External Conditions Of Canada Essay, Research Paper
The External Conditions of the Canadian Situation
Summary Statement; an Historical Perspective
The Late Nineteenth Century [in contrast, not necessarily in substance]
Canada had strong economic and political ties with Britain. Trade flowed
more east and west in association with Britain, than it had during the
Reciprocity Treaty Period, 1854-1866. Primary product exports, decreasingly
forest products, increasingly wheat, were the policy basis of expansion.
Porfolio capital flowed into Canada from Britain to build transcontinental
railways. In short, the expansion of industrialism around the globe, and
the force of the British Empire, developed and integrated Canada, with
primary product exports the leading element in expansion. To Sir Wilfrid
Laurier it seemed like the twentieth century belonged to Canada.
The Late Twentieth Century [in contrast, not necessarily in substance]
By 1990, the British Empire was irrelevant. Canada had strong economic and
diplomatic ties with the United States. The frontier of global industrial
expansion had moved from America to Asia, and to developing countries in
South America. This is not to say that the United States had fallen into
permanenet relative decline. The stagflation of the 1970s and 1980s
evaporated in the 1990s. With innovations in information technology
leading the advance, by 2000, the United States was enjoying one of the
longest expansions and increases in productivity in its history.
Canada’s primary product export industries were no longer forceful engines
of expansion, though they experienced continuing development. Canada was
a settled frontier, a permanent northern frontier. Compared to frontiers
in Information Technology, its resource frontier was a dead frontier.
Its finished goods exports exceeded its primary product
exports by two to one in value. The standard
of living in Canada was was falling in relation to other, more rapidly
advancing countries. In the 1990s, it fell absolutely, though by the
last two years of the decade it rose with the growth of GDP, which
reached an annual rate of 4% in the first quarter of 2000. The
relative decline in the demand for Canada’s resources, and the associated
decline in foreign investment and in the value of the Canadian dollar,
together will a heavy burden of taxes associated with both cyclical and
systemic fiscal problems, accounted for the decline in average real income
in the 1990s. Attempts to keep the economy expanding by seeking a niche in
external market for manufactured goods, and by upgrading producitivity in
the new telematic information economy, were successful only at the end of
the decade. The nineteen nineties were a time of incomplete adjustment
The Main Lines of Historical Development
Late Nineteenth and Early Twentieth Century Capital Flows.
Throughout the nineteenth century, and into the twentieth Canada had an
unfavourable Balance of Trade with the United States. It had a favourable
balance with Britain, but mostly it paid for its excess of imports from the
United States with capital imports from Britain — toward the end, mostly
to pay for the building of transcontinental railways. The flow of goods
from the United States, to Canada, to Britain, to the United States, was
matched by a flow of money the other way. There was a small, but growing
flow of capital from the United States to Canada, but that was equity,
rather than portfolio capital. There was no question of the value of the
Canadian dollar. The Gold Standard was in effect internationally, and
Canada’s currency was, by 1913, virtually a gold certificate.
This perfect beginning for the century – Canada growing quickly, immigrants
pouring in, capital pouring in – was about to change, but not, at first,
for the worst.
The Great Shift 1910-1930
The First World War hastened the economic reduction of Britain,
the decline of the British Empire, and the rise of the United States to
the position of the most industrialized and richest nation in the world.
The automobile and the aircraft replaced the railway, which began its
long decline into obsolescence. A new primary product frontier came to
the fore in Canada; really two frontiers, as mineral and forest products
exported to the United States rose in value in relation to wheat exports
The exhaustion of British capital, in part because of the war, and in part
because of her relative decline, caused Canadian interests to turn to
United States sources. Canada became indebted to the United States, and
as United States electrical, automobile, and pulp and paper and mining
interests moved north, more of the capital inflow came in the form of
equity. American capital replaced British capital to offset Canada’s
trade deficit with the United States. The international corporation and
“foreign ownership”, mostly American, rose to prominence in Canadian concerns.
Expansion on the Prairies came to an end. Two transcontinental railways
bankrupted and were bought out to form the one, government owned, Canadian
National Railway. Still, the advance of the consumer capital industries,
that is, of the innovation of durable consumer goods like radios,
automobiles, and vacuum cleaners, and new resource exports, particularly
of mining and pulp and paper exports, kept Canada afloat economically
until the global depression of the 1930s.
Depression and War
The depression of the 1930s was probably the end of the last upswing based
on investment in railways and of the first upswing based on investment in
paper, minerals, and consumer capital goods [cars, wash machines, radios,
and other electricity dependent production and consumption goods]. The
expansion of real GDP having outrun the expansion of the gold base of
of the monetary system, during this remarkable, double Kondratief recovery
and boom, a shortage of currency was given as one cause of the depression.
Accordingly, the Gold Standard was abandoned, globally. This was
accompanied by competitive devaluation of currencies and increasing
protectionism, as countries tried to export unemployment with so-called
“begger thy neighbour” policies.
Perhaps the severity of the depression was passing by 1939, but it was
the Second World War that brought a return to prosperity in North America.
It brought devastation to Europe and Japan.
After the War
Following the War there was a concerted effort, through the International
Monetary Fund, the World Bank, and the GATT,
to prevent the disorderly economic nationalism of the Nineteen Thirties.
But, more importantly, the Cold War set in. North America, having
emerged from the War industrially intact, found itself facing great demand
for its goods. The United States was wealthy enough to lend the
money needed to buy them. [This was the source of "Euro dollars"]
The U.S.’s consequent great expansion required
even more natural resources that its great expanse held. It developed
new sources in Canada, Latin America, and the Middle East. In this
however, the politics of the Cold War had as much influence as
merely economic concerns.
It has to be noted here that the GATT was successful in reducing tariffs
around the world, remarkably successful. By the time of the Canada-
United States Free Trade Agreement in the late 1980s, fully 80% of the
formal tariff barriers to trade between the two countries had been
removed. However, the reduction in tariffs was accompanied by
a global proliferation of non-tariff
barriers: quotas, voluntary export restraints, safety regulations
government procurment quotas, labour regulations, content regulations
subsidies and financial supports in the form of unemployment, housing
and social policies. Out of this “New Mercantilism” emerged the
United States – Canada Free Trade Agreement.
For Canada the period was marked by a resource boom, and an increase in
U.S. ownership of Canadian industry. Manufactured exports to the U.S.
increased, particularly by way of the 1950s “Auto Pact”, which generated
a common continental market in automobile production. In this period the
value of the Canadian dollar was controlled by the Balance of Payments
modified by the Bank of Canada’s ability to alter the money supply.
Under the pressures of the time it rose to $1.10 (U.S.) Canada became
the second richest country [measured by average standard of living] in the
The effect of this, of course, was that Imperialism, Nationalism, and
Regionalism – the three corners of the 19th century Canadian Triangle – had
transmogrified into Continentalism, Nationalism, and Regionalism; with
Regionalism supported by Continentalism though differently from the way
that Nationalism had been supported by Imperialism in the late nineteenth
Eventually Europe and Japan recovered. Europe began the process of forming
a single, continental European economy, and Britain chose to join. This
left Canada in a dilemna: to stay with Britain, or make common cause with
the United States in a North American Common Market. Recovery in Europe
and Japan brought an end to expansion in North America, and a recession
between 1957 and 1962. Thereafter North America expanded again on the
demand generated by industrial expansion in Europe, Asia, and other
rapidly developing countries.
The Relative Decline of North America
The United States, caught up in the cold War, and eventually the war
in Asia, fell behind Europe and Japan in economic growth and growth of
productivity. The excesses of currency expansion, as the world tested
fiat monetary systems, led to inflation, as did the inflationary financing
of the Vietnam War, and the United States response to the OPEC oil cartel.
[The source of "Petro Dollars"]
Then it was that the United States continuing deficit in international
trade, emerging from the advances of Europe and Japan, was funded by
capital imports as foreign interests purchased United States concerns. The
capital inflow was not enough to prevent the eventual devaluation of
the United States dollar, and the end of the so-called Breton Woods system
in which the United States dollar was used as the reserve currency of
the world, just as gold had been used under the Gold Standard.
[Yet another factor in the importance of Euro and Petro Dollars.]
The Canadian dollar fell with the American dollar. Indeed, as
United States investment leaned toward Asia, away from Canada, and Canada
inflated its currency supply [and its rate of inflation] beyond that of
the United States, and, finally, as the demand for Canadian primary
products levelled, the Canadian dollar began its long decline in relation
to the United States dollar. When the Canadian government moved to
have oil and gas production owned in Canada [indeed, nationalized in
Petro Canada, which was later privatized in the neoconservative
reduction of government activities in the 1990s], during
the OPEC oil crisis, the Canadian dollar took a precipitous fall, from
about 90 cents to about 80 cents, from which level it continued its slow
decline in relation to the United States dollar.
This was a bad time for North America. The whole world suffered from
inflation with Euro Dollars and Petro Dollars in abundance, but North
America suffered from stagflation. It stagnated in productivity growth.
It had inflation and unemployment. It also experienced obsolescence in
its “smoke stack industries”. Iron and steel, and automobiles
were better made in other countries with cheaper labour and more recent
technologies. It looked like the beginning of the end of American
superiority. There was talk of the deindustrialization of America,
but, America was not going to fade all at once. Indeed, it was going
to recover its position.
At this time, when globalization was replacing nationalization, just
as nationalization had replaced regionalization in the United States
in the nineteenth century. American national industries, under threat,
became protectionist. The Congress took back from the Executive some of
the initiative in legislation related to commerce. Countervailing and
retaliatory duties were placed on incoming goods. Canadian exports of
fish, meat products, iron and steel, and forest and agricultural products
were favourite targets. In these circumstances
Canada began to seek an agreement on trade, and, indeed, before the
1980s were out, a Free Trade Agreement was achieved. The most important
part of the FTA was a “disputes settlement mechanism” by which Canada hoped
to stop United States neo protectionism from piecemeal destruction of its
exports to that country. The subsequent North American Free Trade Agreement
seems to have been motivated more by an attempt to get a market as large
as possible, and to permit the exploitation of comparative advantages
throughout the continent: a matter of intercontinental competition,
North America, vs. Asia, vs. Europe.
Tarnished Golden and Silver Ages
In the 1990s Canada accepted its attachment to the North American Continent
and its need to find a different entry into world markets, particularly
a niche in the market for manufactured goods. Of course, a strong
vestigial reliance on primary products remained, particularly in Western
Canada. Atlantic Canada is a more complicated case. The west continued
to rely on exports of primary products to rapidly industrializaing
Asian countries. Despite its general acceptance of the new global
situation, Canada remained in recession with sluggish productivty gains
through the middle of the 1990s.
In 1996 the economy of North America seems to have bottomed out. In 1997
and 1998, employment grew, productivity grew, inflation remained low.
GDP grew at an acceptable 3% to 4%. The United States, perhaps because it
had accepted the readjustment process of downsizing, privatizing,
deregulation, and reduction in wages, more than Canada had, [but more
likely because Canada had a more sever adjustment to make, and had to cope
with internal political problems related to the structure of the
federation and its entanglement with a more fully developed social welfare
experienced a fuller recovery than Canada. Neither had a full
blown Golden Age. It was more likely a Tarnished Golden Age for
the United States, and a Silver Age for Canada. The United States
continued to have a serious deficit in trade, financed by imports of
capital. That is, superiority in production of goods continued to slip
away. In the provision of certain computerized services, of course, the
United State retained its lead. Canada continued to have high unemployment
and slow growth in productivity until late in the 1990s, and it continued
to rely to a significant
extent on “commodity” exports, the prices of which continued to fall until
1999. Real living standards in Canada fell over the 1990s.
In 1997, the advance of Asia ended, temporarily, and a fairly deep
recession set in. From an historical perspective, there was nothing
unusual in this. The frontier of the expansion of industrialism had
always experienced a boom and bust cycle. What happed in Asia was
typical. There was over expansion as the investment process itself
generated profits for projects that would never produce a profit
once the investment was in place. Gross inefficiencies and corruption
once again characterized the boom period of capitalistic expansion.
This became particularly evident in Thailand. Investment stopped,
pulling down the value of the baht, the Thailand currency. This meant
that Thai debts could not be paid, and Thai markets collapsed
This affected sales and profits in Malaysia, where similar problems and
a similar process occurred. Indeed, the “contagion” spread to most of Asia
outside of China and India, to Russia, and it would have spread to
Brazil, and then to the United States [perhaps], if the United States
had not rapidly increased its money supply, and consequently lowered
the rate of interest to allow support for debts in Brazil. The problem
of trade imbalance in the United States worsened as the U.S.
dollar rose in response to international capital seeking a safe
haven from the troubles elsewhere. Profits fell
in United States industry, but only temporarily. The contagion was
contained, and expansion continued in American and, by 1999 the West
Pacific Rim was beginning to recover.
Canada, perhaps one should say British Columbia, with
greater reliance on Asian markets, and Alberta with reliance on world oil
prices [which have been sustained by poltical instability and an unstable
unstable cartel in the Middle East], has suffered more than the United
States. The United State’s Golden Age is more tarnished. Canada’s Silver
Age is also tarnished. We wait to see what happens when Asia recovers.
It has been suggested that we are in the upswing of a Kondratief long
cycle, based on biotechnology and the internet, thought not to peak until
2010. If so, so much the better, for now.
Late Twentieth Century Capital Flows
Canada now has a favourable balance of trade with the United States, and
and unfavourable balance with the rest of the world. The balance with
the United States easily outweighs the balance with the rest of the world.
Still, the value of the Canadian dollar continues to fall, as it has since
the nineteen seventies. Past foreign investment, particularly from the
United States, still has to be serviced, and profits flow out to foreign
owned companies. Net unfavourable monetary flows, including net outflowss
of investment (about $130 billion over the past decade) outweigh net
favourable commodity flows, making it difficult to hold the value
of the Canadian dollar. Falling
interest of foreign investors in Canadian industry, particularly with the
unreliability of recent reverses in the fall in “commodity” prices,
including oil prices, has kept the Canadian dollar under attack, even with
lower rate of inflation that that of the United States