Historical Foundations of Canadian Trade Policies

1. Historical Foundations of Canadian Trade Policies Geoffrey Hale Political Science 3 170 September 28, 2010

2. Outline • Unfinished business from Thursday • Historical Evolution of Canadian Trade Policies • Approaches to Policy Change • Hall’s conditions for Paradigm Shifts (Macro) • Kingdon’s “Agendas and Alternatives Model” of Public Policy Making (Mix of Macro / Micro) • Key Focusing Events / Turning Points • 196os * 1980s • NAFTA negotiations as two level game

3. Managing “game breakers”,risks of “defection” • Uncertainty, inadequate political / technical research often critical factors in managing negotiations. • Negotiators often “bluff” in order to convince counterparts that their “win-sets” or “kinky” – reflecting limited capacity to sell compromises past specific point. • Involuntary defection – a negotiator or leader is unable to secure ratification of an agreement • May result from informal political processes (being overruled by political superiors or colleagues) or formal political processes (legislative or electoral defeat). • e.g. Negotiations with U.S. government subject to ratification by Congress with independent powers, multiple veto points empowered by decentralized decision-making system.

4. Managing “game breakers”,risks of “defection” II • Voluntary defection – the reneging on a bargain by a “rational egoist” in the absence of enforceable contracts. • Less likely when likelihood of repeated negotiations on different subjects creates incentives for the cultivation of trust among political and bureaucratic actors. • Good faith may be reinforced by potential for political, diplomatic or economic costs.

5. Summary (Game Theory) • “Two-level” game theory provides general model for analysis of international negotiations • BUT – use as predictive model depends on the number of separate factors, actors involved in negotiations, ratification AND • Capacity of negotiators, policy analysts to identify accurately the key members of stakeholder coalitions, their priorities and conditions for ratification in highly dynamic, uncertain game.

6. Historical Development of Canadian Trade Policies – Policy Paradigms • Paradigm – intellectual framework that seeks to explain some major dimension of the way the world works. • Policy Paradigm – unified set of ideas intended to provide explanation of some broad policy system in relation to a particular vision of the public good and the policy measures necessary to achieve or sustain it.

7. Policy Paradigms II • Paradigm – intellectual framework that seeks to explain some major dimension of the way the world works. • Policy Paradigm – unified set of ideas intended to provide explanation of some broad policy system in relation to a particular vision of the public good and the policy measures necessary to achieve or sustain it. • New policy paradigms usually evolve in response to major internal or external policy challenges that can no longer be addressed effectively by the existing or previously dominant paradigm.

8. Key Conditions for Paradigm Shift (Peter Hall) • Economic viability • Does the policy address (or provide reasonable probability of addressing) the key economic challenges that the previous policy paradigm was unable to overcome? • Authoritative political or bureaucratic sponsorship • Does the proposed policy shift have powerful or authoritative sponsors within the relevant government? • Institutional capacity / Administrative viability • Do relevant governments have the legal/constitutional authority and administrative capacity to implement the proposed changes without major difficulties? • Political viability • Can the government secure sufficient political / public support for the policy to secure election?

9. Historical Development of Canadian Trade Policies I Canada International • late 19th century  emergence of protectionist National Policy in 1870s • Response to emergence of U.S. protectionism, financial / trade depression of 1870s. • Import substitution industrialization (“infant” industry protection) • mid-late 19th century – interaction of British global trade hegemony based on free trade, gradualist emergence of protectionist economic development policies in U.S. (after 1866), Germany. • Erosion after First World War • Collapse during Great Depression of 1930s.

10. Historical Development of Canadian Trade Policies II Canada International • Post Second World War (1940s-60s) • Shift of Canada from British (or mixed UK/US) trade orbit to U.S. sphere of influence • Complemented by expansion of foreign investment, domestic welfare state (“Embedded Liberalism”) • Rejection of FTA – 1947 in favour of multilateralism (WLM King veto) . . . gradual liberalization reveals cracks in ISI policy paradigm • BUT – alternatives contested (e.g. debates within Gordon Royal Commission of 1950s) • Gradual liberalization of trade, investment under GATT following Second World War • American dominance, hegemony (guarantor state) provided strategic umbrella for re-emergence of int’l market system • Parallels of “Embedded Liberalism” (Ruggie) in U.S. domestic politics

11. Kingdon’s “Agendas and Alternatives” Model of Policy Change • Problem Streams • Significant problems or issues on public agenda (“Agenda-Setting” by governments, policy enterpreneurs or interest groups  general or specialized) • Policy Streams • Major policy options / alternatives under consideration by key members of policy community (esp. inside government) • May reflect competing intellectual, bureaucratic or policy interests inside, outside government

12. Kingdon’s “Agendas and Alternatives” Model of Policy Change II • Political Streams • Major political trends – may be reflected in “national mood”, public opinion, interest group pressures, election results, turnover in key decision-makers. • Policy Windows • Opportunities for problem, policy, and political streams to converge in political / legislative decision-making process • May be driven by well-established institutional patterns (election campaigns / outcomes, budget processes) or by “focusing events” which capture popular and political imagination

13. Historical Development of Canadian Trade Policies III • 1960s • Focusing event – loss of U.S. duty remission case (Modine Manufacturing) in 1964 threatens basis for expansion of Canadian auto industry • Pressure from U.S. Treasury for comprehensive deal  open to sectoral customs union. • Result  cross-border industry / union coalition supportive of sectoral free trade (Auto Pact) • Political / bureaucratic leadership changes in Ottawa. • “Managed Free Trade” agreement with Canadian production floor (proportion of Cdn. auto sales in N. America) • Followed by major industry consolidation, expansion.

14. Historical Development of Canadian Trade Policies IV Canada United States • Attempted diversification of trade in 1970s (“Third Option”), with minimal success • Economic nationalism in early 1980s prompts Congressional backlash • Multi-track proposals for negotiations with U.S. (Cdn. Senate 1982 etc.; DFAIT 1982-84; • Liberal proposals for expansion of sectoral free trade (1983-84) rejected • Decline in economic hegemony in 1960s, 1970s • Use of “continent protection” / trade remedy laws to combat “unfair” trade practices

15. Historical Development of Canadian Trade Policies V • Focusing events (1982-86) • Internal power shift to DFAIT from Industry, Trade & Commerce (1982) • Pro-free trade shift of major Cdn. business interests (BCNI, CMA) (1982-83) • Election of Mulroney Government (1984) • Presence of friendly U.S. administration receptive to opening of talks • Report of Macdonald Commission (1985) • Consistent with evolving, pro-market federal agenda, agendas of Quebec and most Western provinces.

16. The Deal-Maker: Dispute Settlement • Canadian position proposing automatic national treatment, elimination of trade remedy jurisdiction over Canada seen as constitutional / political non-starter by U.S. government. • Presence of authoritative Congressional decision-makers (Ways and Means, Finance) open to procedural “fix” allowing for retention of trade remedy, combined with dispute settlement mechanism (details disputed). • Extensive haggling over details resulted in last minute agreement addressing each party’s core objectives.

17. Summary • CUFTA provided genuine paradigm shift in Canadian trade policies compared with incremental shifts of 1940, 1960s. • Growth of U.S. contingent protection (trade remedy laws) highlighted vulnerability of Cdn. manufacturers in era of trade regionalization (Problem Stream) • Collapse of Trudeau’s economic program demonstrated political, economic limits of ISI strategy (Problem Stream / Elimination of traditional alternative) • Macdonald Commission provided arms-length validation of alternative policy framework • Bureaucratic shifts, change of government provided authoritative political sponsorship after release of Macdonald Commission report • Policy window opening in USA with Reagan administration, cross-partisan support in Congress.