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York University
Administrative Studies
ADMS 1010

Business in the Canadian Context ADMS1010 – Summer 2012 – Troy Young Lecture 4 – Canada Expands: Agriculture & Manufacturing – May 31 2012 A Mixed Economy: What is it? - Contains private ownership and state-ownership of the means of production, infrastructure, and institutions - It allows for private financial decisions by businesses and individuals - Government has the power to override these decisions through legislation - A market economy is an economy in which goods and services are traded. - Governed by the law of Supply and Demand - Prices are determined in a separate market for each commodity. - Prices act as the signaling mechanism to answer all basic economic questions. Performance Criteria of a Mixed and Market Economy - The emphasis is on achieving maximum output per person or per person employed. - Freedom of choice is available to both producers and consumers. What is Competition? - Buyers and sellers interact to establish prices and exchange goods and services. - Causes firms to develop new products, services, and technologies. - Consumers get greater selection and better products. - Greater selection causes lower prices. What is Protectionism? - Using Tariffs or other non-tariffs barriers to lower importation of goods. - Attempts to strike a competitive balance between imports and domestically produced goods. - Contrasts with the free trade model, the goal of which is to eliminate barriers to trade. - Protectionism tied to Mercantilism. - Sought to achieve a positive trade balance by limiting imports. - Modern economists feel protectionism impedes economic growth. - Most modern nations turn to protectionism to help industries deemed to be of great political importance. Types of Protectionism - Tariffs - Import Quotas - Anti-dumping legislation - Subsidies (direct or export) The History of Canadian Protectionism - The Reciprocity Agreement of 1854 - The National Policy of the 1870’s - The Reciprocity Agreement of 1911 - The General Agreement on Tariffs and Trade in 1947 (GATT) Reciprocity Agreement of 1854 - Canada needed to find new avenues to sell its products due to the cancellation of the Corn Laws in Great Britain which put tariffs on goods coming from outside the British Empire. - The United States represented a huge opportunity with its large growing market and proximity to Canada. - Americans were granted the right to fish in Canadian waters while Canadians could sell raw materials and agriculture products without tariffs in the US. - Tariffs were reduced on many non-manufactured products. A 15% tariff was introduced on manufactured goods; later increased to 20% by the Galt Tariff of 1858. - Pressures around the American Civil War and the desire by American businesses to return to protectionist ways lead to its repeal in 1866. - This repeal helped to push Canada towards Confederation. The National Policy - Macdonald sought to strengthen the new Dominion both at home and abroad - It was based on high tariffs to protect the manufacturing industry. - There were few factories in Canada when the policy began. - Wanted Canada to be secure and less reliant on the United States. - US imposed high tariffs on Canadian goods, thus making it impossible for them to compete in the US. - US companies were dumping products at lower cost in Canada. - Canadian business would have preferred free trade. - Tariffs on raw materials were lowered to help manufacturers. - The National Policy was popular in Toronto and Montreal, but not in Western Canada o Made agricultural equipment more expensive o Made Canadian farmers have to compete on the international market Did it Work? - Manufacturing played a relatively small role in Canada’s economy when introduced - Raw material industries suffered due to the policy - Canada did see an economic boom and the creation of a strong manufacturing base, but this was occurring globally at this time - It increased prices and hurt Canada in global competition. - Too many inefficient companies that could not compete without this protectionist policies in place were created. - Prices were higher than necessary due to a lack of competition. - On a positive side, it did create the railway which led to an interconnected nation. - Westward settlement expansion. - Economists will say the National Policy was bad, while historians will say it was good. The Reciprocity Agreement of 1911 - The Liberal Government in the lead up to the 1911 election negotiated a free trade agreement with the US. - The West, seeking markets for its agricultural products, had long been a proponent of free trade with the United States. - The protected manufacturing businesses of Central Canada were strongly against it. - The powerful manufacturing interests of Toronto and Montreal switched their allegiance and financing to the Conservatives. - The Tories argued that free trade would undermine Canadian sovereignty and lead to a slow annexation of Canada by the U.S. - Liberals lost the election. - Free Trade put on hold until 1988. GATT - General Agreement on Tariffs and Trade functions as the foundation of the WTO trading system. - It is an international agreement that intends to limit tariffs and other trade barriers. World Trade Organization - The WTO was created on January 1, 1995 to replace the General Agreement on Tariffs and Trade. - Deals with regulation of trade - Formalizes trade agreements - Dispute resolution panels - 153 members, representing 97% of the world’s population, including Canada, currently belong to this organization. The Evolution of Protectionist Intervention in Canada - Keynesian ideas and formulas were no longer working; he believed “stagflation” was impossible - Inflation erupted - Unemployment rose - Critical shortages and rising costs of energy changed the economy - Social Welfare spending by government continued to grow What is Stagflation? - Stagflation is a term in macroeconomics used to describe a period of characteristic high inflation combined with economic stagnation, unemployment, or economic recession. - It occurs when demand for products is high, but is also accompanied by high unemployment - The 1970’s was a time of high stagflation in western economies. Arguments for Protectionism - To develop new industries and allow them time to become competitive. - To ensure that required goods will not be impacted by war. - To protect against product dumping. - To influence the redistribution of income. - To expand employment Protection of Infant Industries - For o When foreign competition is reduced or eliminated by import barriers, domestic industries can develop rapidly. - Against o Protection frequently cannot be removed because the domestic industries never develop sufficient competitive strength. National Defense Argument - For o Seeks to avoid dependence on foreign sources for supplies of essential materials or finished products that might be denied in time of war. - Against o Such paranoia can lead to conflicts itself. Counter Dumping Argument - For o To prevent foreign companies from dumping their surpluses below costs to recover some of their investment and have negative effects on domestic industries. - Against o Other countries can do the same to prevent your domestic companies from doing the same (inviting retaliation) Redistribution of Income Argument for Protectionism - For o
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