Free Trade Agreement and Its Affect on Canadian Business With the coming of the Free Trade Agreement (FTA) there have been very serious implications for Canadian business and for that matter, Canada as a whole. Many aspects of the previous economic climate have changed such as the reduction or eliminatation of tariffs and the restrictions on subsidies to name only a few. There has been much heated debate on the pros and cons of this deal: whether Canada will prosper or become the 51st. American state. This paper will not take this approach to the issue of whether or not it is a wise agreement, but will look at what business can do to better itself with the existing FTA. If Canadian business is to survive and prosper in this radically changed North American and Global atmosphere of easier trading, then it must adapt.
Some of the main areas that will have to be addressed is the need for more productive and efficient operations, a new focus by business on the new trading reality, and a change in policies by Government to enable Canada to function better with the FTA. The FTA stands to alter Canadian business which has grown rather relaxed and inefficient behind walls of tarrifs. While these may have initially spurred industry, they have after time encouraged complacency. With these rapidly disappearing walls, business will have to become “lean and mean” in order to compete in a very competitive global market. Looking at the present state of affairs our status in research and development (R&D), labour costs and expansion, there is much that must be done. Compared to the other industrialized western nations we lag far behind in nearly all areas. Take for example R&D. In 1990 Canada spent approximately 2.1% on R&D.
Japan spent 5.6% and Germany 4.8% Even the US spend more at 3.1%. Given these statistics, it will be very difficult for Canada to compete in any form of new technology if all parties are on a level field with less protective trade barriers. Another reason for a dire need for an increase in efficiency is the trade relationship we are currently involved in. While countries in say the EEC are in more or less the same economic power bracket between Canada and the US, there is a major size difference. So if we are to have any hope of competing with a power so large clearly we must become more efficient even more so than other countries. Another key aspect which business must deal with is that of becoming better suited to dealing with the North American, and to a lesser extent, other foreign markets rather than only to Canadian or even in some cases, to provincial markets.
Corporations which do so stand far better of to gain from the FTA than those that do not. It would be wise for the example of Northern Telcom Ltd. to be followed. Where production and market presence are global and not just Canadian. Unfortunately many companies are not following this example and are still very much “Canadian” in their outlook. According to a Toronto Management consulting firm – Ernst and Young 62% of all Canadian manufacturers have no significant exports to the US. As Al Lituka a Professor at York, says: “The FTA has gven a strong phsycological impetus to thinking North American”.
1 One trend of becoming better oriented for new markets is that of specialization. By taking a “niche” in the market and becoming very profficiant in it has proven to be very successful, as has also been the case with Northern Telecom Ltd. with its many hi- tech telecommunications equipment. Another example, albiet one in Europe, is Aerospatible, a French areospace firm. Through creating a superior product the Airbus commercial passenger plane, they have been able to capture a large share of the market even though France has never been considered a large power in production before and lacks the manufactuing ability of the US or Germany.
Another trend is that of US and Canadian firms banding together. This makes a great deal of sense since not only can they handle the North American market in a more unified fashion, but they are stronger and thus more able to compete with Japanese and EEC competitors. Many multi-national corporations are following this continental incorporation to take advantage of the realigned tarrifs. One such company is Procter and Gamble. Before the FTA they had separate US and Canadian offices for marketing and production which resulted in a considerable duplication of tasks.
As their director, David Elliot says: “We increasingly look at North American business on a unitary basis.” 2 This method is beneficial for both countries as with the rationalization of production efficiency is increased. Canadian business can do many of the things listed above such as become more efficient but is not entirely up to the private sector to make a successful adjustment to the FTA. Government is an integral part of any major change and in the case of the FTA it is even more so. Certain fields of the economy will be helped or hurt by the FTA. This will also be the case among various businesses within certain fields.
depending on how well they can adapt. To aid this adaption the government should by giving financial and other forms of assistance to businesses that will have to change substantially to meet the new trade climate. This should at least limit the need for costly programs such as unemployment insurance if they cannot adapt successfully. Another major aspect that the Government controls is that of the dollar. The value of the Canadian dollar will have an equal effect on small business as the FTA will.
Even small changes in the dollar can mean the difference between success and failure. Says Carl Beigie: “If the dollar continues to go up, it will wipe out any benefit from the deal.” 3 There are also numerous other government policies which must change to better Canada’s standing in international trading. Some of only a few are the retention of interprovincial trading barriers, shortages of skilled workers and a mounting and excessive debt at both the provincial and government levels. The defecit, in particular, is a very serious problem. The many aspects of a high defecit will not be examined here, though.
Its impact on the FTA is that is that it keeps interest rates high which thus greatly increases the cost of borrowing. Which is critical in that business will have to borrow in order to change to become more efficient with the FTA. In summation, the FTA has provided Canada with access to a market of over 250 million people at much kinder terms than before. How well this market can be utilised depends on how well we can adapt to it by meeting the conditions outlined here. As Jim Conrad, a Canadian economist says: “What Canada really needs is a window of the world to leap out of”.
4 The window has come and it is up to business and government to make this great leap and allow Canada to reach its full potential. Bibliography Cameron, Duncan. The Free Trade Papers. James Lorimor & Company, Publishers, Toronto, 1986 The Canada and US FTA (Complete Doccument), External affairs Canada, Ottawa Laxer, James. Leap of Faith: Free Rade and the Future of Canada. Hurtig Publishers, Edmonton, 1986 The Case Against the Critics of Free Trade.
John Miora. Finanical Post, Feb. 8, 1986 Brave New World. Marc Tait. Maclean’s, Jan. 9, 1989 Firms going continental.
Jennifer Sachsa. Globe and Mail, June 12, 1990 Roundtable: The Canada-US FTA. Fred Swift. Globe and Mail. August 12, 1988 End Notes 1 Firms going continental.
Jennifer Sachsa. Globe and Mail, June 12, 1990 2 Brave New World. Marc Tait. Maclean’s, Jan. 9, 1989 3 Firms going continental.
Jenniger Sachsa. Globe and Mail, June 12, 1990 4 Roundtable: The Canada-US FTA. Fred Swift. Globe and Mail. August 12, 1988.