U.S.-CANADA FREE TRADE
AGREEMENT OF 1989



The U.S.-Canada Free Trade Agreement of 1989 (FTA) represented a bilateral agreement between the world's largest trading partners. The United States and Canada have more trade between them than any other two countries on earth. At the time of the agreement, the United States and Canada traded roughly $150 billion worth of goods a year.

Negotiations on the FTA began in 1985, and the pact actually was agreed to on 4 October 1987. Following approval by the legislative bodies of both nations in 1988, the agreement officially took effect on 1 January 1989. The historic pact was the culmination of more than 100 years of on-again, off-again talk of free trade between the United States and its northern North American neighbor.

The issue actually caused much more of a stir in Canada than in the United States. Polls taken at the time of the debate indicated that more than 40 percent of Americans were not even aware that the two nations had signed such an agreement, compared with just 3 percent of Canadians. In the United States, the FTA did not garner nearly as much press as did the North American Free Trade Agreement (NAFTA), the pact between the United States, Canada, and Mexico that came about five years later, and which incorporated most FTA provisions into its framework.

In Canada, however, the FTA was the subject of long and heated debate. The Liberal party in Canada even used the FTA to force an election—with free trade virtually the only subject of the campaign. The reason for the disparity in emotion on the issue becomes readily apparent upon examination of the comparative economic situations. For the United States, while trade with Canada is significant, it is not all that large when taken as a portion of the whole economy. From the Canadian standpoint, though, United States investment and trade is a fairly hefty percentage of the economy.

After all the talk and debate, the FTA was adopted and took effect on time—with the understanding that the agreement was an evolving document with mechanisms for changing and problem solving. What the FTA tried to do is put simply in the objectives agreed to by the two nations:

On the last point, the FTA apparently has been successful, as it helped lay the foundation for NAFTA, although certain differences do exist between the two agreements.

HISTORY AND BACKGROUND

When the FTA finally took effect in 1989, the issue of free trade talk between the two nations had a history that went back into the 1850s. In 1854, there actually was a reciprocal free trade agreement signed that lasted until 1866, when the United States terminated the pact.

That agreement actually was negotiated between the United States and Great Britain, because the five British colonial provinces that existed back then had not yet become nations. The agreement basically covered commodities such as natural resources and agricultural products. Although manufactured products were not part of the pact, about two-thirds of trade between the then-30 United States and the Canadian provinces were covered.

There were attempts to make this agreement into a common market—where both areas would set unified tariffs for all third parties—but those efforts came to an end when the United States terminated the agreement in 1866. The United States appeared to take this action as protectionism began to develop in the United States during and after the Civil War.

During the next 45 years, first Canada and then the United States tried to bring back the free trade agreement, but protectionism on one or the other's part stalled progress each time. An informal agreement that was never ratified came about in 1911 after a tariff war that took place in 1907. Canada started by adopting a three-tiered tariff system that greatly affected the United States, which retaliated in 1909. An oral agreement on a free trade pact was reached in January 1911, put into a formal letter by the Canadian delegates, and then replied to formally by the United States Secretary of State, Philander Knox. But the Liberal party in Canada that negotiated the agreement was defeated in an election held because of the proposed free trade agreement, and the pact was never implemented.

The two nations held no further bilateral talks until 1935, when they agreed to what was termed a modest most-favored nation agreement. The two sides held negotiations again in 1948 but the Canadian government broke off the discussions.

Why the 1988 agreement succeeded where some of these earlier attempts did not is unclear, although a number of issues—including the globalization of the business world—no doubt had some impact. Some Canadians also wanted their nation protected from possible protectionist legislation they feared the United States might implement. Although most of the protectionist actions in the United States were aimed at Japan and the Far East, Canada thought it could be affected if the United States implemented emergency action under rules of the General Agreement on Tariffs and Trade (GATT). Under GATT, all nations must be treated alike, and Canadians were afraid of the possibility of such measures from its largest trading partner.

DIFFERING OBJECTIVES

Leading up to the signing of the agreement, both the Canadian and American sides had objectives they wished to achieve. On one side, Canada had its high tariffs that encouraged foreign manufacturers to build plants in Canada for the Canadian market, as it would be more cost efficient than to service the market with exports. During the 1950s and 1960s the Canadian economy grew extensively and the nation had few programs that influenced market conditions. But in the 1970s and 1980s, Canadians became more concerned about the extensive control and possible influence of the United States multinationals that had operations in Canada. The Canadian government began screening foreign direct investment and adopted policies aimed at making Canada less dependent on the United States and more competitive on its own. Although the ownership and control of the United States in Canada's industry did lessen, the United States share of Canada's trade remained high and Canadian competitiveness did not improve.

Canadians who favored free trade began to believe that Canada's resource products would no longer sustain the nation, so the country should focus on its competitiveness in the manufacturing arena. Canada's tariffs, following seven rounds of GATF talks, were no longer high enough to shield it from foreign competition. What was keeping Canada from being competitive were nontariff barriers in foreign nations, and the threat of further such barriers, particularly in the United States

The Canadian government articulated four main objectives heading into discussions on the FTA: access to the United States market by limiting the effects of United States trade laws; enhance access to the United States market by eliminating tariffs and achieving more liberal nontariff barriers; ensure any gains through a strong agreement with an effective dispute settlement mechanism; and maintain policy discretion in cultural industries and foreign investment in some sensitive sectors.

From the United States side, officials saw the FIA as beneficial in several ways. Limitations of the GATT agreement had affected United States access to foreign markets for United States high-technology products. Various things such as trade-related investment policies, subsidies, treatment of intellectual property rights, government procurement practices, and product standards had limited the United States in trade.

In addition, the United States, by reaching this agreement with Canada, would be showing the European Union, Japan, and other nations that it was open to other trade possibilities if the ongoing Uruguay Round of the GATT talks did not bring substantial results.

The FTA also brought the United States a chance to eliminate the higher Canadian tariffs and to secure improvements made in the trade and investment climate. In nontariff barriers, the United States could get rid of or at least lessen discrimination of federal and provincial procurement practices along with barriers caused by technical standards and testing requirements.

BASIC TERMS

Over a ten-year period, the FTA was to eliminate tariffs, duty drawbacks, and most import restrictions. The phase-in was aimed at allowing certain industries to get used to the realization of competition in a free market environment.

There were three options for tariff removal. As of 1 January 1989, duties were eliminated in full on about 15 percent of all dutiable goods traded between the two nations. Some of the industries and products included skis, whiskey, vending machines, needles, fur, and computers.

Products that covered another 35 percent of dutiable goods were placed on a five-year elimination program, with the tariffs reduced by 20 percent each year beginning 1 January 1989. Aftermarket auto parts, chemicals, furniture, explosives, paints, some meats, paper, subway cars, and telecommunication equipment were some of the covered products.

The final 50 percent of dutiable products were put on a ten-year tariff reduction path, with 10 percent of the duty taken off each year, with the process ending I January 1998. Those products included: most agricultural products, appliances, beef, pleasure craft, railcars, softwood plywood, steel, textiles and apparel, and tires. With regard to automotive products, tariffs were phased out on vehicles that meet a 50-percent content rule, where half the content must come from the two nations.

The FTA also prohibits restrictions on exports, export taxes and subsidies, and the dual pricing of exports. There were, however, a few safeguards. During the ten-year phase-in period, duties could be restored for up to three years if domestic producers prove suffering because of the reductions.

Also included were measures to standardize environmental provisions, such as pesticide and emissions regulations, usually by lowering Canadian protection standards to more lenient U.S. levels.

Both nations also will give each other's subsidiaries what is known as "foreign treatment" with regard to foreign investment. Canada did reserve the right to screen direct purchases of its largest nonfinancial corporations and financial institutions. That nation's cultural industries were exempted from most provisions of the agreement.

For settling disputes, the FTA set up a five-person panel with two members from the United States, two from Canada, and one decided by the other four members or chosen at random from an approved list. Issues will be referred when either side feels the other has made an unfair judgment under trade laws. The dispute-settlement process was expected to develop a set of mutually agreed rules about what constitutes dumping and subsidies, among other things.

GETTING IT APPROVED

In the United States the process was relatively quiet. President Reagan put the FTA on the fast-track process for congressional approval. That meant the Congress had only so many days to debate it and then had to either accept it or reject it in its entirety. They could not amend the agreement in any way. The United States House of Representatives approved it 9 July 1988, while the Senate followed suit on 9 September. Neither vote was close.

In Canada, however, there was no equivalent to the fast-track process. Under its parliamentary form of government, the House of Commons passed the matter easily because the majority of seats were held by the Progressive Conservative party, was led by Prime Minister Brian Mulroney.

But the Canadian Senate is not an elected body. Senators are appointed for life by the prime minister. Because the Liberal party had been in power for most of the 15 years prior to the FTA, that party had a majority of Senate seats and blocked passage. The Liberals used the debate to force a general election to break the impasse, and the election became an emotional debate on free trade and its impact on Canada. When the votes were counted, the conservatives still had a majority, although reduced, and the Liberal party did not oppose the voice of the people and allowed the FTA to go through.

Canadians were so aware of the debate because the impact on them was far greater than on United States citizens. Exports accounted for 28 percent of the Canadians' gross national product, compared with just 7 percent in the United States. And 80 percent of Canada's exports were destined to go to the United States.

Many Canadian critics felt vindicated in the years following the passage of the FTA, eyeing the contraction of employment across all industries between 1989 and 1993. The Canadian Labour Congress reported the loss of over 250, 000 jobs in the first two years of the Agreement, along with a wave of takeovers of Canadian-based countries. Some commentators, however suggest that the FTA was hardly a crucial factor in these numbers, and attribute them instead to other domestic economic policies like the fight against inflation.

DIFFERENCES WITH NAFTA

Besides bringing Mexico into the arena for free trade, the North American Free Trade Agreement (NAFTA) also broadened the parameters of the FTA between United States and Canada in many respects. Areas where NAFTA expounds upon FTA include intellectual property rights, land transportation, the environment, and several others. Below is a summary of some of the differences:

MARKET ACCESS.

NAFTA makes no changes in the three-stage phase-out of tariffs for items traded between the United States and Canada.

RULES OF ORIGIN.

NAFTA clears up many of the questions regarding rules of origin in the FTA and also integrates the administration of the rules. It includes a provision that allows up to 7 percent of the value of North American products to originate outside the continent. It also mandates that cars and light trucks have 62.5 percent of costs derive from North America to qualify for preferential treatment. For other vehicles, NAFTA specifies 60 percent North American content after a phase-in period.

NAFTA also makes the rules of origin simpler for certain electronics products and strengthens it for textiles. Fabric and yarn for garments must now come from North America, although there is a quota that allows a certain number of garments to qualify as North American in origin although they do not meet the rule.

CUSTOMS ISSUE.

NAFTA extended by two years the deadline for elimination of duty drawback to I January 1996. Duty drawback is the refund of duties on imported inputs incorporated into products for export. NAFTA also allows trade and professional equipment duty-free treatment when brought in on a temporary basis by professionals covered by the provisions.

GOVERNMENT PROCUREMENT.

NAFTA raises the guidelines on federal procurement of goods and services valued at over $50,000 ($25,000 on goods alone) and construction contracts that are valued at over $6.5 million. The provisions also cover certain government-owned corporations for contracts over $250,000 on goods and services and $10 million on construction contracts. These items are intended to allow firms from all three countries to compete on equal footing for government contracts over the threshold. For example, under the FTA, firms from the United States won 535 Canadian contracts worth in excess of $20 million between I January 1989 and 30 June 1992.

SERVICES.

Under NAFTA, the provisions covering services are expanded to most every service sector. The agreement also eliminates federal and local restrictions on partner country access to services markets except in some instances, as well as citizenship or permanent-residency requirements on the licensing of professional service providers.

FINANCIAL SERVICES.

NAFTA sets up a series of rules on trade and investment in financial services. It also ensures that United States firms in Canada can process financial data in the United States and gives access to NAFTA dispute settlement mechanisms for financial services firms.

INVESTMENT.

NAFTA broadens guidelines regarding investors so that the definition includes non-NAFTA individuals who operate in a NAFTA country. NAFTA also covers real estate, stocks, bonds, and certain contracts and technologies, and provides binding arbitration in disputes between investors and any of the three governments involved in NAFTA.

INTELLECTUAL PROPERTY RIGHTS.

Addressing a topic not detailed by the FT A, NAFTA extends patent protection to a minimum of 20 years; provides copyright protection for products such as computer programs, sound recordings, motion pictures, and satellite signals; and bolsters trademark protection, service markets, trade secrets, and other intellectual property rights.

LAND TRANSPORTATION.

Another area not covered by FTA, NAFFA makes certain that future Canadian laws and policies will not discriminate unfairly against land transportation service providers in the United States.

ENVIRONMENT.

In another new provision, NAFTA allows the three nations to keep their existing health, safety, and environmental standards and to impose new standards that can be scientifically justified and are not discriminatory.

[ Bruce Meyer ]

FURTHER READING:

Feinberg, Susan E., Michael P. Keane, and Mario Frank Bognanno. 'Trade Liberalization and 'Delocalization': New Evidence from Firm-Level Panel Data." Canadian Journal of Economics, October 1998, 749-777.

Gaston, Noel, and Daniel Trefler. "The Labour Market Consequences of the Canada-U.S. Free Trade Agreement." Canadian Journal of Economics, February 1997, 18-41.

Siddiqui, Fakhari, ed. The Economic Impact and Implications of the Canada-U.S. Free Trade Agreement. Lewiston, NY: Edwin Mellen Press, 1991.



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