Social Policy in Ontario

The FTA and the now 20-year-old North American Free Trade Agreement (NAFTA) managed to tilt the balance in favour of big corporations at the expense of the public good.

The FTA/NAFTA was a big business-driven initiative whose primary purpose was investment deregulation. Trade was important, but as a second order rather than a primary goal.

The agreements did make it easier for business to ship goods and services across the border. However, at its core were new powers and freedoms granted to corporations to facilitate their pursuit of shareholder value.

These provisions enabled corporations to move with minimal restrictions on the North American continent, shifting production to jurisdictions that offered the greatest returns in terms of regulations, subsidies, taxes, labour costs, etc.

In NAFTA’s wake, Canadian goods exports to the U.S. — boosted by a low Canadian dollar — rose from 15 per cent of GDP in 1990 to 34 per cent by 2000. But then shrunk back to 18 per cent of GDP. Services exports followed a similar trajectory.

Now freed from government restrictions, corporations have been able to relocate production, whether because of the post-9/11 “thickening” of the border, or to offset the higher costs in Canada caused by the petro-boom-driven rise in the dollar.

The FTA/NAFTA laid the institutional groundwork for Canada’s petro-boom, reorienting production North-South and preventing any recurrence of the National Energy Program. It limited governments’ ability to actively shape business investment. Industrial policies such as the 1960s Auto Pact, which had greatly expanded value-added exports, are no longer possible.

Post-FTA/NAFTA, Canada has regressed to its traditional status as a resource exporter. Exports of unprocessed and barely processed resources now account for almost two-thirds of Canada’s goods exports, from 40 per cent just before the turn of the century. Value-added products have shrunk from almost 60 per cent of exports to roughly one-third in 2012.

The FTA/NAFTA was expected to close the productivity gap between Canada and the U.S. In 1950, Canadian business productivity was about 70 per cent of the U.S. level. The gap closed steadily in subsequent decades, reaching over 90 per cent by 1980, and then stagnated. The FTA/NAFTA was supposed to eliminate the gap, but instead the gap widened. By 2011, business productivity had fallen back to 70 per cent of U.S. levels.

Even more important were provisions that enabled large corporations to grow even larger through cross-border restructuring of corporate ownership. FTA/NAFTA triggered a massive increase of foreign direct investment flows — overwhelmingly in the form of mergers and takeovers.

Between 1950 and 1990, the average firm size of the 60 largest corporations on the Toronto Stock Exchange (TSX 60) compared to all firms on the TSX, increased from five to six times. After the FTA/NAFTA, it climbed to 23 times by 2010. Their share of all TSX company profits rose from 30 to 60 per cent by 2010.

The trends in the concentration and profits of these dominant corporations are shadowed by the trends in income share of the top 1 per cent. At its most extreme, the compensation of Canada’s100 most highly paid CEOs has risen from 105 times that of the average worker in 1998 to 177 times in 2012.

Between 1950 and 1990, there was a steady drop in the share of national income appropriated by capital (profits) and a rise in labour’s share. In the wake of the FTA/NAFTA, that relationship reversed. Capital’s share rose dramatically; workers wages and salaries’ share fell in lockstep.

Contrary to assurances given Canadians prior to the FTA/NAFTA, big business lobbied hard to reduce program spending and taxes.

Unemployment insurance, health and education transfers, social assistance and housing programs, etc. were “harmonized downward” toward U.S. levels.

Governments cut taxes: from the mid-1990s to 2012, the overall tax level of Canadian governments shrunk from 36 per cent of GDP to 31 per cent.

Corporate income taxes were cut in half and the total tax rate of Canada’s richest 1 per cent of families dropped to less than that of the poorest 10 per cent.

The FTA/NAFTA has not been solely responsible, but was a key component of a web of mutually reinforcing “market friendly” policies that produced these outcomes.

It entrenched in an international treaty new freedoms for corporations while hampering governments’ power to actively shape economic and social development.

In the end, the FTA/NAFTA failed to meet the fundamental test of any major policy initiative: to better the lives of its citizens. And it helped weaken the bonds of nationhood embodied in the Canadian social state.

Bruce Campbell is the executive director of the Canadian Centre for Policy Alternatives. Thanks to Jordan Brennan’s study, “Shrinking Universe,” CCPA, November 2012.

< http://www.thestar.com/opinion/commentary/2013/12/30/free_trades_tarnished_silver_anniversary.html >