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
- 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
- Contrasts with the free trade model, the goal of which is to eliminate barriers to
- 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
- 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
- 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
- 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
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
- 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
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
- 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.
- General Agreement on Tariffs and Trade functions as the foundation of the WTO
- It is an international agreement that intends to limit tariffs and other trade
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”
- 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
o When foreign competition is reduced or eliminated by import barriers,
domestic industries can develop rapidly.
o Protection frequently cannot be removed because the domestic industries
never develop sufficient competitive strength.
National Defense Argument
o Seeks to avoid dependence on foreign sources for supplies of essential
materials or finished products that might be denied in time of war.
o Such paranoia can lead to conflicts itself.
Counter Dumping Argument
o To prevent foreign companies from dumping their surpluses below costs
to recover some of their investment and have negative effects on domestic
o Other countries can do the same to prevent your domestic companies
from doing the same (inviting retaliation)
Redistribution of Income Argument for Protectionism