OP-ED: Elbow to the face: What Canada risks by embracing economic nationalism

Peter Shawn Taylor writes, "The very fact Canadians today consider Trump’s tariffs to be an economic crisis reveal how important free trade with the Americans has become to Canada."

Author: Peter Shawn Taylor

There was free trade between Canada and the U.S. before there was a country called Canada. In 1854, 13 years before Confederation, the colonies of British North America signed a reciprocity agreement with the Americans that allowed for free trade in lumber, meat, grains, coal, pitch and tar and other basic goods. This quickly led to an economic boom throughout Canada that lasted until the Americans revoked the deal in 1866.

Since then, trade relations between Canada and the U.S. have been on a merry-go-round alternating between protectionism and openness depending on the political mood in each country. It is an historical legacy that holds many valuable lessons for how Canada should respond to the current Trump tariffs. And perhaps the best source of advice can be found in what historians today call the “Nixon Shocks”.

Source: Wikimedia Commons

In the early 1970s, U.S. president Richard Nixon was dogged by a new economic malaise termed “stagflation”. In response to this erosion in America’s financial might, Nixon upended global economic relations with his New Economic Policy, taking the U.S. off the gold standard, instituting wage and price controls and imposing a 10 per cent tariff on all imports.

To Canada’s shock and horror, it too was subjected to Nixon’s tariffs. During the postwar period Canada and the U.S. had slowly been embracing freer trade and so the tariffs were seen as a serious break in Canada’s access to the U.S. market. Prime Minister Pierre Trudeau argued vigorously for an exemption, but was unsuccessful. (Sound familiar?)

In response to being rebuffed by Nixon, the Trudeau government released a white paper outlining three possible reactions. The first was to maintain the status quo. Second, seek even stronger economic relations with the U.S. Third, look elsewhere. The Trudeau government found the final choice, what became known as the Third Option, to be the most attractive and pursued it aggressively.

In addition to seeking out trade with other countries, the Trudeau government also tried to expand Canada’s political and cultural relations with other countries, especially Communist countries such as the Soviet Union, China and Cuba. At home, the Third Option gave birth to many deliberately protectionism policies meant to keep the Americans at bay, including the Foreign Investment Review Agency and the National Energy Program.

The Third Option’s overarching objective was to sever Canada’s deep economic and cultural ties with the U.S. It didn’t work. There was no real diversification of Canada’s export trade away from the Americans, despite all the self-harm caused by the NEP and other policies. Today, the Third Option is widely acknowledged to have been a complete failure.

In recognition of this failure, in 1982 Trudeau set up the Royal Commission on the Economic Union and Development Prospects for Canada headed by Donald S. Macdonald to investigate all aspects of the Canadian economy and deliver advice on how to “respond to the challenges of rapid national and international change in order to realize Canada’s potential.”

The Macdonald Commission’s final report, delivered in 1985 to Progressive Conservative Prime Minister Brian Mulroney was a conclusive repudiation of the Third Option and instead called for a free trade deal with the U.S.

To his credit, Mulroney set aside his party’s old animus towards free trade and entered into negotiations with U.S. President Ronald Reagan. The result was the 1989 Canada-U.S. Free Trade Agreement, which was later followed by 1993’s NAFTA. And while these deals caused some dislocation to Canada’s economy, the net result has been overwhelmingly positive – the same as was the case in 1854. The very fact Canadians today consider Trump’s tariffs to be an economic crisis reveal how important free trade with the Americans has become to Canada.

Given these lessons of history, how should Canadians respond to the Trump Shocks today?

First, there’s no getting around the fact that Canada’s prosperity will always depend on trade with the U.S. Today, as was the case in the 1970s, more than two-thirds of Canada’s exports go south of the border. Economic nationalism is not a winning strategy, as our experience in the 1970s with the Third Option demonstrates.

Second, history also tells us that the U.S. will eventually come around to recognizing the benefits of free trade. Higher tariffs mean higher prices and less choice for American consumers, after all. Canada’s best chance for long-term success lies in making common cause with American interests equally hard hit by tariffs, particularly in border states.

Third, while Canada waits for the U.S. to come back to its senses, we can’t ignore our own home-grown problems. In particular, Canada needs to address its productivity crisis. Where we were once a top tier country in terms of productivity, today we are ranked 22^nd out of 32 OECD countries. Fixing this issue will require tough choices, including reforming the tax code, investing in basic infrastructure, promoting competition, curtailing social programs and pushing back against Indigenous veto-seeking.

It won’t be easy, but the current bout of patriotism and a ready-made villain in Trump means Canadians may be more accept such hardships in the short-term. We should take advantage of the opportunity.

The best response to Trump’s tariffs is not to invent new ways to hate our neighbours, but to fix our own flaws. Only when our house is back in order will we be ready to take full advantage of the American market when freer trade returns. And based on 171 years of experience, we can be sure it will.

Peter Shawn Taylor is senior features editor at C2CJournal.ca, where the original, longer version of this article first appeared.