THE FREE TRADE AGREEMENT IS A COMPLEX
legal document. The following provides a sample of
how the FTA has worked in three areas: key provisions, side
deals attached to the FTA, and indirect effects which rein-
force or hinder other laws and policies.
Key provisions: Articles 407, 408, and 409 limit the
ability of governments to manage natural resources. Articles
902, 903, and 904 reproduce these limitations for energy
resources. The provisions state that Canada can reduce oil
and gas supplies to the United States only in equivalent
proportion to domestic cutbacks. A 10% decline in produc-
tion, for example, would result in a 10% decline in both
availability in Canada and exports to the United States. Since
Canadian gas exports are a small proportion of U.S. gas
consumption, the proportional rule places the brunt of any
shortage on Canada. Ninety percent of recent natural gas
discoveries in the Arctic have already been contracted to U.S.
markets. In event of national shortage, or for conservation
purposes, Canada is now powerless to curtail these supplies.
Under tariff item 22.01, water has for the first time been
defined as a commercially tradeable good. This opens the
door to the possibility of massive water diversion from
Canadian rivers to the United States: a boon for the “own-
ers” of Canada’s water resources, a bane for national devel-
opment.
A British Columbia law which required domestic proc-
essing of all fish caught off the B.C. coast was successfully
challenged by the United States under GATT. Canada was
still permitted to impose export taxes on unprocessed fish to
achieve the same effect. However, article 408 of the FTA
prohibits export taxes. This has weakened the bargaining
power of fisheries workers; jobs and processing capacity in
this major industry are moving south.
Article 2010 on public sector ownership permits govern-
ments to designate a “monopoly,” but other provisions
(notably articles 1605 and 2011) prevent them from actually
creating one. Canada’s national health care system would
have been impossible to put into place if these provisions had
existed. The Ontario government’s plans to establish public
auto insurance will conflict with them and will likely cause
a federal-provincial jurisdictional battle. (Article 103 re-
quires the federal government to ensure provincial compli-
ance with the FTA.)
The FTA greatly weakens the government’s capacity to
maintain food security and domestic processing, by remov-
ing key enforcement mechanisms: tariffs (article 401) and
quotas (article 706). Canadian milk products (ice cream and
yogurt, for example) have suffered greatly from the removal
of tariffs. The government moved to transfer them to the
import control list (i.e., to impose quotas), but the United
States protested successfully at GATT that this was contrary
to GATT’s Article XI. U.S. dairy products are protected by
a GATT waiver.
Canadian policies to ensure domestic production by for-
eign firms have been undercut by the FTA. The most signifi-
cant one to go is the Auto Pact, an arrangement governing
much of Canada’s auto trade which provided safeguards
ensuring minimum production levels in Canada. The main
enforcement mechanisms for these safeguards, tariffs, are
gone (article 401). Japanese and European car makers, which
account for 40% of the market, are prevented from joining
the Auto Pact (article 1002). Article 1603 prevents produc-
tion-sharing agreements generally.
Canada had pursued a series of policies to guarantee
Canadian control of strategic sectors of the economy. The
FTA’s article 1602.2 prohibits the imposition of any Cana-
dian equity participation as a condition of establishment or
takeover of a business by a U.S. corporation. Article 1602.1
prevents practically all forms of differential treatment to-
ward U.S. investors. This provision is extended to service
companies in Article 1402.2. The latter opens the door, for
example, to U.S. for-profit health care firms, contradicting
one of the fundamental principles of national health care.
Non-discrimination against U.S. corporations also applies to
new government subsidies or taxation measures.
Canada had regulated foreign companies to ensure “net
benefit” to Canada. Although a few remnants of this power
appear to remain, they have been effectively undercut in
most sectors by various articles in chapter 16 of the FTA. The
Canadian economy has an extremely high level of foreign
ownership (50% by sales), and experience has shown that
without regulation, foreign-owned firms do not necessarily
provide “net benefits” to Canada.
Side Deals: A dispute over Canada’s 15% tax on all
Canadian softwood exports to the United States was settled
in favor of U.S. lumber interests as a condition for Senate
Finance Committee fast-track approval for FTA negotia-
tions. It is now entrenched in Article 2009. The Canadian
industry estimates that the loss of this tax, as well as the rise
in the Canadian dollar, have cost up to 100,000 jobs.
The original U.S. communique announcing the FTA
negotiations in October 1987 cited an agreement to extend
longer monopoly patent protection to U.S. pharmaceutical
companies. Under Canadian protest it was quickly with-
drawn. Nevertheless, parallel to the FTA negotiations, the
Canadian government approved separate legislation on
compulsory drug licensing requirements which provided
precisely such protection.
Indirect Effects: The unpopular and regressive 7% Goods
and Services Tax was imposed recently as a consequence of
the FTA. It was intended to help Canadian exporters to
compete, and to compensate for lost duty revenue. It is also
a result of a narrowing of tax alternatives, especially with
regard to corporate taxes, due to the greater mobility of
capital under the FTA.
Prior to the 1988 elections, Conservative politicians and
most business leaders denied that free trade would lead to any
“harmonization” of social programs and standards–cutting
the benefits Canadians enjoy down to the U.S. level. How-
ever, shortly after the election, a major business leader,
Molson Breweries chief Mickey Cohen, admitted to the
Financial Times of Canada that programs that put Canadian
business at a disadvantage would have to be changed. “If
we’re going to compete, we have to look more like the guys
we’re competing with….” Others were quick to take his lead,
reversing their earlier denials with shameless indecency.
Some say bluntly that dismantling social programs and
standards is necessary to compete under free trade; others
point to the need to be globally competitive or to reduce the
public debt. The Conservative federal government has been
more than willing to comply; some provincial governments
have resisted.
Unemployment insurance, for example, one of the most
important income support programs in Canada, has been cut
back severely by tightening eligibility requirements, reduc-
ing the amount and duration of benefits, and eliminating
government financial participation in the scheme. A special
benefit to East Coast fishermen was removed in response to
claims by New England fishermen that it was an unfair
subsidy. The goal of these changes was to introduce greater
“flexibility” into the work force and make it more like the
U.S. system: to level the playing field. Before the changes,
four of five unemployed Canadians qualified for unemploy-
ment insurance. Although figures are not yet available, it is
now certainly closer to the one in three who qualify in the
United States.
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