Free Trade and the Power Asymmetry between the United States and Canada

Free Trade and the Power Asymmetry between the United States and Canada

1. Introduction

This paper will address the question what strategic goals stood behind the promotion and implementation of free trade between the United States and Canada. The purpose is to evaluate the Canada-U.S. Free Trade Agreement (CUFTA) and the North American Free Trade Agreement (NAFTA) in respect to the objectives of both parties that were not commonly shared in the beginning. It is about the consequences of power imbalance for regional free trade and not about the social costs that are intensively discussed and certainly heavily felt in both countries. Since the view of a power asymmetry that exists between the two countries should be rather uncontested, the central idea of the following text is to examine in detail at which points this has shaped the content of the two agreements. This approach is inspired by the broader question, whose interests free trade serves in general. An important rhetoric strategy of promoters of the neo-liberal agenda is to suggest that the free play of market forces encouraged by such agreements gives all participants the same fair opportunities to engage in trade without intervention from governments. Consequently, all members of the distinct community will benefit from freer trade. For it is rather clear that power and national interests always play a role in politics – in this case in the processes leading to free trade agreements – it shall be demonstrated how this works in particular.

The prime (official) goal of negotiating a free trade agreement is secure and nearly unrestricted market access for all member states to the markets of the participants. If the markets of the negotiating parties are of different size – as is the case with the U.S. and Canada -, the country offering access to the bigger market will inevitably extract some compensating concessions. But this process only represents the first stage: “Finally, asymmetries of power affect how the legal text of an agreement is translated into actual policy at the implementation stage.”^[1] In the framework underlying this paper, it is not possible to assess the benefits or costs both partners had to acknowledge, neither economically nor socially. The focus is dedicated to the political gains and losses directly associated with the agreements. Therefore, the success of both states in reaching their strategic objectives will be the standard for the evaluation.

There are two possible ways to address this issue. The first is to conduct a careful diplomatic historical research regarding the negotiations themselves. The second approach that is followed here concentrates on the results of the negotiations finally incorporated in the agreements. Therefore, the goal is to show how the imbalanced power relations between the U.S. and Canada are mirrored in the text of the trade agreements, in other words, to test the assumption that free trade facilitates and reproduces power differentials.

Since NAFTA, completed in August 1992, is in great part a successor agreement of CUFTA, it will be necessary to go back to CUFTA provisions with the exception of provisions that made their debut in NAFTA. As it will be shown, the prospects for Canada to reverse unfavourable rules during the NAFTA negotiations were rather small. The relationship between the United States and Canada is determined by ‘power asymmetry’. Being already strongly dependent on the U.S. market before, exports to the USA grew under the influence of CUFTA and NAFTA by nearly 100%, while in comparison the amount of exports to other countries increased by not more than 30% till 1997, meaning a further concentration of the Canadian economy on the U.S. market.^[2]

For the U.S. the period examined is shaped by continuity concerning political enthusiasm for free trade. The Reagan, Bush and Clinton administrations were strongly supportive for free trade whether bilateral, trilateral or – most favored – multilateral. The situation in Canada was somehow different. Since the beginning of the 1980s a “Paradigm Shift”^[3] occurred in Canadian politics. For many, not only in Canada, the failure of interventionist Keynesian-style policies seemed apparent because the coincidence of inflation and high rates of unemployment seemed to contradict basic assumptions of Keynesianism. When in 1984 the liberal Trudeau era ended with the election victory of the Progressive Conservative Party under Brian Mulroney, the so- called “Third Option” that had “represented a desire to ’lessen the vulnerability of the Canadian economy to external factors in particular the impact of the United States’”^[4] by increasing national autonomy vis-à-vis the U.S. had definitely reached its end. The choosing of the “Second Option”^[5] of increased continental integration has since then been pushed forward successfully by domestic Canadian capital finding like-minded partners in the political arena.

Taking into consideration this specific background, one needs to distinguish between provisions of NAFTA that did not necessarily serve Canadian interests but were part of the (domestic) neo-liberal agenda and therefore intended to be ‘locked in’ via the supraconstitutional^[6] functioning of the agreements on one side and provisions serving U.S. strategic interests alone on the other side. Strategic goals of the U.S. and its business community that can hardly be associated with Canadian objectives were especially related to the inclusion of the energy resource sector, property rights protection and provisions on intellectual property rights into the agreements.

In addition, it has to be observed whether the Canadian main objectives of secure and enhanced market access and improved measures to counter U.S. trade-remedy measures were met adequately. Obviously an important aspect for assessing such opportunities for Canada is whether the mechanisms that were designed to mediate, or even better, solve trade disputes work ‘fairly’ in the sense that outcomes are dictated by rules and not by the power differential:

“However given the salient role of foreign trade generally within the Canadian economy, the weight of the U.S. economy in Canada’s international trade and investment activities, and the nature of the U.S. political system, in which domestic interest groups play an important role in moving their government to take protectionist stands and threaten market access, the effectiveness of the dispute resolution mechanisms to address these issues is of principal importance to evaluate NAFTA in the interest of Canada.”^[7]

2. The U.S.: Objectives for Engaging in Regional Free Trade

With negotiating CUFTA, the U.S. followed five principal objectives: access to Canada’s banking and financial sector, “secure and enhanced access” to the resource sector, especially - as will be discussed in detail later – the energy sector, the inclusion of the service sector, tariff reduction for the manufacturing sector, and the abandonment of scrutiny on FDI-flows.^[8] The negotiators did this very successfully: “It [the U.S.] played hardball and won.”^[9] Furthermore, provisions could be used as precedents for future rounds of negotiations on the General Agreement on Tariffs and Trade (GATT). One major objective in the negotiations must be added: The inclusion of intellectual property rights, an objective that could be found also on the multilateral U.S. trade agenda. In the following part, the solutions for the energy problematic and for (intellectual) property rights will be examined in detail because they can not be described as common goals.

Generally, it can be spoken of an offensive, expansionist, and a defensive agenda of U.S. trade legislation. The second merely consists of the usage of trade-remedy measures, while the first is designed to break perceived barriers to U.S. trade and investment:

“This agenda is sectoral and highly selective. It focuses on areas of U.S. competitive advantage or vital interests, including investment rights, trade in services, intellectual property rights, access to strategic resources, and globalization of agricultural markets.”^[10]

The clearest expression of the offensive agenda is found in Section 301 of the U.S. Trade Act of 1974. In the case of CUFTA and NAFTA, it seems obvious that Canada mainly tried to find measures against the defensive agenda, while the U.S. saw an opportunity to engage in favour of the expansionist agenda or even both: “Where the United States is strong enough, as with dependent trading partners like Canada and Mexico, it can pursue both agendas simultaneously.”^[11]

2.1 Strategic Interests versus Canada

In contrast to the Canadian constitution, which had been amended in 1982 by a Charter of Rights and Freedoms that deliberately excluded property rights, CUFTA provided in Article 1605 mutual protection for the property of corporations. NAFTA later contained an identical provision. This had obviously not been intended by the Canadian negotiators: “(…) this provision created a property right for foreign corporations that neither the government nor the public had at first understood.”^[12] Many of the TNCs (transnational corporations) operating in Canada are U.S.-owned; therefore this article indirectly affects the power asymmetry in a negative way for Canada.

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^[1] Grinspun, R./ Cameron, M. A., 1994: The Political Economy of North American Integration: Diverse Perspectives, Converging Criticisms, in: Grinspun, R. et al. (eds.), The political economy of North American free trade, N.Y., 3-25, 16.

^[2] Lammert, C., Dec. 1999: Globalisierung, Regionalisierung und die Zukunft des kanadischen Bundesstaates, Frankfurt/M. , 15/16, 29.

^[3] McBride, S., 2001: Paradigm Shift: Globalization and the Canadian State, Halifax, Nova Scotia.

^[4] Ibid., 52.

^[5] Clarkson, S., 2002: Uncle Sam and Us. Globalization, Neoconservatism, and the Canadian State, Toronto et al., 27-33.

^[6] Clarkson, S., 2002: Locked in? Canada’s External Constitution under Global Trade Governance, at: http://www.cedim.uqam.ca/articles/Clarkson.doc, 9. (last visited: 10-1-2004), 4-6.

^[7] Posadas, A., 2004: NAFTA at 10 years: what is its value added?,at: http://www.jhfc.duke.edu/canadianstudies/Canada_NAFTA_Final.doc, 2. (last visited: 10-1-2004)

^[8] Drache, D., 1994: : Assessing the Benefits of Free Trade, in: Grinspun, R., et al. (eds.), 1994, 73-87, 81.

^[9] Drache, D., 1994, 81.

^[10] Sinclair, S., 1994: NAFTA and U.S. Trade Policy: Implications for Canada and Mexico, in: Grinspun, R., et al. (eds.), 1994, 219-233, 221.

^[11] Ibid., 222.

^[12] Clarkson, S., Locked in?, 9.