OP/ED: Rethinking Trade Treaties and Taxation?

Murray Dobbin
By Murray Dobbin
May 5th, 2016

If the federal Liberal government is on the verge of a major shift in economic and industrial policies, as Terence Corcoran suggests in his April 20 column, “Ghosts of business past — and future,” then all that can be said is thank goodness.

Since the mid-1990s Canada has basically been without any coherent or deliberate industrial policy, as federal governments embraced the ideological lunacy of  “getting out of the way of business.”  That meant leaving one of the most important processes in any country — capital allocation — in the hands of individual CEOs all acting in their own narrow interests. That approach was vigorously promoted by the Business Council of Canada, the group that Corcoran’s column focuses on. (It was originally called the Business Council on National Issues, but was renamed for awhile the Council of Chief Executives, and I always wanted to ask their former president, Tom d’Aquino if they changed it because they realized that, as far as they were concerned, there were no national issues.)

As Corcoran states, the organization successfully pursued a number of key fiscal and economic policies in the 1980s and ’90s including “free trade,” slashing corporate taxes, labour flexibility and balanced budgets. So, not only was government removed as manager of the economy, it also radically reduced its own spending capacity through draconian tax cuts for high-income earners and corporations (former finance minister Paul Martin cut $100 billion over five years; Jim Flaherty cut $60 billion over three years, and lopped two points off the GST).

Actually, it is not quite accurate to say there was no economic policy. There was one: more and more trade agreements (the domestic economy — accounting for nearly 80 per cent of GDP — was simply ignored). But these treaties have never accomplished what they set out to do.

Even its strongest promoters knew the Canada-U.S. Free Trade Agreement (FTA) was a leap of faith. Peter Nicholson, a free trade guru, former Scotiabank vice-president and later a personal adviser to Martin, acknowledged that supporters of the FTA thought it would “cause Canadian firms to pull up their socks … and compete in the North American market.” Instead, Nicholson lamented, many companies adjusted to the FTA “by simply moving across the border … taking the path of least resistance.”

Or by selling out to the highest bidder. Foreign direct investment soared but, on average, over 95 per cent of it went to buying up Canadian companies. Meanwhile, a 1997 study by Industry Canada concluded, “the impact of (free trade) after controlling for other variables on Canadian exports to the U.S. was modest, (just) nine per cent… the strong U.S. economic expansion and the real exchange rate were mainly responsible for the large expansion of Canadian exports to the U.S. in the 1990s.”

What those promoting the Business Council’s policies either neglected or simply failed to understand is that Canadian corporate culture is chronically risk-averse and fails time and again to invest in new technology, management techniques, or research and development — things that actually increase productivity and make companies competitive.

Two separate studies on competitiveness by Harvard Business School’s Michael E. Porter concluded that “The U.S. is just much more entrepreneurial … Research uncovered key weaknesses in the sophistication of (Canadian) company operations and strategy.”

Porter observed that, where Canadian companies did compete successfully, it was on the basis of cheap labour and access to natural resources. Cheap labour came courtesy of the Chrétien government’s brutal labour flexibility policies: slashing eligibility for unemployment benefits, killing the Canada Assistance Plan, and maintaining punitively high interest rates through most of the 1990s — keeping unemployment above nine per cent for most of the decade.

Canada’s free-trade treaties have never accomplished what they set out to do.

The results of these policies and their continuation under the Conservatives are glaringly obvious today. Cheap labour and ridiculously low corporate taxes have resulted in the accumulation of $650 billion of idle capital “allocated” to corporate bank accounts rather than productive investment. Tax cuts have depleted federal coffers of over $50 billion a year that could be used in ways to actually create an innovation-based economy. Meanwhile, any economic stimulus consumers might offer is restricted by wages and salaries that have stayed flat since the early 1980s, with our economy kept afloat by the most indebted population in Canadian history.

So what’s the endpoint of the Business Council’s policy preferences? Corporations have capital and won’t spend it; the government, starved of capital, can’t spend; and workers, deprived of their share of productivity increases, have no discretionary income to spend. But how’s that trade policy working out? The trade deficit from October 2014 to October 2015 reached $17.4 billion — the worst one-year total on record. With a record like that it’s no wonder the CEOs keep changing the name of their organization.

It would be interesting to listen to an analysis of our economy by the Liberals’ new guru, Dominic Barton, who, Corcoran says, likes big government with big ideas. Barton is fond of lessons from South Korea and China. They can make capital-allocation decisions on a dime. China became the world’s largest producer of solar panels and windmills in less than 10 years because it could make big decisions virtually overnight. Of course it helps when you have an authoritarian regime or an outright dictatorship.

Nonetheless, the Canadian government needs to get a grip on its own reality. First, by rejecting the idiotic “trade” agreements that make industrial policies increasingly difficult. Then, it has to recognize that having faith in Canadian corporations to provide leadership on their own has proven to be a monumental failure and that only with an aggressively activist government can Canada join other developed countries in creating the new economy. Lastly, Trudeau and his new guru will have to deal with the fact that, without replacing revenue lost through almost two decades of irrational tax cuts, rebuilding the Canadian economy will be almost impossible.

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