1988 election did produce a mandate for CUSFTA in the parliamentary majoritarian sense and the CUSFTA decision is regarded as democratically legitimate (Doern and Tomlin, 1991: 294). As a result, the Conservatives were in a solid position to implement CUSFTA and continue the pursuit of closer economic relations with the United States (Cameron and Tomlin, 2000: 6). However, if Mulroney government had not won the 1988 election, the change of government would have brought Canadian ratification into serious doubt. Electoral politics and ratification were thus a major issue throughout the negotiations and afterwards.
B. Canada and NAFTA (North American Free Trade Agreement)
(A) Initiation
What were the motivations of the Canadian state to participate in NAFTA? What gains did Mulroney government anticipate? The Canadian state did not expect Mexico’s show of interest in free trade with the United States and was surprised by the sudden interest of the U.S. in another free trade agreement. Were Mexico and the United States to sign a bilateral free trade agreement, the resulting “hub and spokes” relationship would disadvantage both Canada and Mexico (Wonnacott, 1990). The United States would enjoy preferential tariff-free access to the markets of both its partners, but each of them would only have competitive access to the U.S. market and no particular access to each other (Lipsey, 1990; Lipsey et al., 1994; Leyton-Brown, 1994). The United States would have been the only location from which a producer would have had free trade access to all three markets, an arrangement that would have diminished Canada’s attraction for Foreign Direct Investment (FDI) (Lipsey et al., 1994: 23). And if Canada declined participation and then sought to join NAFTA at a later date, it would probably have to accept conditions already set by the original NAFTA partners (Lipsey et al., 1994: 23).
Liberals and New Democrats (NDP), it does not follow that a majority of Canadians used their votes to oppose free trade (see Doern and Tomlin, 1991: 238-39).
The Canadian government concluded that the only way to defend its various interests was by participating in the original NAFTA negotiations.
Consequently, Canada entered into the NAFTA negotiations with the primary objective of preventing the erosion of benefits achieved in CUSFTA. It also sought to resolve a number of specific irritants with the United States that had arisen under CUSFTA (Molot, 1997). Finally, it sought increased access not only to the growing Mexican market, but also access for Canadian industry and consumers to low-cost Mexican products (Wonnacott, 1994: 170).
Although the Canadian state’s decision to participate in NAFTA negotiations was thus largely defensive, still there were economic benefits to be gained: Canadian firms would gain from access to a growing Mexican market. Here international and domestic concerns interact in shaping international negotiation. In early 1991 Canada opted into the negotiation, and President Bush announced on 5 February 1991 that the three countries would initiate negotiations on a North American Free Trade Agreement.
Trilateral negotiations commenced in Toronto on 12 June 1991. The prospect of increased growth, markets and jobs motivated the three political leaders. “Like President Bush, Mr. Mulroney is expected to use positive features of the trade agreement in his own bid for reelection” (New York Times, 1992).
(B) Negotiation
NAFTA, signed by The United States, Canada, and Mexico on 17 December 1992, is the most far-reaching free trade pact ever negotiated between regional trading partners,24 and it was the first reciprocal free trade pact between developing and
24. Ten years ago the three countries formed a free trade area with a total gross domestic product (GDP), at present, of US$11.4 trillion. “This makes North America the world’s largest free trade area, with about one-third of the world’s total GDP, significantly larger than that of the European Union. Even with the addition of ten new members next year, the EU’s GDP will increase to US$8.3 trillion, still well behind the NAFTA region” (see report from the Canadian Department of Foreign Affairs and International Trade, 2003).
industrial countries. NAFTA was scheduled to enter into force 1 January 1994, after ratification by the three legislatures. Public debate in Canada during NAFTA negotiations was much less fierce than the CUSFTA debate. There are fewer societal and state pressures promoting Canadian participation in the NAFTA talks, as the agreement was essentially an extension of CUSFTA to include Mexico. Among provincial governments, the line-up was for the most part similar to the line-up as to CUSFTA: Quebec, Alberta, Saskatchewan, and the Atlantic provinces favored participation in the NAFTA talks;
Ontario was strongly opposed to a trilateral arrangement; and Manitoba and British Columbia were undecided. Moreover, NAFTA provisions on investment and financial services apply to the provinces, and the labor and environment side agreements cover topics that fall largely under provincial regulation (Molot, 1998: 8).25 As a result, Canada’s federal negotiators were more dependent on provincial information, expertise and cooperation for implementation than was the case with CUSFTA.
It has been observed above that class conflict and resistance was sharper within states than between states during the CUSFTA negotiations. During the CUSFTA negotiations, the Canadian government had set up CCTN (Continuing Committee on Trade Negotiations) as a forum for provincial inputs and exchange of views and information, and to promote a cross-provincial consensus. During the NAFTA negotiations, the Canadian government established the Federal-Provincial Committee on the North American Free Trade Agreement (C-NAFTA) to serve the same role (Abelson, 1996).
25. George MacLean (2002: 47) indicated that “side agreements on labor and environmental protection widen the scope of the Agreement. The North American Agreement on Labor Co-operation (NAALC) was created to promote interaction on labor matters and enforcement of domestic labor law. The Commission for Environmental Co-operation (CEC), founded in 1994, seeks to coordinate regional environmental cooperation, reduce potential environmental and trade conflicts, promote the implementation of environmental law, facilitate cooperation in conservation efforts, and to protect and strengthen the North American environment.”
In terms of social pressures, Canadian MNEs, the Canadian Chamber of Commerce, the Canadian Manufacturers Association and the Automotive Parts Manufacturers Association all believed that Canada should not permit others to define the North American trade and investment regime; in their view Canada had to participate in the NAFTA negotiations (Eden and Molot, 1991: 28). Integration with the broader U.S.—Mexican market could still prove critical for important Canadian industries:
“The combined Southwestern American and northern Mexican market is already attracting a wide range of exporters, from Nova Scotia fishermen to Ottawa telecommunications firms to Alberta natural gas companies to British Columbian coal mines. Canada’s withdrawal from NAFTA now would penalize its shrinking automotive industry, which would find itself excluded from the continent’s fastest-growing market. It would hurt Canadian wheat growers, who have quietly become Mexico’s biggest suppliers, and the lumber exporters who hungrily eyed the timber-scarce Mexican construction market. Most dangerous of all, it would make Canada less attractive to Asian and European investors.” (Orme, 1996: 53)
Labor leaders, farmers, and others were concerned with the social effects of NAFTA. They feared that lower wages and lower environmental standards in Mexico would lure companies and jobs away from Canada (Cameron et al., 1992: 182; Dyck, 2000: 171). In addition, concerns about more job losses and restructuring were closely tied to fears that the government would be limited in its ability to structure welfare policy to help affected citizens (Jackson, 1999). In sum, they saw the NAFTA as eliminating jobs, redirecting investment, and eroding social benefits. While the Canadian government claimed that certain domestic services and industries were either protected or not affected by NAFTA (culture, water, environment, health, safety and labor standards, and social programs), critics noted that the protective wording in these fields was weak (Dillion, 1996). A number of “sensitive” sectors like “autos, textiles, agriculture and petrochemicals are the sectors where negotiations seem to have been the most intense”
(Whalley, 1993: 357-58; Milner, 1998: 30). Firms and industries already finding adjustment to the CUSFTA difficult, such as the furniture, shoe, and garment industries,
were concerned about the impact of another trade agreement (Eden and Molot, 1992: 74).
The above mixed views “are reflected in a February 1991 opinion survey which found that forty-six per cent of Canadians supported NAFTA, fifty per cent opposed it, and the remainder were unsure” (Eden and Molot, 1992: 75).
As in the CUSFTA negotiation stage, the Canadian government was anxious to provide opportunities for both active and passive supporters of free trade to counterbalance negative arguments about free trade. The 38-member International Trade Advisory Committee (ITAC) and the fifteen Sectoral Advisory Groups on International Trade (SAGITs), established during the CUSFTA negotiations (described in the foregoing section on CUSFTA), would perform the same functions during NAFTA negotiations, particularly for organized labor and environmental groups, “to try to defuse their concerns” (Mayer, 1998: 116).
On June 12, 1991, the three trade ministers—Carla Hills for the United States, Jaime Serra Puche for Mexico, and Michael Wilson for Canada—met in Toronto to launch the negotiations. For Michael Wilson, the overriding goal was to avoid reopening its existing agreement with the United States. Canada would seek some improvements, particularly on the confusing rules of origin that had recently been the subject of a significant dispute with the United States, but he would insist that CUSFTA be the core of NAFTA (Mayer, 1998: 112). The three trade ministers established some ground rules for the negotiations. And they agreed to create 19 working groups; among the more significant were financial services, agriculture, market access, automobiles, intellectual property, services, and investment. These working groups reported to chief negotiators for each country—Jules Katz for the United States, Herminio Blanco for Mexico, and John Weekes for Canada, who in turn reported to the trade ministers (Mayer, 1998: 112).
The negotiating groups began work in the week of June 17, 1991, and the chief negotiators met on July 9 and again on August 6. Between international meetings, trade negotiators consulted domestically with their private advisory groups.
There was good cause for Michael Wilson’s concern regarding the “rules of origin”
in CUSFTA.26 Trade in automobiles and autoparts constituted by far the largest volume of goods traded among the countries of North America: 14% of U.S. exports to Mexico, 30% of Mexican exports to the U.S., and 6% of U.S.-Canadian trade (Canovas, 1995:
159-183). Any regional free trade agreement discriminates against goods produced outside of the region, and favors goods produced within the region. This requires a rule to determine what are regional goods and what are not. Establishing national positions on the rules of origin was complicated by differences of interests in the private sector (Mayer, 1998: 120). The Big Three automakers—General Motors, Ford, and Chrysler—were the biggest manufacturers in Canada. All three made careful calculations about the effects on their competitive position, of several different possible rules of origin.
GM, primarily because of a joint venture with Izuzu in Canada, needed to keep the percentage low enough for its joint venture cars to qualify for North American treatment, and therefore pushed for 60 percent North American content (Mayer, 1998: 120-121).
Ford and Chrysler preferred a 70 percent rule. Canadian autoparts makers also wanted a high percentage rule (Mayer, 1998: 121). Canada and Mexico had always wanted a lower percentage than the United States, to make it easier for foreign operations to set up shop there. The Canadians, who would have been happiest with the 50 percent rule of CUSFTA, reluctantly inched up to 60 percent, but they were unwilling to go higher, lest they jeopardize the status of their Japanese and European “transplant” automakers (Mayer, 1998: 142). As stated by Canadian negotiator John Weekes, “We didn’t want to create a situation in which Japanese and European vehicles being manufactured in Canada wouldn’t be open to free trade treatment. We worried about this possibility and were working very closely with the Japanese and European transplants” (Mayer, 1998: 142; del Castillo, 1995: 21-50). If the rules of origin went much higher than 50 percent, the
26. The auto “rules of origin” case is based on Mayer (1998).
transplants might not be able to continue to sell duty-free into the United States, thus negating the economic rationale for locating in Canada (Mayer, 1998).
The Canadian internal negotiation can be modeled as a game involving the Big Three, and Canadian autoparts makers, and the several European and Japanese transplants that assembled vehicles in Canada. The Canadian United Auto Workers (UAW) urged a high rule of origin requirement—perhaps 80 percent—but, having few ties to the Conservative party, UAW had little weight in the internal Canadian negotiation (Mayer, 1998: 159). The Canadian negotiators were sensitive to the concerns of the transplants, however, and gave them deference amounting substantially to veto power over the Canadian position (Mayer, 1998: 159). This Canadian rules of origin negotiation case demonstrates that a two-level bargaining in which the preferences of powerful private interests within the domestic arena, some national and some transnational, largely determine the national positions taken by trade negotiators in the international arena (Mayer, 1998: 157). On August 12, the negotiators shook hands on a deal that would be the North American Free Trade Agreement.
The present work argues that in every sector, the problem for the Canadian trade negotiators was domestic politics. The state must listen to the complaints and concerns of the interest groups, because the support of these groups is needed in order to win ratification and implementation. Accordingly, domestic pressures critically shaped the international negotiations.
(C) Ratification and Implementation
NAFTA was signed in December 1992, with implementation scheduled for 1 January 1994. It was a sad but potent coincidence that shortly after CUSFTA came into effect in 1991, Canada suffered its worst recession since the ‘30s. Scholars (including Finlayson and Bertasi, 1992: 39; Gaston and Trefler, 1997; Pastor, 2002) found that the poor economic conditions of the early ‘90s such as recession, the Bank of Canada’s fight against inflation with high interest rates, de-industrialization, deteriorating labor
productivity, and rising labor costs account 86% of the 390,600 jobs lost between 1989 and 1992. Many Canadians saw the recession as a consequence of free trade, and dissatisfaction with free trade increased. By the summer of 1991, Prime Minister Brian Mulroney had sunk to historical lows in public opinion polls, with barely 15 per cent of the electorate indicating that they would vote for the Tories if an election were held at that time (Brooks, 2000: 194).
The Tory government, even though its popularity was at the lowest level of any Canadian government in this century, is a strong advocate of free trade and economic integration. But its efforts to change attitudes and perceptions towards NAFTA were seriously undermined by attention diverted to national unity issues (Bruning, 1993: 129).
The government was particularly distracted by a profoundly divisive constitutional crisis created by the failed October 1992 referendum on the constitutional proposals known as Charlottetown Accord that would have granted special status to Quebec (Grinspun and Cameron, 1993: 14).27
In sum, serious recession in the early ‘90s, the introduction of GST,28 and the failure of the 1992 Charlottetown Accord referendum all greatly contributed to the unpopularity of the Mulroney government. In 1993 Mulroney stepped down, as the least
27. An agreement on major constitutional changes reached by the federal, provincial and territorial governments, and Native groups, following extensive public consultations, but which was subsequently rejected in a country-wide referendum, 55 to 44 % (McMenemy, 2001: 39). In October 1992 Canadians overwhelmingly defeated a proposed constitutional change that would grant distinct-society status to Quebec, among other important changes that affected native peoples, the structure of the national senate, and the rights and privileges of distinct minorities. More than half of the provinces refused to support the proposed constitutional change. Quebec and the rest of Canada were in the process of determining their positions on the specific issues brought out in the recently defeated referendum (Bruning, 1993: 129).
28. A federal consumption, or value-added tax introduced by the Conservative government in 1991, applied to virtually all goods and services sold at all stages of production and distribution. The GST, which replaced the federal manufacturers’ sales tax, is similar to a retail sales tax in that it is paid by the consumer. The tax was introduced despite considerable opposition. The unpopularity and defeat of the Conservative government in 1993 was due in some degree to the GST (McMenemy, 2001: 123).
popular Prime Minister in Canadian history, but his misfortunes had little impact on the ultimate fate of his trade policy. Kim Campbell, his better-received successor as party leader and Prime Minister, backed Mulroney’s decision to push NAFTA through the House of Commons before the fall election in 1993 (Orme, 1996: 49).
In June 1993 Canada passed legislation implementing NAFTA. The Conservative majority government was defeated in the Canadian general election,29 however, and the
29. Prime Minister Mulroney sought to establish the party’s dominance by forging a coalition of Quebecois nationalists and western populists. The failure of the 1992 referendum on Charlottetown Accord was a rejection of the Conservative government’s Quebec strategy. Moreover, Mulroney’s western strategy did not win out either. Many westerners believed that existing federal arrangements allow Ontario and Quebec (where the major part of the votes and seats necessary for a majority just happened to be) to take away the resource wealth of the west, to fuel growth and prosperity in the central provinces (Brook, 2000: 194).
Mulroney hoped to establish a firm base of support in western Canada by elevating western Canadian members of parliament to prominent positions in his government and promoting western interests generally (McMenemy, 2001: 62). In 1987, the Mulroney government awarded a multimillion-dollar maintenance contract for the CF-18 jet to Canadair of Montreal (a Quebec-based firm) rather than Bristol Aerospace of Winnipeg (located in Manitoba of western Canada), even though the latter firm had submitted a bid that was cheaper than and technically superior to Canadair’s (Tanguay, 1999: 338; Brooks, 2000: 195). Most westerners were enraged by this decision. Both CF-18 affair and the Charlottetown Accord referendum were interpreted by western populists as special deals for Quebec that were directly harmful to the interests of the west (Bickerton, 1999: 230). What was needed was a new party to hear the voice of western protest to extract favorable policies from central Canada; the Reform Party’s founding convention was held in Winnipeg in the fall of 1987 (Tanguay, 1999: 338; Brooks, 2000: 195; Dobbin, 1992; Flanagan, 1995).
Preston Manning’s Reform Party was able to use the CF-18 affair, the Charlottetown Accord, and unpopular new taxes such as GST, among other unpopular measures, to launch a populist revolt against the governing Conservatives. Mulroney’s inability to hold together the coalition of western populists and Quebecois nationalists ultimately led to the fracturing of the Conservatives Party and the partial electoral realignment of 1993 (Tanguay, 1999: 336). The Conservatives took a mere 16% of the vote and were reduced to two seats only in Parliament, their worst performance by far since 1867 (Tanguay, 1999: 337).
The Reform Party won 52 seats, while the Bloc Quebecois won 54. The Liberals won a comfortable majority of 177 of the Parliament’s 295 seats. The success of the Bloc Quebecois reflected disaffection with federalism among Quebecers following the failure of the Charlottetown Accord (Massicotte, 1999:
174). The Reform Party’s displacement of the Conservatives as the dominant party in the west in 1993
change of government in late 1993 brought Canadian ratification into doubt. Only after receiving several assurances from the Clinton administration did the newly elected Liberal government agree to implement NAFTA (Molot, 1997: 518; Milner, 1998: 31).
Despite much pre-election fanfare, the Liberal Chretien government, once in office, was quite content with minor changes in the pact (Dyck, 2000: 171). In a subsequent atmosphere of gradual economic recovery, the NAFTA implementation process has progressed quite normally. But in Canada, “trade issues and the pressures of global economic interdependence are seldom far from the political debate” (Milner, 1998: 32).
Ratification was thus a major issue throughout the NAFTA negotiations and
Ratification was thus a major issue throughout the NAFTA negotiations and