This paper examines economic developments and policies in Canada during 1990–95. Spurred by the robust growth in the United States and the easing of monetary conditions between 1991 and 1993, economic growth in Canada continued to strengthen during 1994. Real GDP grew by 4.5 percent in 1994 after growing by 2.2 percent in 1993 and 0.6 percent in 1992. Economic growth in 1994 was led by exports and investment in machinery and equipment. However, growth was more broadly based in 1994; private consumption strengthened, and there was a rebound in residential and nonresidential construction.

Abstract

This paper examines economic developments and policies in Canada during 1990–95. Spurred by the robust growth in the United States and the easing of monetary conditions between 1991 and 1993, economic growth in Canada continued to strengthen during 1994. Real GDP grew by 4.5 percent in 1994 after growing by 2.2 percent in 1993 and 0.6 percent in 1992. Economic growth in 1994 was led by exports and investment in machinery and equipment. However, growth was more broadly based in 1994; private consumption strengthened, and there was a rebound in residential and nonresidential construction.

XVI. Developments in Canadian Trade Policy 1/

1. The Uruguay Round Agreement

The Canadian Parliament approved the Uruguay Round Agreement in late November 1994, for implementation on January 1, 1995. The legislation also included revisions to federal statutes necessary to comply with Canada’s obligations under the Agreement. Although other provisions were effective January 1, Canada has announced, following similar announcements by the European Union and the United States, that it will not begin implementing its commitments on agricultural goods until the new marketing year begins on August 1. Canada’s major commitments include the elimination of tariffs in specified sectors (described below) and the reduction of remaining tariffs by 40 percent in five to ten years; the replacement of agricultural import quotas by tariffs and an increase in market access levels to a minimum of 3 percent in 1995 and 5 percent by the year 2000; the expansion of intellectual property rights protection to live performances and to wines and spirits; revisions of rules governing antidumping and countervail; and the reduction of export subsidies on food grain.

Although trade accounts for one third of Canadian GDP, the impact of the Uruguay Round Agreement on Canada is expected to be relatively small because trade with the United States (which accounts for roughly 80 percent of Canadian trade) had already been substantially liberalized under the Canada-U.S. Free Trade Agreement. The Department of Finance has estimated that the Uruguay Round Agreement will result in a 0.4 percent increase in real national income, or $3 billion annually, after phase-in is complete. This is expected to result from an increase in the demand for Canadian exports, which in turn will result from higher global income, particularly in Canada’s nontraditional trading partners.

Tariff reduction measures will lower Canadian tariffs by an average of one third; industrial tariffs will decline by an average of 50 percent from 9.0 to 4.8 percent. 2/ In addition, Canada has agreed to eliminate tariffs on paper and paper products; pharmaceuticals; beer, whisky, and brandies; steel; construction equipment; agricultural equipment; medical equipment; office furniture; and toys. Canada will benefit from substantial tariff reductions abroad on industrial exports: the European Union will reduce tariffs on these goods by over 60 percent, Japan by 70 percent, and Korea by 50 percent. Canada, the United States, and the European Union have expressed interest in negotiating accelerated tariff reduction schedules for individual items and harmonizing rules of origin.

The agricultural sector will be most affected by changes required under the Uruguay Round Agreement. Canada has agreed to reduce agricultural tariffs by an average of 36 percent and a minimum of 15 percent per item. 1/ In addition, all import quotas must be converted to tariff-rate quotas in 1995: rather than barring imports above the quota level, imports above that level will be subject to a higher tariff rate, set at Canada’s discretion. Both the below-quota and above-quota rates must be reduced by 15 percent by the year 2000. The degree of liberalization, however, will be very limited for goods previously subject to import bans or very small import quotas; Canada has set prohibitive tariff rates (ranging from 175 to 350 percent) for poultry, eggs, and dairy products, which are currently subject to supply management. 2/ Nonetheless, some market opening will be achieved through the minimum access requirements. In addition, pressures for further liberalization of trade in supply management systems have come from domestic food processors, who have argued that the high cost of domestic agricultural commodities has inhibited the growth of the domestic processing industry. These pressures led to some price reductions on domestic milk and the expansion of poultry production quotas in 1994.

The Agreement also requires Canada to reduce trade-distorting domestic subsidies in the agricultural sector. Federal payments for the transportation of food grain under the Western Grain Transportation Act will be subject to reduction in terms of expenditure on export subsidies (36 percent) and volume of exports subsidized (20 percent). The Government’s 1995/96 budget calls for the Act’s elimination this year. Commitments to reduce trade-distorting domestic subsidies (to 80 percent of the greater of 1986 or average 1986-88 levels) will not require expenditure cuts because by 1993 subsidies had already fallen to roughly 60 percent of the 1986-88 baseline.

Canada continues to be involved in multilateral negotiations with a view to forging an agreement on international trade in services. Deadlines have been set to complete negotiations on telecommunications, maritime transport, the movement of persons, and financial services. Canada intends to retain its membership in GATT until at least December 31, 1995, although the respective authority of GATT and the World Trade Organization (WTO) will overlap after January 1, 1995.

2. The North American Free Trade Agreement (NAFTA)

The NAFTA was implemented on January 1, 1994. The Agreement provides for the phase-out of all tariffs between Canada and Mexico over ten years and maintains the rules for Canada-U.S. trade as defined in the Canada-U.S. Free Trade Agreement (FTA). In addition, NAFTA commits all three countries to extend national treatment to investors from partner countries, with the exception of specified sectors, including cultural industries in Canada. However, many nontariff barriers between Canada and Mexico remain intact under NAFTA.

NAFTA extends the dispute-resolution provisions detailed in Chapters 18 and 19 of the FTA (in Chapters 20 and 19 of NAFTA, respectively). No decisions have yet been granted under NAFTA’s dispute resolution procedures, although eight Chapter 19 cases have been filed, of which five involve Canada. Two trilateral working groups were established under the NAFTA to recommend by end-1995 a new system to replace the use of antidumping and countervail rules among NAFTA countries.

The NAFTA and FTA are believed to have enhanced Canada-U.S. and Canada-Mexico trade, although it is unclear how much trade would have expanded in the absence of the agreements. During 1994, Canadian merchandise exports to Mexico rose by 28 percent relative to 1993, and Mexico’s share of Canadian exports reached 4 percent. Canadian imports from Mexico increased by 20 percent for the year. 1/ Canadian trade with the United States in merchandise and services has continued to expand steadily since the implementation of the FTA in 1989. Canada’s merchandise trade surplus with the United States reached a record $28.3 billion for 1994; trade with the United States accounted for 83 percent of Canadian merchandise exports and 66 percent of Canadian imports (versus 71 percent and 64 percent, respectively, in 1988).

At the December Summit of the Americas, the NAFTA signatories announced that negotiations had begun to extend NAFTA to include Chile. The summit participants further announced their intention to create a hemispheric free trade area by 2005. The inclusion of Chile in NAFTA is not expected to have a significant effect on Canada’s trade balance because trade flows between the two countries are currently very small; however, Chile is an important destination for Canadian foreign direct investment.

Under NAFTA provisions for accelerated tariff reductions, Canada and the United States agreed to lower tariffs on products including wine and glass; these reductions follow three previous rounds of accelerated tariff reductions under the FTA, affecting $6 billion to $8 billion dollars of trade annually. Accelerated tariff reduction requires the consent of the industries concerned in all countries involved.

3. Trade disputes

In August 1994, the United States and Canada agreed on terms to limit Canadian wheat exports to the United States for one year. Prior to the negotiated settlement, the United States had filed Article 28 proceedings in the GATT threatening increased tariffs on Canadian wheat, barley, and flour. Canada had threatened to retaliate in kind against U.S. exports should the U.S. impose prohibitive duties under Article 28. The dispute followed a surge in Canadian exports to the United States in late 1993 and 1994 that was induced by a decline in U.S. grain supplies, which in turn resulted from the 1993 Mississippi floods and the export of a large share of the U.S. wheat crop under the Export Enhancement Program (EEP).

The agreed access levels for Canadian wheat exceed recent historical levels of Canadian exports to the United States. Under the terms of the Agreement, the United States will impose a tariff of $23/ton on imports of Canadian durum wheat between 300,000 and 450,000 tons; a tariff of $50/ton, intended to be prohibitive, will be charged on imports of durum wheat over 450,000 tons and on imports of non-durum wheat over 1,050,000 tons. Canada reserved the right to challenge the U.S. tariff schedule under NAFTA or GATT, should the tariffs not be lifted after one year.

In the softwood lumber dispute with the United States, a NAFTA Extraordinary Challenge Committee found on August 3, 1994 that Canadian stumpage policies and British Columbia log export restrictions were not subsidies under U.S. law and thus were not countervailable. As a result of the Extraordinary Challenge Committee decision, the United States was required to lift the duty on Canadian softwood lumber imports and refund all revenues collected since the charge of 6.51 percent was imposed on July 19, 1992. 1/

Consultations with the United States regarding implementation of the August 1993 Memorandum of Understanding on Provincial Beer Marketing Practices resulted in agreement on terms of access for U.S. beer sold in Quebec and British Columbia in May 1994. As a result of the consultations, the Canadian International Trade Tribunal reviewed and decided to rescind its 1991 dumping decision on U.S. beer exports to British Columbia. The Tribunal found that the market for beer in British Columbia could no longer be considered an isolated regional market and that U.S. beer exports were not materially injuring beer producers in the broader market. The issue of minimum price systems in certain provinces was set for discussion at a later date. In February 1994, Canada complained to the GATT council that U.S. states were not moving fast enough to bring import restrictions on Canadian beer into compliance with GATT regulations.

Canada initiated one antidumping investigation under GATT procedures in 1994; no new countervail or safeguard investigations were launched. Ten antidumping measures were revoked affecting electric motors (from six countries), sour cherries, Delicious apples, aluminum wedge clamps, and beer. In July, a new antidumping investigation was initiated against Delicious, Red Delicious, and Golden Delicious apples from the United States, which resulted in a February 1995 injury finding by the Canadian Trade Tribunal on Delicious and Red Delicious apples; no injury was found on Golden Delicious apples.

In addition, 19 final determinations were issued in 1994 affecting corrosion resistant steel plate, carbon steel plate, 12-gauge shotgun shells, synthetic baler twine, and black granite memorials. One countervailing duty final determination was made affecting black granite memorials from India and the countervailing duty on Brazilian electric motors was lifted. Canada continued a temporary safeguard action introduced in mid-1993 on imports of boneless beef from non-NAFTA sources. The original surtax of 25 percent on boneless beef imports over 72,021 tons was liberalized to 85,021 tons in May 1994; in October 1994, certain beef cuts were exempted from application of the surtax.

4. The agreement on internal trade

On July 18, the Prime Minister and the premiers of all 12 provinces and territories signed an agreement on internal trade designed to reduce inter-provincial barriers to trade in 12 sectors. Interprovincial trade in Canada is nearly as large as Canada’s international trade at almost one third of GDP and growing; interprovincial trade increased 16 percent between 1984 and 1988. Although the Canadian constitution states that goods shall move freely within the Federation and allows the Federal Government to pass laws regarding interprovincial commerce, neither the Parliament nor the courts have ever challenged internal trade barriers. The constitution has generally been interpreted to mandate a customs union with no internal tariff barriers, but nontariff barriers to internal trade have been substantial, notably in the form of standards, regulation, and government procurement practices. The objective of the agreement is to make the domestic environment more efficient for Canadian business and thereby to make Canadian firms more competitive internationally. The negotiators sought to promote intra-Canadian trade by making the market more accessible to domestic firms without granting advantages to foreign firms, particularly those from the United States.

The opening of government procurement is considered to be the most important sectoral improvement contained in the agreement. Procurement by provinces and major agencies will be open to out-of-province suppliers effective July 1, 1995. Further negotiations will discuss the opening of procurement by municipalities, school boards, and other publicly funded entities. As a result, the agreement will ultimately cover procurement contracts worth as much as $50 billion annually and is expected to yield savings to procuring government and public entities of between $2 billion and $6 billion annually through increased competition. Other provisions include elimination of residency requirements for employment or licensing; mutual recognition of licensing systems and occupational qualifications; prohibition of provincial investment incentives designed to compete with other provinces; prohibition of the use of safety or environmental standards as a means of discrimination against out-of-province suppliers; and a prohibition on the creation of new trade barriers.

The agreement also provides for the creation of a dispute settlement mechanism, patterned on NAFTA. Private parties, as well as governments, will be able to bring complaints. By taking dispute settlement out of the court system, the agreement is expected to reduce litigation costs and to eliminate the courts’ historical bias toward provincial rights. No enforcement mechanism is provided, however. Retaliation with a penalty of equal weight will be permissible. The agreement also provides for annual reviews so that newly-arising issues can be addressed.

Barriers to trade in agriculture and energy remain unaddressed. However, the signatories agreed to a work program on agriculture trade issues, including inspection and standards. The work program also includes a review of the Western Grain Transportation Act and the marketing board systems. A deadline of July 1, 1995 has been set for finalization of a chapter on energy. At issue is whether a province is required to allow bordering provinces to transport electricity, for a fee, across their power lines; for example, whether Quebec must permit Manitoba to export electricity to Newfoundland across Quebec’s power lines, or whether Quebec can refuse and insist that Newfoundland must instead buy electricity directly from Quebec.

5. Tariff code revision

Canada is undertaking a review of its import tariff regime with a view to making the system simpler, more transparent to users, and easier to administer. Currently, Canada’s tariff code provides preferential rates under eight tariff treatments, in addition to the Most Favored Nation (MFN) treatment. The adoption of the international harmonized system of tariff nomenclature expanded the customs tariff from 3,000 provisions to over 9,000. The tariff structure is further complicated by many special provisions designed to protect specific domestic products; as a result, the tariff code contains many redundant and outdated provisions.

The Government has begun consultations with industry on concessionary import tariff codes. Currently, Canada imposes higher tariffs on many imported inputs than does the United States; a temporary export duty drawback program has mitigated this problem by refunding duties on inputs used to manufacture goods for export. In preparation for the expiration of the drawback on January 1, 1996, Canada intends to reduce these tariffs toward levels commensurate with U.S. tariffs, starting with intermediate goods, in order to remain a competitive location for production. However determining the new, lower tariff rates through industry-by-industry consultations, as Canada intends, may cause further dispersion in the tariff structure and trade distortion. At present the special provisions in the tariff code typically are more liberal than the general code; many eliminate tariffs on products no longer manufactured in Canada. Provinces have also proposed duty deferral programs as a means of competing with the United States for investment.

6. Generalized Preferential Tariff (GPT) extension

The Parliament voted in early 1994 to extend the GPT, which applies to less developed countries, at a rate 33 percent below the MFN rate and to permit duty-free entry for all eligible exports from least-developed countries. 1/ The Department of Finance also announced a review of the scope and structure of the GPT. Although the extension is valid until June 30, 2004, prior to that date Uruguay Round tariff reductions will reduce Canadian MFN rates, thereby reducing the GPT preference. The Government is seeking to at least retain the GPT preference of one third of MFN rates, and is considering increasing the preference to half or full tariff exemption. The review will also consider extending coverage to a broader range of goods. Also in 1994, a joint Parliamentary committee reviewing Canadian foreign policy recommended using enhanced GPT coverage as an alternative form of foreign aid. While concessional tariffs have budget implications that need to be considered, they offer a market-oriented approach to enhancing the incomes of developing countries.

7. Trade relations with the former Soviet Union and central and eastern Europe

Following the dissolution of Coordinating Committee for Multilateral Export Controls (COCOM) in March 1994, Canada agreed to retain the COCOM lists of restricted products; these lists, however, had been substantially liberalized since 1992. Canada remains party to negotiations for a post-COCOM multilateral export regime; the new regime is envisioned to restrict trade in arms or products whose primary use involves arms production to countries associated with terrorism.

Canada has approached the liberalization of trade with countries of the former Warsaw Pact or former Soviet Union in an MFN context; any country that is not a member of GATT/WTO can obtain MFN treatment from Canada should it reciprocally offer MFN treatment to Canadian goods. Further, Canada has negotiated Foreign Investment Protection Agreements (FIPAs) with Poland, Hungary, the former Czechoslovakia, and the former Soviet Union, as well as Uruguay and Argentina. Preliminary discussions have been held with Russian representatives to convert the Soviet agreement to an agreement with the Russian Federation.

8. Other bilateral and multilateral trade policies

In November 1994, Canada and the other members of the Asian-Pacific Economic Cooperation Forum (APEC) signed an agreement to devise a free trade and investment accord that would achieve free trade in the region by 2020. The agreement is primarily a statement of intent and does not set down a framework for further negotiations nor specify when the first trade liberalization measures would occur.

Canada maintains restrictions on payments and transfers to Iraq (since August 1990) and Serbia and Montenegro (since June 1992 and April 1993, respectively). As of October 17, 1994, Canada lifted financial sanctions against Haiti in accordance with United Nations Resolution 944.

1/

Prepared by Elaine Buckberg.

2/

Import-weighted average bound rates. The pre-Uruguay Round average applied rate for industrial products was 4.9 percent.

1/

Pre-Uruguay Round tariffs averaged only 2 percent, but rate dispersion was high, peaking at 27 1/2 percent on sugar beet.

2/

Under supply management, marketing boards in each province limit production by imposing production quotas on producers, subject to a provincial quota imposed by the federal government. Supply-managed commodities also are subject to nationally-determined prices, designed to keep prices to producers high.

1/

Canada does not publish data on trade in services between Canada and Mexico.

1/

Refunds have begun for duties paid after March 17, 1994, but challenges to the ruling in the United States have delayed the refund of duties paid before that date.

1/

The GPT is Canada’s version of the General System of Preferences (GSP). It includes most processed and manufactured goods, but excludes most textiles, garments, and leather footwear, as well as certain steel products.