A Winning Formula: How Business Manages Canada

Sooner or later, Canadian big business gets what it wants. What it wants today is much deeper integration with the United States, from trade and investment to labour and environment, immigration, law and security, and continental defence.

For the past several years, the CD Howe Institute, the Fraser Institute, and the Canadian Council of Chief Executives (CCCE) have been using every excuse imaginable to explain how much better things would be if only Canada and the US shared a common security perimeter, or a single immigration policy, or an integrated North American defence system – that is, all the things normally considered the proper purview of a federal government.

Until now, they've been held at bay by the Liberals' lukewarm support for continentalism, but with the upcoming election, that could change suddenly.

The integrationists are on the move, and they have hitched their policies to the Conservative Party, which promises to "[e]nhance our NAFTA relationship with the United States by moving towards harmonized tariffs, eliminating rules of origin, and moving beyond trade to pursue enhanced common labour, environmental, and security standards. [emphasis added]" After a decade of maintenance, it's time to shake things up.

The Formula

Big business in Canada has hit on a winning formula for managing this country: the Conservative Party enacts sweeping economic and social changes, and then the Liberal party consolidates those changes so that the country is ready for the next phase.

If this sounds counterintuitive, keep reading.

The last time a Conservative government was in power, it oversaw a radical re-ordering of the economy. The Free Trade Agreement and its associated birthing pains, including John Crow's infamous made-in-Canada recession, threw Canada into a turmoil from which it has only recently recovered.

Recall the 1984 election that swept the Trudeau Liberals out of power (yes, Canadians have always voted parties out, not in, which helps to explain why the formula works). At the behest of the Business Council on National Issues (BCNI), the Fraser Institute, and the Canadian Manufacturers' Association, the Mulroney government undertook to transform Canada's place in North America, and by extension its own internal structure.

Canada had been on the road to economic self-sufficiency. The Foreign Investment Review Agency (FIRA) favoured fixed direct investment (FDI) that added to Canada's capital stock of infrastructure, provided jobs for Canadians, and transferred technology and R & D into the country.

Its goal was to wean Canada off foreign capital. Despite business claims to the contrary, Canada was capable of meeting its own capital needs. The net inflow of capital into Canada was miniscule; some 80 percent of the foreign investment from 1980 to 1990 was actually reinvested profits that had already been made in Canada, with loans from Canadian financial institutions making up most of the difference.

A New Agenda

On taking office, the Mulroney government disbanded FIRA and replaced it with Investment Canada, which made no preference for FDI and actively sought US investment. Of the next $106 billion dollars invested into Canada, $99 billion went straight into acquisitions.

The Tories were just getting started. The centrepiece of their revolution was the Free Trade Agreement (FTA). After comparing free trade to "sleeping with an elephant… if the elephant rolls over you are a dead man," Mulroney undertook what a leaked internal memo called "a selling job" by "getting across the message that the trade initiative is a good idea" and fostering "[b]enign neglect from a majority of Canadians".

The selling job worked. During the 1988 federal election, widely regarded as a referendum on the FTA, some 42 percent of Canadians voted Conservative: less than half, but enough to give the party a majority in Canada's first-past-the-post electoral system.

The heart of the FTA was a guarantee that neither country could discriminate against capital based on its country of origin, and that countries could not impose performance requirements on investors. As such, it was more an investment agreement than a trade agreement. It allowed American companies the unfettered right to buy Canadian companies and move production to the low-wage southern United States.

At the same time that FTA was signed, the Bank of Canada jacked the prime rate several points higher than the American prime. The results were as devastating as they were predictable. The cost of servicing debts hurt the government, businesses, and consumers alike; consumer demand fell, workers were laid off, and exporters were punished by a high Canadian dollar as American currency investment flooded the country to take advantage of a higher rate of return. The federal government ran massive $40 billion dollar deficits, and the debt grew astronomically at the higher rate. A million people were thrown out of work, mostly in manufacturing jobs that disappeared for good.

Continental Integration

The new Canada valued integration into the American economic sphere more than it valued independence. Immediately on signing the FTA, the US government embarked on new talks to add Mexico to the mix through NAFTA.

With NAFTA, corporations were well situated to exploit American capital, Canadian resources (Canada is America's biggest energy supplier), and Mexican low-wage labour under a single regulatory structure. What we call "trade" is largely the internal movement of materials through company production cycles that happen to cross political borders in order to exploit each region's comparative advantage.

Even though the Conservatives were thrown out in the 1993 federal election, the caretaker Liberal government that replaced them ratified NAFTA without any significant changes, and then made the sharp cuts to social spending that were required to balance the federal budget in a NAFTA environment.

The practical result for Canadians was that investors and highly skilled workers benefited, while semi-skilled and unskilled workers – the majority – suffered. The number of Canadian millionaires tripled between 1987 and 1997 even while the median income stagnated. By the end of the 1990s, employment had finally crawled back to the level it was before the 1990 recession.

Caretaker Government

The Liberals did an excellent job of consolidating NAFTA. Handed a $30 billion dollar deficit in 1993, Finance Minister Paul Martin delivered his first balanced budget in four years, and the Liberals have run surpluses ever since.

The federal government offloaded spending to the provinces, which offloaded spending to municipalities. Most Canadian cities are running in the red now, and will not be able to deliver social services through the next recession.

Health care, public education, and municipal infrastructure are chronically under-funded and showing signs of strain. Creeping privatization has compromised all three to varying degrees, but for the most part, the Liberals have held it together long enough to retain public support up to now.

The logic of the first transformation has fully permeated through our society. Even the NDP offers a fiscally responsible platform that balances social programs against the underlying need to restrain public spending.

The past decade was essentially a holding pattern while Canada grew accustomed to the new rules, but big business has grown tired of waiting for the next phase in Canada's transformation.

The Next Phase

A few efforts were made in the 1990s to kick-start the next phase. The Multilateral Agreement on Investment, negotiated in secret through the mid-1990s by some twenty-four governments of industrialized nations, was making excellent progress until the citizens of those nations found out about it. It would have allowed companies from any signatory to buy up and deliver all public services privately and for profit.

The MAI was soon derailed by public protests, so business tried to secure the same investment rights under the auspices of the World Trade Organization. However, massive demonstrations in 1999 and 2000 kept disrupting trade summits, and by the Cancun Summit of 2003, a group of developing countries were expressing frustration that the WTO rules weren't benefiting them, grinding talks to a halt.

That was not the end, however.

On March 22, 2002, the Globe and Mail reported that big business had given the Alliance and the Progressive Conservatives an ultimatum: merge to provide a credible alternative to the Liberals, or else see your funding cut off. As Pat Daniel, CEO of Enbridge Inc, explained, "The business community wants to see a strong, national and viable alternative to the Liberal Party. ... The only way to beat the Liberals is for the Alliance and the Tories to make a deal." Of course, a year and a half later, the deal was made and business threw its support behind the merged Tories.

This spring, the Canadian Council of Chief Executives (a renamed BCNI) went to the United States and met with Bush Administration Chief of Staff Andrew Card, National Security Advisor Condoleezza Rice, and Homeland Security Advisor General John Gordon to discuss closer economic and security integration with the United States.

The associated discussion paper, "New Frontiers: Building a 21st Century Canada-United States Partnership in North America", notes with approval that Stephen Harper "has called for a continental ‘strategic partnership', one that would link freer flows of goods, services, labour, capital and technology with improvements in continental security."

On security matters, the report dismisses Canadian reluctance to join the US ballistic missile defence program, "because the United States already has decided to proceed. In short, the BMD program is going ahead, and if Canada wishes to have any say in its future development, it is in our interest to be an active partner." In other words, don't bother trying to stop the inevitable.

Fatalism as Governance

This profession of futility closely mimics the tactics that the BCNI used to bring the FTA and the NAFTA to fruition. Eleven years ago, BCNI president Tom D'Aquino insisted Canada should join NAFTA because "the outlook is poor in Canada for relatively low-wage, low-skill industries, regardless of whether NAFTA comes into effect."

The CCCE's plans for "21st Century Institutions" would cede Canada's authority to supranational entities – "A North American court on trade and investment", "Extension of the NORAD model of binational operational management to the defence of critical infrastructure", "A formal mechanism to enable the sharing of information and intelligence at the provincial, state and local levels", and, of course, "Formal exchanges among senior levels of the business community in all three countries."

Not surprisingly, this closely echoes the Conservative platform. Is it any surprise that the Conservatives would create a new Ministry for Canada/US relations and elevate the Ambassador to the US to a Cabinet position?

FTA and NAFTA were always understood by their architects and most fervent supporters to be the first stages in a long-term continental integration that would eventually see every aspect of national governance – trade, investment, labour, tax, security, defence, etc. – executed or overseen under the auspices of a single continental umbrella.

Back in 1984, the Conservative Party and its big business friends took advantage of voter frustration with the incumbent Liberals to ram through an economic policy the public hadn't asked for and didn't support. Two decades later, we find ourselves in the same position. If Canadians don't learn the lessons of the past two decades, then we are surely destined to repeat them.

Ryan McGreal
June 14, 2004

Valid HTML 4.01 / Valid CSS
This page fully complies with the W3C standard for HTML 4.01 Transitional and uses Cascading Style Sheets (CSS).

Why does this site look so bland?

This site is designed to comply with current web standards - HTML 4.01 and Cascading Style Sheets (CSS) - which separate style from content. Because your browser does not support style sheets, they have been "hidden" so that you only see the content and basic formatting.

Get more out of the internet and upgrade to a standards-compliant browser - check out the Web Standards Project for links to Standards-Compliant browsers

Copyright © 2000, 2002 by Ryan McGreal