory of comparative advantage

to explicitly disprove theories of protectionism, while implicitly making an argument for

free trade. Ricardo explained that free trade makes it possible for the consumption of

more goods, regardless of whether trading partners are more or less economically

advanced (Buchholz 67). Under a system of perfectly free commerce, each country

naturally devoted its capital and labour to such employments as are most beneficialIt is

the principle which determines that wine shall be made in France and Portugal, that corn

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shall be grown in America and Poland, and that hardware and other goods shall be

manufactured in England (Ricardo 81).

Ricardo based his conclusions on the postulates that first, capital and labour move

freely within a country and, second, that capital and labour are immobile between

countries. Jacob Viner, a leading mid-twentieth century proponent of the doctrine of

comparative costs articulated:

The doctrine of comparative costs maintains that if trade isleft free each country in the long run tends to specialize inthe production of and to export those commodities whichcould be produced at home only at a comparative

disadvantage in terms of real costs, and that suchspecialization is to the mutual advantage of the countriesparticipating in it (438).

In the late nineteenth century a neo-classical paradigm emerged from the works of

Alfred Marshall and Francis Edgeworth and was furthered by Eli Heckscher, Bertil

Ohlin, and Paul Samuelson during the first half of the twentieth century. Two

propositions emerged from the theory of international trade from this paradigm that

provided the basis for much of the trade theory that exists today.

Deepak Nayyar of the University of Delhi advanced that the first of the

propositions, known as the gains from trade proposition, establishes that free trade,

via the equalization of domestic and international prices, will ultimately result in the

optimal functioning of the market (Nayyar 4). According to Paul Samuelson:

when trade has opened up, and when each countryconcentrates on its area of comparative advantage,everyone is better off. Workers in each region can obtain alarger quantity of consumer goods for the same amount ofwork when people specialize in the areas of competitiveadvantage and trade their own production for goods inwhich they have a relative disadvantage. When borders are

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opened to international trade, the national income of eachand every trading country rises (558).

For Marshall, the gains from trade were analogous to consumer surplus, and

could be computed by adding up what a country would have been willing to pay if it had

bought the good from a foreign producer (Kuhn 352).ii

Further:

In a world where countries enter into international tradeon a voluntary basis, each partner must derive some benefitto be in the game. The very existence of trade, then,becomes proof of its mutual benefit, irrespective of how thegains from trade are distributed between countries (Kuhn

352).

Ultimately, the economic basis of the gains from trade proposition combined

with the assumption of perfect competition establishes that free trade would be optimal

(Nayyar 4). In a two commodity model, perfect competition ensures an equalization of

the domestic price ratio with the marginal rate of substitution in domestic production.

Free trade ensures an equalization of the domestic price ratio and the international price

ratio (Nayyar 4). From this it is suggested that, in terms of resource allocation, free

trade will enable the economy to operate with technical efficiency in production. Given,

well-behaved utility functions, free trade, through its equalization of domestic and

international prices, would also enable the economy to optimize consumption through

trade, by equalizing the marginal rate of substitution in consumption and the international

price ratio, in terms of utility maximization (Nayyar 4). Thus, the argument for free

trade is advanced by evidencing that free trade is efficient.

ii See Appendix II for a graphical representation of the gains from trade.

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The second proposition emerging from the neo-classical paradigm is the factor-

price equalization theorem (also known as the Heckscher-Ohlin theory of trade). Bertil

Ohlin suggested that when specialization and trade begin, each region will tend to

produce goods requiring large quantities of the factors with which it is well endowed and

to produce few, if any, goods requiring large quantities of the factors which are scarce

(Kuhn 361). Thus it is argued that because each country will be permitted to produce that

for which it is well endowed, free trade ensures equality in the market.

Twentieth Century Challenges to Free Trade

The early challenge to the doctrine of free trade was grounded on the recognition

that there are two critical assumptions underlying the classical theory of free trade: first,

that market price reflected social costs and, second, that a countrys trade in a good was

not large enough to influence world prices (Nayyar 5-6). It was argued that if these

assumptions did not hold, then free trade could not ensure both efficiency and equality of

trade, and the equilibrium would be unattainable.

A second round of challenges to the theories of free trade arose in the 1950s, as

less developed countries (latecomers to industrialization), expressed a desire to accelerate

their catching-up process (Nayyar 6). For these countries, the argument against free

trade was based on the predictability of market failure. It had two dimensions: 1) It was

argued that there were significant positive externalities in any process of

industrialization which were difficult to identify, let alone capture (Nayyar 6); and 2) It

was argued that, imperfections in factor markets, both labour and capital, would pre-

empt the realization of potential comparative advantage in manufacturing (Nayyar 6).

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The Free Trade Response

The response to this challenge of the assumptions of free trade came from the

neo-classical economists. It was argued that [a]t one level, [the neo-classicalists]

accepted the infant industry argument, or the optimum tariff argument, as the basis of

justifiable departures from free trade but reduced the validity of such arguments to a very

demanding set of conditions (Nayyar 6). According to Nayyar:

The belief in free trade is almost a sacred tenet in theworld of orthodox economics. Yet, from time to time, the

profession of economics has recognized that there arereasons which may justify departures from free trade.Economic theory has analysed these exceptions to the rule,mostly in response to developments in the real world whichhave challenged or questioned the free trade doctrine(Nayyar 7).

The acceptance that there are times when a divergence from free trade is

acceptable was embraced by Adam Smith, who himself was not an unqualified free

trader. Smith explicitly isolated two cases in which barriers on imports were justified.

The first was when considering an industry that may serve a purpose in the defence of a

country. Smith argued that defenceis of much more importance than opulence

(Smith 352). Smiths second case is an application of the principle that normally

competitive conditions should not be distorted by government intervention (Kuhn 329).

Thus it is, at times, necessary to intervene into the trade market when distortions occur as

a result of government action.iii

iii This will be an important exception later in this paper as it will become the foundation of the argumentfor Canadas utilization of NAFTA as a means of correcting the distortions that result from U.S.intervention into the free market by protectionist conduct.

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Free traders also argued that market prices did not measure social costs, whether

on account of a divergence arising out of market failure or on account of a distortion

arising out of government intervention, the optimum policy intervention is one which is

applied at the point at which the divergence or the distortion arises (Nayyar 6-7). In

other words, it was argued that despite their acknowledgement of the potential for market

failure, as a rule, intervention in the form of trade policies would be sub-optimal

(Nayyar 7).

To make this argument, pro-free traders set out to attack the proposed alternative

to free trade, a system of managed or strategic trade in which government regulation of

the markets was thought to ensure an advantageous position for the nation. For example

Paul Krugman argues that:

Gains from intervention are limited by uncertainty aboutappropriate policies, by entry that dissipates the gains, andby the general equilibrium effects that insure thatpromoting one sector diverts resources from others. Thecombination of these factors limits the potential benefits ofsophisticated interventionism (Krugman, Pass 143).

One negative aspect of state intervention is the economic losses associated with

government subsidies and tariffs. Adam Smith argued against any form of state

intervention in trade markets as taxes imposed with a view to prevent, or even to

diminish importation, are evidently as destructive of the revenue of the customs as of the

freedom of trade (439). State intervention, therefore not only inhibits free trade, but

hurts the revenues of the country imposing the tariffs.

Paul Krugman and Maurice Obstfeld further argue that a tariff causes a net loss

to the economyit does so by distorting the economic incentives of both producers and

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consumers. Conversely, a move to free trade eliminates these distortions and increases

national welfare (219). Interfering with the incentives for producers and consumers by

distorting price levels, state intervention generates a second level of economic loss that

negatively affects the economy of that state.

Additionally, state intervention is flawed as there is an inherent inability of

multiple states to coordinate their efforts. Differences in goals between countries often

lead to conflicts of interest. Even when countries have similar goals, they may suffer

losses if they fail to coordinate their policies (Krugman, Obstfeld 7). This inability to

co-operate often results in retaliation, which, if the situation is not dealt with swiftly,

results in a trade war. Robert E. Baldwin states that other countries are very likely to

retaliate with their own protective actions if a country tries to improve its trading terms

by imposing higher tariffs and export taxes (810). This retaliatory response is based on

current game theory accounts, specifically the tit-for-tat strategy, which is ultimately

good for neither state, as the optimal price level (and therefore supply and demand), are

distorted, causing loss to both economies.

The final argument in the critique of strategic or managed trade is that the state is

never be able to act free of political influences. Krugman and Obstfeld summed it up

well when they argued that:

Economists can sometimes show that in theory a selectiveset of tariffs and export subsidies could increase nationalwelfare, but in reality any government agency attempting topursue a sophisticated program of international trade wouldbe probably captured by the interest groups and convertedinto a device for redistributing income to politicallyinfluential sectors (221).

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Thus we must assume that governments do not necessarily act in the national

interestinstead they are influenced by interest group pressures (Krugman, Pass

142).

Contemporary Free Trade

The debate within political economy as to what sort of economic and social

systems are desirable as well as politically sustainable at home and how such systems can

be reconciled with global economic pressures, resulted in a crude consensus from the

end of WWII to the oil crisis in the 1970s (Grinspun and Cameron xi). The consensus

held that a sustainable market economy is necessarily a mixed economyThe conviction

deepened that a pure market economy produced intolerable costs both in equity and in

efficiency, which in turn generated social unrest and political conflict (Grinspun and

Cameron xi). This mixed economy promoted relative stability and growth in domestic

markets, which in turn made it possible to trade in relatively open markets (Grinspun and

Cameron xi). It combined a mild form of Keynesian demand management with a

welfare state, tolerance of trade unions, labour legislation, pegged currencies under the

Bretton Woods system, and gradually expanding, but not perfectly free, trade (Grinspun

and Cameron xi).

The domestic social and political environments of industrialized nations were

altered as a result of advances in technology, the rising cost of labour, the economic

slowdown of the late 1970s, and other elements being brought to the forefront by

globalization (Grinspun and Cameron xiii). The push for privatization of the Reagan and

Thatcher administrations opened the door for business, as transnational corporations

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(TNCs) developed and expanded, exploiting the loopholes of laissez-faire, and caused a

dramatic schism in the distribution of the benefits of international trade, tilted in favour

of the larger countries that were the capital and territorial base of the TNCs. This

progress of globalization and the expanding free trade meant that national powers of

regulation were diminished; for the first time in history larger TNCs were actively

participating (directly or indirectly) in trade negotiations.

In light of this altering of the balance of power in the global market, there exists a

need for new regulation to play a vital role in shaping the evolution of the global

economy. Ideally, the sole purpose of this regulation is to ensure that global free trade

develops in a manner consistent with the general well being of the global community, and

not solely in the interest of the TNCs. While free trade is ultimately more beneficial than

a restrictive trade policy, Joseph Stiglitz and others argue that we cannot stand by and let

the global market develop willy-nilly (Stiglitz 21).

The argument for change in the dispute resolution process of NAFTA as

discussed later in this paper is an example of this need for regulation in the global

economy (or in this case the North American economy). The aim is to ensure that those

with greater power at the beginning of the evolutionary process do not exploit their

advantage, causing the distribution of benefits to be awkwardly skewed in favour of one

country, while its trading partners are forced to try to catch up in perpetuity. Regulation

of international markets is needed to ensure that the best interest of the global community

is accounted for, and to control those whose asymmetrical strength would allow them,

when unchecked, to exploit the system.

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CHAPTER IIIHISTORICAL UNDERPINNINGS OF

CANADAU.S.TRADE RELATIONS

In the early nineteenth century trade between the United States and what was then

referred to as British North America was limited by Britain's preferential system.i Britain

dismantled its mercantile system after 1846, and in 1854 Britain and the U.S. signed the

Elgin-Marcy Treaty, a reciprocal trade agreement affecting agricultural products and raw

materials. The onset of the American Civil War imperilled these growing linkages and

Federalist suspicions of Britain's pro-Confederate sympathies were intensified by the

Confederate use of British North America (Canada) as a base for raids on federal

shipping and border settlements. After 1865, similar concerns were aroused north of the

border as Irish Fenians raided Upper Canada (Ontario) and New Brunswick from U.S.

bases. Meanwhile, in 1866 protectionist elements in the U.S. Congress successfully

agitated against renewal of the Elgin-Marcy treaty which had been suspended by the

American Civil War.

Economic relations progressed in a positive direction between 1867 and 1960,

although not without periods of friction and debate among Canadians over long-term

costs and benefits. Canadian efforts to renew reciprocal trade after 1870 were rebuffed,

and in 1879 Canada adopted a "National Policy" instituting protective tariffs for industry

and constructing an "all-Canadian" railway to the Pacific Coast. Despite these elements

of friction, Canada-U.S. trade increased and by the mid-1920s surpassed Anglo-Canadian

i The following summary of Canadian U.S. relations is derived from Taylor, Graham D. The ReadersCompanion to American History Canada/US relations. College.hmco.com. Houghton Mifflin. 05 Feb.2004 .

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commerce. Meanwhile, American direct investment in Canada's resource and

manufacturing sectors grew, stimulated in part by Canada's National Policy tariffs, to the

point that American investment exceeded British investment by 1930.

The trade rivalries incidental to the Great Depression temporarily slowed the

trend toward closer economic ties, but reciprocal trade agreements in 1935 and 1938

significantly reduced commercial barriers in agriculture and natural products. Canada's

postwar World War II participation in the 1947 General Agreement on Tariffs and Trade

(GATT) led to mutual reductions of tariff restrictions on industrial products. Proposals

for a Canada-U.S. customs union were debated in 1948, but these were not pursued.

During the 1960s these close political and economic linkages came under critical

scrutiny. The U.S. government objected to Canadian trade with Communist China and

Cuba and many Canadians opposed the arming of missiles located in Canada with

nuclear warheads. During the Vietnam War, Canadian leaders criticized U.S. foreign

policy and allowed American draft resisters to reside in Canada. Friction widened into a

more general critique within Canada of the degree of American influence, both culturally

and economically. By the mid-1970s, concerns of threatened American domination of

Canadian energy resources and industry and the pervasiveness of the U.S. media in

Canada, led to measures designed to limit foreign investment (particularly in the media,

oil, banking, and airline sectors), to develop trade links beyond North America, and to

establish an arm's-length posture toward the United States. ii

After 1984, relations became less contentious; Canadian producers were ready to

accept the benefits of free trade. Producers willingness to adopt free trade had been

ii Following the quotation by former Canadian Prime Minister Pierre Elliott Trudeau found at theintroduction to this paper, nationalistic sentiment became a dominant thread in Canadian political andeconomic ideology.

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heavily conditioned by four decades of positive experience in negotiating agreements

dedicated to a much more modest objective: gradual liberalization within the framework

of a multilateral, rules-based regime (Hart). By successfully establishing and

developing this system from the 1940s through to the 1980s, a foundation was laid for

the more radical quest for free trade with the United States and, increasingly, with

others, that has dominated Canadian trade policy since the mid 1980s (Hart).

In 1989 the Canada-U.S. Free Trade Agreement (CUFTA or FTA) took effect.

The debate in Canada over this agreement reflected the historical ambivalence of

Canadians toward the United States. While supporting collective security and

acknowledging mutual cultural and political traditions, as well as the economic benefits

of access to U.S. markets and capital, Canadians remained wary of the prospects of close

integration with their neighbour.

In 1994 Canada, the United States and Mexico signed NAFTA, what was then the

largest free trade agreement in the world. Currently Canada and the U.S. are each others

largest trading partners; however, while the United States dominates Canadas export

portfolio, Canada is only moderately more important to U.S. exporters than are the

United States other major trading partners (Canadian Standing Committee on Foreign

Affairs and International Trade, hereafter CSC, 14). iii Further, notwithstanding the strong

growth in trade between the two countries, the importance of that trade is declining in the

general North American context (CSC 15).

In light of the history of the relationship between Canada and the U.S., the

question presents itself as to why Canada felt the need to push for a more open trading

iii See Appendix III Trade Data, for a statistical representation of these asymmetries.

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relationship with the U.S. Opportunities for such a relationship had presented themselves

historically, so why did Canada finally decide to chart this course in the late 1980s?

Paul Wannacott suggests there were three factors influenced this decision.

Firstly, Wannacott argues that there arose a growing realization of how difficult it is for

Canadian manufacturing to achieve large-scale, efficient production without access to a

large market (Wonnacott 57). Secondly he suggests that there was a general changing

character of the Canadian economy and of its international trading relationships

(Wonnacott 58). Finally Wonnacott argues that Canadians pursued a free trade

agreement with the U.S. because of the fear that protectionism in the United States

threatens existing Canadian trade (Wonnacott 58). Thus according to Wannacott, the

Canadian initiative was inspired both by a hope for a better trading relationship, and a

fear that things might get worse (Wonnacott 58).

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CHAPTER IVNAFTA

NAFTA was and is portrayed by its proponents as a meansof accelerating integration on the North American continent

in a way which is consistent with the political and socialinterests of a variety of disparate groups, including thebusiness community, labor unions and environmentalists(Abbott 4).

The NAFTA is politically justified by its attention tointerests which are more difficult to address at the WTOmultilateral level (Abbott 4).

The North American Free Trade Agreement is the foundation that defines the

current Canada-U.S. relationship. Canada sought a treaty that would protect it from

protectionist actions by the United States; the U.S. desired certainty in the availability of

resources and a secure North American market.

History of NAFTA

The Canadian U.S. Free Trade Agreement came into effect on January 1, 1989.

CUFTA provided for the gradual elimination of tariffs and reductions in non-tariff trade

barriers on goods and incorporated a more effective dispute settlement processes

(Douglas). On January 1, 1989, all tariffs on Canada and U.S. origin goods were

eliminated, with the exception of a limited number of over-quota tariffs associated with

tariff quotas on some agricultural products (Douglas). These tariff quotas replaced earlier

non-tariff measures and were to be implemented by both the U.S. and Canada in 1995 as

part of the outcome of the Uruguay Round of multilateral trade negotiations.

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CUFTA was incorporated into NAFTA on January 1, 1994. One of the main

changes from CUFTA is that NAFTA expands the free trade area to include Mexico, and

added free trade sectors not covered under CUFTA such as investment, trade in services,

intellectual property, competition, the cross-border movement of business persons, and

government procurement (Douglas). In addition to the main text, NAFTA includes two

supplemental agreements on environmental and labour issues that address cooperative

efforts to reconcile policies and procedures for dispute resolution between member

countries.

Factors Influencing the Negotiation of NAFTA

ASYMMETRY OF POWER

Returning to the quotation by former Prime Minister Pierre Elliott Trudeau, we

recall the analogy of sleeping with an elephant. Trudeau graphically referenced the great

asymmetry of power that exists between Canada and the U.S. According to a report

issued in 2002 by the Canadian Standing Committee on Foreign Affairs entitled Partners

in Integration, the weight of the elephant is massive (CSC 6). Stephen Clarkson

suggested in terms of power, whether you want to use the word domination or

hegemony or influence or asymmetry, its obvious that the difference between

Canada and the United States is enormous (qtd. in CSC 6).

The existence of such a dramatic asymmetry of power is not something to be

brushed aside, as it has the ability to pervade every aspect of the two countries

relationship. One area where the asymmetry manifests itself is the American trend to

protectionist tendencies and the concern this raises in Canada, issues that will be

addressed in Chapters V and VI.

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POLITICAL INSTITUTIONS AND DOMESTIC ENVIRONMENTS

From the outset NAFTA negotiations were bitterly controversial in all three

countries. For the purpose of this analysis we will focus on the political debates that

occurred in the United States and Canada, leaving out Mexico.

U.S.

Conflict arose within the U.S. from the beginning of the negotiating process.

When President Salinas of Mexico approached President George H. W. Bush to pursue a

bilateral trade agreement in 1990, the U.S. representatives were reluctant as they were in

the process of negotiating the Uruguay Round of trade negotiations. Pressure from

Republican leaders to speed up the negotiations and not wait until the end of the 1994

Uruguay Round eventually won out, and President George H. W. Bush was persuaded to

proceed.iv

A large factor in the negotiating and ratification process of NAFTA within the

U.S. was the self-interest of Congress. Members of Congress were divided by their

personal interest in appeasing their constituents as a means of maintaining their office.

The executive branch was also mollifying the Congress on specific issues sufficiently to

obtain negotiation authorization, and using the congressional pressure to justify the

demands that it would make on Mexico as the price for the free trade

agreement(Cameron and Tomlin 73). Ultimately the sales pitch for NAFTA revolved

around the expected increase in trade-related jobs. NAFTA was promoted as an

agreement that would produce hundreds of thousands of trade-related jobs in the

countries. It would accomplish that goal by exporting primarily raw U.S. materials and

iv The issue of fast track authority played a large role in the timeline of events with respect to the U.S.decision to negotiate. For the purpose of this paper I will not divert our focus to tackle this issue.

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components to Mexican assembly plants, where they would be made less expensively,

and then shipped back for U.S. consumption (Craver).

CANADA

Canada was also a reluctant partner at the start of the NAFTA negotiations. As

Cameron and Tomlin point out: Canadian trade and investment ties with Latin America

and Mexico have been weak historically, providing little commercial incentive to enter

into free trade negotiations with the Mexicans (Cameron and Tomlin 63-64). In

addition, the government was not eager to reopen the bitter national debate that had

occurred over Canadas bilateral free trade deal with the United States.

The main fear [for Canadians], instead, was that closerintegration with the American economy would threatenCanadas European-style social-welfare model, either byleading certain practices and policies (such as the generousminimum wage) to be regarded as directly un-competitive,or else by pressing down on the countrys base of corporateand personal taxes, thereby starving public-spendingprogrammes of resources (Free Trade on Trial).

In the end, however, Canada entered NAFTA because key policy makers believed

[Canada] had little choice if it was to protect its interests in the North American Market

(Cameron and Tomlin 64).

Despite the concerns of the Opposition and a divided public, the Canadian Parliament

approved NAFTA during the final days of former Prime Minister Brian Mulroneys

government, but the proclamation of NAFTA remained to the next government. Then

newly elected Prime Minister Jean Chrtien was initially hesitant in proclaiming NAFTA

into effect on January 1, 1994, having campaigned against its implementation, unless it

included a method for resolving disputes and defining subsidies and dumping that were

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more equitable to Canada. The mechanism for resolving disputes under the [CUFTA] is

often lengthy and costly, draining away resources from businesses that should be

focusing on research and development, marketing and retooling (The Liberal Red Book).

Prime Minister Chrtien argued for a more effective dispute process, one that arrives at

decisions faster and leaves no room for foot dragging if the Americans dont like the

decisions (Ferguson, NAFTA: Canadas Concerns).

Ultimately Chrtien gave in to American pressure to ratify the agreement and

issued a unilateral federal declaration on December 2nd

, 1993 proclaiming NAFTA. The

deal is not perfect, but I am very satisfied with the progress we have made (Ferguson,

Not Perfect). A high ranking liberal official echoed the Prime Ministers sentiment,

our conditions were basically satisfied, we stood up to the Americans and our concerns

were addressed (Ferguson, Not Perfect).

Chrtiens unilateral proclamation of NAFTA was not without criticism, however, as

Federal Conservative party members criticized Chrtien for his impulsiveness.

Progressive Conservative MP Jean Charest, a cabinet minister in the government that

negotiated the deal and rushed it through the Parliament in Brian Mulroneys final days in

power, said The Liberals broke a record of taking only 27 days to break a major

campaign promise (Ferguson, Not Perfect).

Key Elements of NAFTA

TARIFF ELIMINATION

Central to NAFTA was the elimination of tariffs. This element focused primarily

on Mexico as it was required to eliminate tariffs on nearly half of all industrial goods

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imported from the U.S. The effect of this provision on Canada was limited as most

Canadian trade with the U.S. was already duty-free as a result of CUFTA and there was

relatively little trade between Canada and Mexico. NAFTA called for all tariffs to be

eliminated on all North American industrial goods within 10 years and tariffs on farm

goods within 15 years (Cobb).

NON-TARIFF BARRIERS

NAFTA removed most (but not all) import licenses on U.S. exports to Mexico

which had been acting as quotas. This had little effect on Canada as this provision

paralleled existing arrangements in CUFTA. NAFTAs failure to remove all non-tariff

barriers continues to this day.

RULES OF ORIGIN

The architects of NAFTA set out to clearly establish rules of origin, in the interest

of removing any debate as to whether a good can be subjected to tariffs. The agreement

laid out that tariffs were to be reduced on goods made in North America with substantial

North American content. This ensured that foreign goods could not be shipped into the

territory of one partner, and then traded to another without tariff.

SAFEGUARDS

NAFTA incorporated a safeguard measurement stating that a tariff can be re-

imposed for up to four years if imports seriously threaten a specific industry. This was

heavily conditioned on the requirement that a partner taking safeguards must compensate

the country whose exports are affected (Cobb).

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INVESTMENT

All firms of a member state were given most favoured nation status and were

required to be treated the same as a domestic firm. Further, all firms were given direct

access to remedy for expropriation through NAFTA Chapter 11.

ENVIRONMENT

A tri-national environmental commission was installed after the environmental

side agreement was signed, to oversee the adherence to environmental laws and imposes

sanctions if a country does not enforce its own laws.

Impact of NAFTA

NAFTA in operation has proved no less controversial thanNAFTA before ratification, for both supporters andopponents of free trade liberalization have cited experiencewith the agreement to justify their positions. GaryHufbauer and Jeffrey Schott (qtd. in Craver).

As far as economic effects are concerned, the rightquestion to ask of NAFTA is simply whether it indeedsucceeded in stimulating trade and investment. The answeris clear: it did (Free Trade on Trial)

TRADE

The growth of trade between the three member countries of NAFTA has been

substantial since 1994. Trade grew from $306 billion in 1993 to almost $621 billion in

2002 (constant) (Hall). U.S. exports have increased by 95 percent to Mexico and 41

percent to Canada while Mexicos exports to the U.S. grew by 195 percent and Canadas

to the U.S. grew by 61 percent (constant) (Hall).v

v See Appendix III for Canada-U.S. trade data.

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JOBS

Despite the dramatic increase in the flow of goods and services across the borders,

critics attack NAFTA on the basis that it has failed the working man. The argument is

based primarily on estimated job losses. In a 2003 study entitled The High Price of Free

Trade, the Economic Policy Institute (EPI) estimated net U.S. job losses under NAFTA

at 879, 280 after adjusting for jobs gained (Hall).vi

While this number may on the

surface look high, the EPI acknowledged that the job losses are modest relative to the

size of the economy (Hall).

Job losses attributable to NAFTA are in actuality much less than anticipated.

According to Gary Hufbauer, its a fair statement that 80 percent to 85 percent of the

manufacturing job losses would have happened regardless of NAFTA because U.S.

manufacturers had to lower costs to compete in a global environment. NAFTA simply

accelerated the pace of that manufacturing exodus, and China further accelerated it to

accentuate the jobs backlash we are seeing now (qtd. in Craver). Thus, while some job

loss can be attributed to NAFTA, the actual number of jobs lost because of the agreement

is much smaller than that originally asserted by NAFTA opponents.

Conclusion

NAFTA has garnered unwarranted criticism. On balance, it appears that very

little of the job loss can be attributed to NAFTA itself, nor can it be blamed for the

overall decline in North American employment which resulted from a shift away from

the manufacturing sector. What has happened is that NAFTA has become the scapegoat

for those politicians and analysts who are trying to explain the downturn in their

vi See Appendix IV for NAFTA job losses

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economies. An article in theEconomisttackled this issue and presented a logical

explanation: One theme is common to all three [countries]: a tendency to blame NAFTA

in particular, and international integration in general, for every economic disappointment

of the past ten years, however tenuous the connection might be (Free Trade on Trial).

The article then proceeded to suggest why this disenchantment with NAFTA specifically,

and free trade generally, has become such an issue in the U.S:vii Americas evident

disenchantment with liberal trade has less to do with the economic depredations of the

1990s when the economy boomed, in fact than with a political failure to make the

case for free trade against its increasingly well-organize opponents (Free Trade on

Trial).

I conclude that despite this criticism, NAFTA is a positive influence on its

signatories and every effort should be made to work within the framework of the

agreement to remedy the issues at hand, rather than abandoning the agreement altogether.

vii I would suggest the same argument holds for Canada as well.

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CHAPTER VU.S.PROTECTIONISM

The most serious threat to the world economy and toour domestic economy is the swelling tide of

protectionism.W. Allen Wallis, U.S. Under Secretary for EconomicAffairs, (qtd in Altschiller 71).

While the measures designed to protect selected U.S.firms raise their incomes, they reduce the incomes ofAmerican firms and individuals that serve foreign markets.Consumers who buy protected products must pay higherprices and face a reduced range of choices. The benefit forthe protected firms and industries, then, comes at the

expense of consumers in general and firms that export.Gene Smiley (Smiley).

We can shut out part or all foreign competition, but wewould pay a price for doing so perhaps a rather largeprice. Alan Greenspan, Chairman of the Federal ReserveBank (Greenspan).

Our administration will be creative. Were committed toprotecting our environment and improving our economy, toacting at home and working in concert with the world. This

is an administration that will make commitments we cankeep, and keep the commitments that we make. PresidentGeorge W. Bush (United States Office of the PressSecretary (hereafter USOPS), Bush Discusses ClimateChange)

A protectionist is defined as an advocate of government economic protection for

domestic producers through restrictions on foreign competitors (Merriam Webster).

Former Under Secretary for Economic Affairs W. Allen Wallis defined protectionism as

any measure that gives a domestic producer an artificial advantage over foreign producers

(qtd. in Altschiller 72). Central to each definition is that protectionist actions artificially

alter the market equilibrium (described by Smith in Chapter II), providing an advantage

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for domestic producers at the expense of foreign producers, in the interest of the

protection of domestic markets.

The spring of 2002 was one of the most protectionist periods in U.S. history. On

March 6th 2002 President George W. Bush caused tariffs ranging from 8 to 30 percent to

be imposed on steel imported from other industrialized nations. On March 22nd

, 2002 the

President slapped prohibitory tariffs on Canadian softwood lumber, igniting a

maelstrom. In May 2002, the President signed a $180 billion (USD) farm bill, providing

$10 billion of annual subsidies to Americas already heavily subsidized corporate farms.

These three actions, coupled with the passing of the Byrd Amendment (which

transferred duties collected from anti-dumping cases to U.S. firms), indicate a significant

upswing in the 21st

century protectionist policies of the United States, and thereby an

increased threat to Canadian (and other foreign) investors. i

STEEL INDUSTRY

On March 6th, 2002 the U.S. imposed duties of up to 30 percent on imported

steel.ii

The administration defended its move by suggesting that it was imposing a

safeguard measure to protect its domestic steel industry from a recent surge of steel

imports that had caused serious damage to the industry.

President Bush justified his administrations actions with respect to global trade

by arguing an integral part of our commitment to free trade is our commitment to

enforcing trade laws and to make sure that Americas industries and workers compete on

i See Appendix V for a graphical representation of the historical downward trend of U.S. protectionismsince the 1930s. The protectionism actions of the 21st century are clearly inconsistent with this pattern.ii Details of the plan included: a 30 percent tariff on tin mill steel, flat steel products, hot rolled bar and coldfinished bar; a 13 percent tariff on carbon and alloy fitting and flanges; a 15 percent tariff on stainless steelrods and bars, and rebar; and an 8 percent tariff on steel wire (Antosh). The tariffs were to be scaled downover a three year period, while the permitted quotas were be increased.

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a level playing field (qtd. in Fournier). President Bush suggested that the relief will

help steel workers, communities that depend on steel, and the steel industry adjust

without harming our economy. These safeguards are expressly sanctioned by the rules of

the World Trade Organization (WTO), which recognizes that sometimes imports can

cause such serious harm to domestic industries that temporary restraints are

warranted. This is one of those times (USOPS, President Announces Temporary

Safeguards for Steel).

Not everyone was in favour of the tariffs as U.S. steel consumers faced rising

prices. Gary Hill, the president of National Metalwares, a tubular steel product maker,

said were going to be at a 20 to 25 percent cost disadvantage to offshore manufacturers

who may now choose to target the U.S. marketand our customers may wind up under

attack from offshore competitors now too (qtd. in Deutsch). Treasury Secretary Paul H.

ONeil was also opposed to the tariffs. During an off-the-record discussion ONeil was

quoted as saying that imposing tariffs would cost more jobs in the United States than it

would save, and risked Americas interest as the worlds leader in promoting free trade

(Kahn and Stevenson).

GLOBAL RESPONSE TO U.S.STEEL TARIFFS

Following the U.S. announcement of tariffs on steel imports, both the EU and

Japan responded with retaliatory tariffs. In the case of Japan, a 100 percent retaliatory

tariff was imposed on U.S. steel, the first time in history Japan had taken such an action

in any trade dispute (Beams). The EU, on March 27, 2002, adopted safeguard measures

on steel to prevent the flood of steel imports being diverted into the EU from those

countries affected by the U.S. tariffs. The EU threatened to target the imports of

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industries in key swing states for the 2004 presidential election (EU adopts temp.

measures). EU Trade Commissioner Pascal Lamy lambasted the U.S. for what he called

unfounded, unnecessary, and unfair U.S. trade actions. He said the U.S. action has

forced us to take temporary steps to look after EU industry, and EU workers. But we

have done this without indulging in protectionism. Unlike the U.S., we will keep our

markets open to imports from the rest of the world. These limited and carefully crafted

measures have one simple goal, to prevent a flood of diverted steel coming into the EU

market (qtd. in EU adopts temp. measures). The Policy Director of the UK Steel

Association responded angrily when notified of the U.S. tariffs: Tariffs at 30% are

nothing short of outrageous protectionism. They break the WTO agreements and fail to

tackle the root cause of the U.S. steel industrys problems (UK steel industry reacts).

Finally, Brazil entered the fray when Brazilian President Fernando Henrique Cardoso

explained, the path to strengthening multilateral trade is not the path of

protectionismand it is certainly not the path of discretionary antidumping or

agricultural subsidies used in scandalous proportions to impede free competition (qtd. in

Rich).

In July of 2003 the WTO ruled on a complaint filed by the EU, Asian Pacific

nations, Brazil, Norway, and Switzerland, finding that the U.S. measures were illegal. In

November 2003 the WTO appellate body, on appeal by the U.S., upheld the original

decision. The panel ruled that the U.S. safeguards were unjust because steel imports to

the U.S. were not surging, and therefore were not presenting a danger to the domestic

industry (U.S. faces sanctions).

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On December 4th, 2003, following the WTO appellate ruling, U.S. President

George Bush announced that he was ending the temporary steel safeguard measure as

they had achieved their purpose, and as a result of changed economic circumstances, it

is time to lift them (USOPS, Presidents Statement on Steel). No mention was made

of the WTO ruling in the Presidents release.

SOFTWOOD LUMBERnd

On March 22 2002, the U.S. Department of Commerce imposed average total

duties of 29 percent on imports of Canadian softwood lumber into the United States. iii

The Department alleged that Canada was subsidizing the softwood lumber industry by

charging low fees to log public lands and allow its producers to sell their lumber in the

United States at below market prices (U.S. imposes 29% duty). They argued that low

stumpage or timber cutting fees were subsidies that maintained artificially low Canadian

lumber prices and threatened the U.S. industry (Cordon).

U.S. lumber companies initiated the case but many lumber-intensive industries

complained that prices will rise (a group of lumber customers in the housing industry

claimed that the duties would raise the cost of a new home by $1,500 (Antosh)).

GLOBAL RESPONSE TO U.S.SOFTWOOD LUMBER DUTIES

The battle over softwood lumber between Canada and the U.S. has been long and

arduous. Immediately following the U.S. decision to levy tariffs of up to 29 percent

against Canadian lumber, Canadian International Trade Minister Pierre Pettigrew

iiiThe Commerce department set a 19.3 percent duty to punish Canada for the subsidies and a second tariffaveraging 9.7 percent on six individual Canadian softwood lumber firms for dumping. The tariffs ondumping ranged from 15.8 percent for Weyerhaeuser to 2.3 percent for West Fraser (US imposes 29%duty).

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requested the creation of a panel under NAFTA to investigate whether the duties are

consistent with American obligations under international trade law. iv

In a separate proceeding, on August 29th

, 2003, the WTO ruled against the U.S.

duties on softwood lumber from Canada. Less than a month after the WTO ruling, the

NAFTA panel released its decision on September 6, 2003, ruling that the U.S. must

reconsider its determination to impose tariffs on softwood lumber imports from Canada

(U.S. must redo tariffs). This was the third decision the U.S. has lost in the dispute.

Specifically, the NAFTA panel said it was particularly troubled by the extensive lack of

analysis undertaken by the U.S. before making a determination that was based on

considerable speculation and conjecture (ONeil and Hamilton).

Private corporations have also moved into the fray over softwood lumber. Canfor

Corp. made an effort in 2002 to collect millions of dollars in damages from the U.S. over

punishing lumber duties, filing a notice of arbitration and settlement claim under NAFTA

Chapter 11. Canfor claimed damages of not less than $250 million USD, saying U.S.

conduct in the longstanding softwood lumber dispute violated NAFTA prohibitions

against arbitrary, unfair and discriminatory treatment (Greenwood). The Canfor claim

has yet to be adjudicated.

In December of 2003 the U.S. issued a proposal which was promptly rejected by

Canadian lumber producers as being an insufficient compromise on the Americans part.

On January 12, 2004, Canadas International Trade Minister Jim Peterson met with U.S.

Trade Representative Robert Zoellick and Commerce Secretary Don Evans and turned

iv This paper will establish that there is an alternate mechanism available to Canadian investors throughNAFTA Chapter 11 (as amended).

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down the U.S. proposal in support of the position of the Canadian firms (Dispute

settlement).

Most recently, on March 22nd

, 2004, the WTO rejected the U.S. claims that the

U.S. softwood lumber industry faces injury from a potential surge of Canadian exports

(Canada Wont Respond Yet). In response to the ruling, Canadian Trade Minister Jim

Peterson said he would delay a counter-offer to the U.S. proposal, made in December of

2003, until a NAFTA panel had made their decision in a related case in late April

(Canada Wont Respond Yet).

FARM SUBSIDIES

In May of 2002, the U.S. implemented a $180 billion Farm Security and Rural

Investment Act of 2002 (Farm Bill).v According to President Bush, [t]he bill is

generous, and will provide a safety net for farmers. And it will do so without

encouraging overproduction and depressing prices. It will allow farmers and ranchers to

plan and operate based on market realities, not government dictates (USOPS, President

Signs Farm Bill).

Critics of the bill say it is an unmitigated disaster, claiming it is an example of

partisan politics at its worst as it gives too much support to large farms and perpetuates

the welfare state of farming, all the while devastating third-world farmers and sending the

wrong message to the international community about the commitment of the U.S. to free

trade (Stein). Opponents of the bill also highlight the marked shift in agricultural policy

that the bill suggests, both in terms of the President reversing his stance on a campaign

v The main provisions of the bill included subsidy payments to large cotton and grain farmers, conservationpayments to save wetlands, preserve farmland and improve water quality and soil conservation on farms,food stamps as part of the nutritional components of the bill, a new $1.3 billion national dairy program, anda food labeling program requiring all meat and fish to be labeled with its country of origin (Becker,Accord reached).

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issue, as well as a defined movement away from the market liberalizing movement of the

1996 Farm Bill, aimed at weaning the agricultural industry from government subsidy

(Kirchhoff).

GLOBAL RESPONSE TO THE FARM BILL

The Farm Bill was a source of international consternation for its sheer size and

impact on global agriculture markets. A statement made by the 18-nation Cairns Group

of agricultural countries, explained that [a]t $180 billion over the next decade, the sheer

size of the package will hurt farmers round the world (qtd. in Beams).

With respect to the global implications of such a large subsidy, a group of

developing nations came together and forced the issue at the WTO trade talks in Cancun.

Brazil, along with China, India, South Africa, and a dozen other developing nations,

altered the global trading balance last year when they banded together at the trade talks in

Cancun, Mexico, as a bloc, determined to reduce rich-nation farm subsidies. They

argued that the subsidies not only hurt their exports but also ruined the livelihoods of

their poor peasants and farmers, creating huge social and political problems in addition to

the economic ones (Becker, Battle is looming).

Brazil brought a case challenging the cotton subsidies in the Farm Bill before the

WTO, accusing the U.S. of breaking trading rules by giving American cotton growers

and agribusiness $1.54 billion in annual subsidies (Becker, Battle is looming). The

Brazilians say that the overproduction caused by American subsidies is destroying their

export markets and undermining the livelihoods of their farmers (Becker, Battle is

looming).

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Former Canadian Prime Minister Jean Chrtien, in speaking of the Farm Bill,

called into question the U.S. commitment to international free trade: It makes no sense.

You cannot say, Im a free trader and increase subsidies by 80% as they have done in

the farming community there. It is kind of stupid (qtd. in Fife). Further, Prime Minister

Chrtien pointed out that 75% of U.S. farm subsidies benefit only 10% of U.S. farmers,

most of whom are wealthy landowners such as Ted Turner, the vice-chairman of AOL

Time Warner Inc (qtd. in Fife).

The EU used the Farm Bill as an opportunity to exonerate themselves from their

protectionist history, and highlight the American position as the worlds largest

agricultural subsidizer. Franz Fischler, former Agriculture Minister for the EU, said that

American farmers now receive subsidies 10 times greater than European farmers and that

they can no longer use Europe as their scapegoat in the global battle over farm subsidies

(Becker, Europes Farm Minster).

THE BYRD AMENDMENT

The Byrd Amendment proposed by Senator Robert Byrd (D-WV) was passed by

Congress in late 2000, and required that duties collected from anti-dumping cases be

transferred to U.S. firms that were hurt by specific foreign trade practices.

Proponents of the amendment said it was necessary as it imposed a higher price

on dumping. Senator Byrd said the payout is a matter of justice since it gives the

money to the injured parties (Greene). A co-author of the legislation, Senator Mike

DeWine of Ohio, said that the law provides a much needed incentive for foreign

companies to operate under a free and fair market system (Greene).

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Critics of the amendment argue that it will harm U.S. exporters and American

consumers by raising prices, increasing the incentive for U.S. firms to seek additional

trade protections, and hampering efforts to reduce trade barriers around the world

(Schavey). Most damaging to foreign trade, perhaps, is the suggestion that the Byrd

amendment will give U.S. businesses more of an incentive to seek relief from foreign

competition through the application of anti-dumping laws. U.S. firms already have an

incentive to seek protection, because a favorable ruling would make their goods and

services more competitive and imported goods and services less competitive. But the

windfall in revenue they will receive from the new protectionwill encourage them to

seek the additional protection (Schavey).

These fears that U.S. firms would increase their efforts to pursue anti-dumping

cases have proven valid. According to documents filed with the WTO, between January

1 and June 30, 2001, companies in the United States filed suit to initiate anti-dumping

investigations 39 times. During the same period one year earlier, only nine probes were

launched (Greene). Thus, after the passage of the Byrd Amendment, U.S. firms filed

countervailing duty suits with renewed vigour, zealously trying to take advantage of the

opportunity to not only attack their foreign competitors, but also to benefit financially

from their competitors loss.

GLOBAL RESPONSE TO THE BYRD AMENDMENT

Within six months of Congress passing of the Byrd Amendment, a joint action of

eleven countries had been presented in front of the WTO court of appeals calling into

question the legality of the law. One of the key points of contention was that the

amendment promoted the dragging out of trade dispute resolutions: The affected

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domestic producers will have a vested interest in receiving funds and this will impede any

resolution of such trade disputes (WTO panel finds).

On September 16, 2002, the WTO panel ruled that the amendment violated the

U.S. obligations under the WTO (WTO panel finds). On January 16, 2003, the WTO

appeals panel, on appeal by the U.S. of the September 16, 2002 ruling, declared the Byrd

Amendment illegal and called on Congress to repeal it as a first order of business (Klatt).

Leading this charge was the EU. The Byrd Amendment is not a U.S.-EU

problem, but a U.S.-rest-of-the-world problem, said EU Trade Commissioner Pascal

Lamy when the case was filed in July [2001]. Our unprecedented joint action will send

a very clear signal to the U.S. of the need to repeal legislation that so clearly flies in the

face of the letter and spirit of WTO law (Greene). Canadian Forest Minister Mike de

Jong echoed Lamys comments, suggesting the law comes into conflict with Americas

international obligations: We have been arguing that a law that allowed American

industry to profit by protectionism is not only wrong, but fundamentally inconsistent with

international treaty obligations (qtd. in Lavoie).

Most recently, eight countries requested a meeting to be held, by January 15,

2004, to ask the WTO for the authorization to retaliate against the U.S. in an amount

greater than $700 million U.S., calculated as the amount disbursed by the U.S.

government since the legislation was adopted (Dispute Settlement). As of March 15th

,

2004, the U.S. had yet to implement the WTOs ruling and remove the amendment (Sen).

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Trade Issues Today

In light of these protectionist actions by the United States and the responses from

their global trading partners we can see a marked shift in the nature of trade disputes from

the time of the Mercantilists and Adam Smith. During the 18th and 19th centuries the

primacy of importance was placed on the nation state; at the start of the 21st century this

focus has changed, where the primacy of importance is now placed on specific industries.

While governments are still the primary negotiators of the 21st century, they are now

greatly influenced by the interest of their domestic industries.

There has been much debate as to the motivations behind the dramatic increase in

U.S protectionism. Some argue free trade doctrine and globalization are outdated and the

U.S. is simply charting a new and proper course. Others suggest that the Republican

dominated U.S. government is appeasing the interests of its big business contributors,

placating them with protectionist legislation. Others still suggest that the protectionist

actions are part of Karl Roves master plan to get President Bush re-elected in 2004, by

seducing swing states through protection from international competition. As David

Ignatius ofThe Washington Postsaid, You increasingly get the sense that what really

matters in Washington these days is the 2004 electoral map in Roves head. If a decision

looks like it will expand the number of states that will vote Republican, then its good

(Ignatius). Regardless of the motivation behind these efforts, however, one thing that is

clear is that the protectionist action of the U.S. has resulted in a marked sharpening of

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trade tensions within the global community (Beams). What is arguably domestic policy

within the U.S. is viewed as protectionism in foreign countries and gives rise to responses

that are economic in structure.

Trade, however, is not the only international issue causing friction between the

U.S. and its trading partners. The next section explores U.S. behaviour on an issue with

both environmental and economic implications: the Kyoto Protocol. This exploration

will reveal that the U.S. decision to withdrawal from the Kyoto Protocol is a protectionist

action, one which will have a negative affect on Canadian investors.

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CHAPTER VICASE STUDYKYOTO PROTOCOL

Background

TheKyoto Protocol to the United Nations Framework Convention on Climate

Change (Kyoto Protocol) is designed to strengthen the international response to climate

change. Adopted by consensus at the third session of the Conference of the Parties

(COP3) in December 1997, it contains legally binding emissions targets for Annex I

(developed) countries for the post-2000 period (Williams).

i

Greenhouse gas emissions began in the Industrial Age and have increased since

that time through the expansion and development of the industrial base in developed

countries. By promising to arrest and reverse the upward trend in greenhouse gas

emissions, the Kyoto Protocol aims to move the international community one step closer

to achieving the Conventions ultimate objective of preventing "dangerous anthropogenic

[man-made] interference with the climate system" (Williams).

iThere are five main elements to the Kyoto Protocol (see A guide to the Climate Change Convention): a)Commitments - At the heart of the Kyoto Protocol lie its legally binding emissions targets for Annex IParties. All Parties are also subject to a set of general commitments; b)Implementation To meet theirtargets, Annex I Parties must put in place domestic policies and measures that cut their greenhouse gasemissions. The may also offset their emissions by increasing the removal of greenhouse gases by carbonsinks. Supplementary to domestic actions, Parties may also use the three mechanisms joint

implementation, the clean development mechanism, and emissions trading to gain credit for emissionsreduced (or greenhouse gases removed) at a lower cost abroad than at home; c)Minimizing impacts ondeveloping countries - The Kyoto Protocol and its rulebook include provisions to address the specific needsand concerns of developing countries especially those most vulnerable to the adverse effects of climatechange and to the economic impact of response measures. These include the establishment of a newadaptation fund; d)Accounting reporting and review - Rigorous monitoring procedures are in place tosafeguard the Kyoto Protocols integrity, including an accounting system, regular reporting by Parties andin-depth review of those reports by expert teams. e) Compliance - A Compliance Committee, consisting ofa facilitative and an enforcement branch, will assess and deal with any cases of non-compliance.

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Developed countries commited themselves to reducing their collective emissions

of six key greenhouse gases by at least 5% within a prescribed time. ii The six gases are

to be combined in a "basket", with reductions in individual gases translated into "CO2

equivalents" that are then added up to produce a single figure (Williams). Each countrys

emissions target must be achieved by the period 2008-2012, calculated as an average over

the five years. "Demonstrable progress" towards meeting the target must be made by

2005.iii

Countries have a degree of flexibility in how they make and measure their

emissions re

sleeping with an elephant - a canadian defence against 21st century u.s. protectionism

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