Camille Bronsard and F. Kalala Kabuya
The purpose of this paper is to integrate into a general model of an open economy the study of optimal wedges on domestic and foreign transactions.
While it has been customary in the literature to link the analysis of domestic taxes to the provision of public goods, the model presented here views the imposition of taxes and tariffs in the general context of internal and external monopolies. As such, the paper begins with the idea of a compromised optimality. This means essentially that a modern society, while maximizing the welfare of its members, is constrained by other internal objectives such as the fact that the State shares its monopoly power with several other economic entities (for instance employers' federations, trade-unions). Thus, the mere fact of levying taxes gives a State some monopoly power which, in a sense, is similar to that of a Cournot-type monopolist who "imposes" private taxes.
On the other hand, given the possibility that a country with some monopoly power in international trade could improve its situation by imposing tariffs, the analysis lends itself to the study of tariffs and taxes in the broad context of optimal wedges. To allow for this characterization, the paper incorporates into the model of normalization. As a by-product of this, a) it establishes, in terms of generalized inverses of the Slutsky matrix, a link between domestic marginal relative revenues and foreign ones; b) it defines two concepts of optimal tariffs evaluated from f.o.b. prices and c.i.f. prices; c) it suggests some further extensions such as the analysis of transactions costs, the incorporation of market retaliations and cultural characteristics of goods.
"Reciprocity is a relation between two independent powers, such that the citizens of each are guaranteed certain commercial privileges at the hands of the others". The arrangement obtained under the Reciprocity Treaty of 1854 might perhaps be appropriately described as a partial "free-trade area" rather than as a "customs union" since the United States and the British North American Provinces were not assumed to draw up a common tariff schedule for their imports from the outside countries. Each participant maintains its own duties against other countries or even colonies.
The Reciprocity Treaty permitted free access in the coastal fisheries to Americans and abolished duties on a wide range of natural products (grain, flour, fish, livestock, coal, timber and other less important natural produce). At the same time, American vessels were admitted to the use of Canadian canals on the same terms as British and colonial vessels. Reciprocity was to apply to Canadian vessels going to United States.
In the late 1840's the B.N.A. Provinces were faced by that policy which the literature has called "Little Englandism". When Britain repealed the corn laws and gradually the preferential tariffs on timber the B.N.A. Provinces were shocked to be left on their own. A new commercial system had to be developed: reciprocity was the answer. But, it could have been something else: protection or annexion.
The direction of the external trade changes with the Reciprocity Treaty. Before 1851, Britain was Canada's main partner (59% of Canada's Exports). But a decade later, the United States was both Canada's major supplier and its best customer. Neither the Treaty nor the loss of preference in the British Market succeeded in destroying the Trade of B.N.A. Provinces with the United Kingdom. In fact, trade with Britain was greater in 1865 than in 1854. Later, in 1870, Britain took back its leading position. What we see is a diversion of trade from Britain to the United States and back to Britain where the basic commercial connections were well established.
The Treaty was disappointing for the "dream" of using the St. Lawrence as the main route to capture the trade of the West did not materialize.
The consequence of abrogation was less unfortunate than had in some quarters been anticipated. The Treaty came late after the abolition of the preferential tariffs, and it was disturbed by major events (the crisis of 1857; the American Civil War). After the treaty, recovery of the American currency reconstruction, proximity of the two countries, a new boom in foreign investment in Canada, etc., combined to reduce considerably the potential blow to Canada of the Abrogation. The agreement lasted for twelve years and was finally overwhelmed by the rising tide of protectionism and commercial jealousies and political hostilities of the time.
Reciprocity, Confederation, the Nation Policy, the St. Lawrence Seaway (1840/1950), the National Corporations, the pipelines are all the elements of the same continuum: economic and political integration of isolated markets in North America.
It is argued in this paper that both normative and objective considerations must be taken into consideration in the formulation of tariff policy. Moreover, it is shown that static and partial equilibrium analyses can be disastrously misleading in guiding the framing of tariff policy.
Regarding the regional impact of tariffs, it is shown that within a monetary union, interregional trade flows reflect absolute production and transport cost advantages and that the non-realization of perfect domestic mobility of factors of production entails social and private adjustment costs that must be reckoned with in the cost-benefit analysis of any shift in trade policy.
From the standpoint of Quebec, a French-speaking political entity, the Canadian trade area is far from being optimal. The tendency for Canadian market-oriented economic activity to polarize in Ontario behind tariff walls, accompanied by a large movement of foreign enterprises, pushes the Quebec economy towards the least attractive and the most vulnerable industries among those oriented towards the Canadian common market. A rationalization of these laggard Quebec industries and an up-grading of resources-oriented economic activity would then benefit from the removal of both Canadian and American tariffs. Among Canadian trade options, therefore, Quebec would potentially benefit most from a gradual move toward a North-American free trade area, with ad hoc measures for certain industries, but should reject the world-wide free trade and unilateral free trade options because of the serious industrial dislocations and factors of production outflows they would create.
L’impact d’une zone de libre-échange entre le Canada et les États-Unis : examen critique de l’étude de Wonnacott
B. W. Wilkinson
The Wonnacott study concludes that the most realistic and beneficial commercial policy Canada is likely to be able to pursue at the moment would be to negotiate a Canada-U.S. free trade arrangement. This paper consist primarily of assigning different weights to a variety of the considerations Wonnacott raises and analyzing the effects of these different weights on his conclusions regarding the appropriate free trade strategy for Canada. A number of issues are also raised which do not appear to have been examined in Wonnacott's analysis. The thrust of the paper is three-fold. First, there may not be as large a net economic benefits of Canada-United States free trade as the Wonnacott presentation suggests. Second, depending upon the weight one assigns to some of the political-economic factors, the advantages of the former policy may be reduced even more and accordingly we should not be stampeded into a bilateral Canada-United States agreement. And third, if any change in commercial policy is to have a maximum beneficial effect upon Canada, then regardless of what commercial policy is followed, more attention will have to be given to a number of broader issues such as Canadian practices and policies relating to its overall balance of payments (including capital inflows and their effects upon the Canadian dollar), and to protectionnist provincial policies encouraging the fragmentation of industry.
In this article, the author proposes to focus on two related questions: Does the Economic Council's analysis suggest major theoretical errors in—or perhaps major theoretical challenges to—received doctrine on the nature of the impact of a unilateral removal of Canadian barriers to international trade? To what extent do the Economic Council's findings alter, extend or refine earlier quantitative assessments of the effects of unilateral free trade.
The Council's analysis of the option of unilateral free trade is very brief. A very useful analysis of aspects of this option in the Dauphin study gets very little attention in the report itself. The conclusions on unilateral free trade are very much in the mainstream of Canadian thought on this matter, with perhaps some scaling down of the benefits imputed to unilateral tariff removal. The author finds two serious flaws in the otherwise useful discussion: a failure to give sufficient attention the implications of unilateral free trade for income redistribution within the country, and, in examining the implications of free trade for the long run structure of the economy, a failure to consider explicitly and thoroughly the interaction between the tariff and population and labour force growth, as suggested by Dales.
H. C. Eastman
The case for free trade by the Economic Council of Canada rests on established economic analysis respecting the effect of free trade on industrial organization to induce rationalization, on factor prices to induce international specialization and on innovation to raise productivity and eventually reduce foreign ownership. These effects are not measurable exactly. Hence decision to act requires faith in the reliability of abstract reasoning and comprehension of the logical validity of the theory of comparative advantage.
Urgency in adopting free trade policy exists because the spread of common markets is inducing rationalization and specialization elsewhere, because low wage rate countries are developing rapidly in standardized productivity owing to the temporary boom in Canadian exports of oil and gas.
Multilateral free trade is unlikely to be achieved in the short-term owing to the disinterest of the principal nations and Canada should reduce its tariffs unilaterally. The political possibility of such a policy is increased by growing public distrust of interventionism.
A. M. Sinclair
Given that there are a number of possible models of the regional impact of a tariff, one would have hoped that the Council would have attempted to test the standard ones and/or to have developed new and better ones. After almost forty years Mackintosh's model is still probably the most persuasive model of the long run impact of the tariff in Canada. The Council in its main report has been largely content to repeat and to some extent to confuse elements of the conventional wisdom on the subject. Interesting points have been made in some of the background studies, particularly, among the studies reviewed, by Postner and by Dauphin.
At a general level, the Council has failed to integrate its recommendations concerning tariff policy into the general framework of regional policy in this country. Specifically, the Council fails to consider explicitly that on "second best" grounds the elimination of tariffs may not lead to an improvement in resource allocation, nor does it consider in any detail policies which would be preferable to tariffs to achieve regional (and other) objectives which require intervention by the government. For a study which suggests that free trade would bring gains of at least five per cent of GNP, or over $8 billion per year at current levels of production, it would be unfortunate if a certain naïveté in exposition of the free trade case were to consign the document to the political dust-bin.
Examen critique de quelques hypothèses sous-jacentes à la nouvelle politique commerciale suggérée par le Conseil économique du Canada
This paper criticizes some optimistic hypotheses implied by the Economic Council in proposing its new commercial policy for Canada.
More specifically, it shows why the Samuelsonian free trade model has been misused by the Council and that its reasons for explaining the weak comparative productivity of the Canadian secondary sector are clearly insufficient. Also, the Council underestimates the total costs of the proposed policy and its regional effects.
The paper suggests that the Council's recommendation would be more politically acceptable if it could demonstrate that the new policy will not continue to benefit only the Ontarian peninsula. It would also help if the Council could name the industries able in the medium term to absorb the factors displaced by the tariff elimination, and if it could refute the proposition that more free trade sectorial tests are needed before adopting the proposed very general commercial policy.
After greeting the recent propositions of the E.C.C.'s Report ("Au-delà des frontières") as a potentially useful document to encourage discussions on the efficiency of our institutions, the reviewer recasts them in a first best framework, a second best one and a socio-cultural one. By any standard, these propositions are disappointing: irrealist if their target is a world-wide first best, illogical if aiming at a second best world, countermarches if done to enhance cultural identity. The author concludes by suggesting that the E.C.C. was not exactly conceived to promote such an academic oratorio.
This article outlines the possibility of a "European option" as an alternative to strict continentalism leading to further integration with the U.S. It is argued that the benefits of such an European option are not immediately visible and by using narrow economic criteria with a short-run horizon, this option is not attractive. However by enlarging the evaluation criteria to include political and cultural considerations and by extending the time-horizon beyond the short into the long-run, the European connection appears very attractive indeed. Primarily the complementarity of Canada and Europe at the level of factors of production can be exploited and factor movements made to flow both ways. This coupled with the cultural and political dimensions make the European option both a feasible and desirable alternative to consider before throwing in the towel to continentalism.
The developing countries currently enjoy preferential entry on designated exports of manufactures under the Canadian Scheme of Generalized Preferences introduced in 1974. This paper makes a quantitative assessment of the erosion of such preferential margins likely to result from current multilateral tariff negotiations at GATT. Estimates are made under four alternative tariff-cutting techniques.