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Has ‘Free Trade’ as a Matter of Public Policy Undermined the Role of the Canadian State? Essay

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Updated: Dec 1st, 2021

Introduction

Canada has over the past few decades become committed to globalization through formulation of policies aimed at enhancing internationalization. This has been achieved through entering into Free Trade Agreement (FTA) with a number of countries. As a result, Canada has entered into a number of multilateral and bilateral trade relationships (Daniel 161). The reason behind increased commitment of Canadian government to free trade is to enable it enhance its public policy. This has resulted into an expansion of the country’s access to foreign markets. Free trade refers to a trading policy which allows the parties involved in trade to conduct their transaction without any form of government interference. For instance, Canada entered into a trade agreement with US which formed the basis for formation of North American Free Trade Agreement (NAFTA) (Atik 113). There are various reasons that necessitated Canada’s entry into free trade agreement with US. According to Meltz, some of these include elimination of trade barriers, facilitate fair competition with member states, and enhance foreign investment and achievement of effective dispute resolution mechanisms (115). The effect of the free trade agreement has been an increment in the level of investment and volume of trade thus enhancing the country’s Gross Domestic Product (GDP). In addition, the country’s level of investment was also greatly expanded (Fairbrother 1). Due to increase in the country’s GDP, there have been increased proposals for Canada to enhance its exchanges with US. By entering into free trade through formation of NAFTA, Canada has improved on its relationship with other countries (1). Despite Canada’s increased effort to enhance ‘free trade’ in pursuit for improving its public policy, a number of concerns have been raised in relation to increased free trade. This is due to the fact that increased free trade is undermining the Canada’s role. This paper involves a critical analysis of Canada’s pursuit for free trade. The paper seeks to answer the question ‘Has the pursuit of ‘free trade’ as a matter of public policy undermined the role of the Canadian state?

Ways in which free trade has undermined Canada’s role

Increased unemployment

It is the role of the government to improve on its citizens living standards. This can be achieved through creation of more job opportunities. By entering into free trade agreement through NAFTA, Canadian government had the objective of increasing the country’s level of employment through creation of new jobs (Campbell Para. 3). This is due to the fact that the economic integration would result into opening up of the economy thus stimulating the economy. In the 1990’s Canada experienced increased growth due to increased domestic consumption and investment. For instance, upon inception of NAFTA, there was an increase in the level of employment in Canada. This was mainly experienced in the export industry where 870,700 new jobs were created. According to Seligson, increased pursuit of free trade by the Canadian government has undermined its role of creating jobs within the economy (2). In addition in free trade resulted into loss of employment. It is estimated that an approximate 1,147, 100 jobs were lost. This is associated with increased level of importation which killed the domestic industries. The decline in the level of employment is illustrated in the table below. As the volume of exports increased, there was a significant increase in the level of unemployment from 1989 to 1997.

Employment in exports
Source: Canada in the free trade era

According to Trebilcock and Robert, efficiency in free trade requires elimination of trade protection policies which have been instituted by various governments (155). Pursuit of free trade has negatively impacted Canada’s role in protecting the domestic industries. The result is that the domestic firms are harmed by increased foreign products in the local market. This is due to the fact that the presence of foreign goods in the local market offers a wide range of substitute products. According to Daniel, this intensifies the level of competition to the domestic firms (3). Therefore, increased flow of goods into the local market into Canada resulted into a reduction in the market price. Increased reduction in the price of goods makes it difficult for the companies to meet their production cost. In addition, free trade culminated into an increment in the volume of Canada’s imports from a low of $ (129) billion to $ (208) during the period ranging from 1993 to 2002 which represents a large increase in the volume of imports. On the other hand exports increased with a small margin during the same period from $ 101billion to $ 142 billion (Scott para.5). This represents a trade deficit which negatively affects the country’s balance of payment. According to Barlow, trade deficit undermines the government’s role in meeting the cost of various social programs (Para. 6). To seal the trade deficit and cater for the social programs, the government has to use other sources of finance to seal the deficit (Trebilcock &Robert 156). In addition, increase in the volume of imports compared to exports resulted into an increase unemployment level.

The effect of increased international trade was a net reduction in the level of employment with a margin of 276,000 jobs. This culminated into an increase in the country’s rate of unemployment to a high of 7.4% from the country’s average rate of 5.4% in 1988-1989 (‘NAFTA and social sustainability in Canada and Mexico’ Para. 8). During 1990s, Canada’s rate of unemployment increased to 9.6% while individual’s earnings stagnated. The manufacturing industry is amongst the sectors which were hardly hit by Canada’s incorporation of free trade. This is due to the fact that a number of restructuring were necessary to the manufacturing industries to ensure that it meets the standards set by the economic integration. Corporate restructuring is a costly endeavor to undertake. For instance, the free trade agreement resulted into a reduction of manufacturing industries with a margin of 19%. The manufacturing industries which were hardest hit by the free trade agreement include those with high level of trade restrictions such as the leather, garment and clothe industries. According to Jones, free trade results into elimination of trade tariffs. This means that these industries will face stiff international competition. Tariffs enable the government to tax imports raising their price (Gold 430). This enables the locally produced goods to compete more effectively with the cheap imports. Therefore, elimination of tariffs through free trade undermines Canada’s role in promoting domestic investment as cheap imports penetrate the market. In addition, this creates a certain degree of unemployment which is difficult to be balanced by other expanding industries (Jones Para. 11).

Increased inequality in income distribution

Equality in income distribution is one of the public policy roles that every government should ensure that it attains. Therefore, it is the role of the Canadian government to ensure that there is equality in distribution of wealth and income within the economy. However, there has been increased inequality in Canada over the past decades since it committed itself to increase the rate of globalization through trade liberalization. Free trade has affected the Canada’s role in ensuring equality in the distribution of income. This is due to the fact that free trade results into downward pressure in relation to wage levels amongst Canadian workers. This is arises from what is commonly referred to as ‘threat effects’. This refers to threats by firms to close their operation in a particular country and move to foreign locations or outsource certain activities in their operation. These threats are advanced by firms in an effort to hold down their wage levels.

In addition, rapid growth in Canadian volume of foreign investment and trade as a percentage of the Gross Domestic Product has significantly contributed to increased inequality in distribution of income. In addition, increase in trade deficit has resulted into a downward pressure to the wage level. Inequality in income distribution has been greatly witnessed amongst individuals without college education. These categories of individual consist of the low and middle wage workers and consists approximately 68.5% of the country’s work force (Jones Para. 10).

According to Jones, expansion in the volume of trade results into a decline in price of imports especially for competing products. This culminates into a downward pressure in relation to real wages for the workers producing these goods. However, increase in trade deficit means that the number of individuals who are hurt by increase in the level of imports surpasses those who benefits form increase in the level of exports. Considering the fact that a large proportion of Canada’s imports consists of goods requiring less educated individuals in their production, increased openness of Canadian economy to free trade has affected the government’s role in ensuring equitable distribution of income. The result is that the wage level of these individuals is reduced compared to those in the export sector (Scotts Para. 12).

According to Scotts, increased inequality in relation to distribution of income results from the fact that globalization culminated into an increase in Canada’s level of trade deficit. This culminated into erosion of the already existing jobs while creation of new jobs was minimal during past decades. Upon finding jobs in other sectors, the displaced workers accept lower wages. As a result, there is a reduction in the level of wage within other sectors of the economy.

Free trade also undermines Canada’s role in ensuring equitable development of all regions. This is due to the fact that foreign investors prefer investing in regions which already have well established facilities such as infrastructure. This results into some regions being underdeveloped. This contributes to an increment in the inequality in income distribution (Jones para. 8).

Increase in transaction cost

The Canadian government is committed to reduce the cost involved in its bilateral and multilateral trade relationships. Reduction in the cost of transaction between Canada and its trading partners would stimulate the country’s economic growth with a high margin. However, these efforts are frustrated by increased pursuit of free trade. This is due to presence of numerous and complex rules in relation to international trade. For example, some of the rules relate to country of origin (Laxer 57). These rules and standards culminate into an increase in transaction and administration cost or what is commonly referred to as the ‘spaghetti bowl’. This is due to the fact that there could be an increase in overlapping and overgrowing free trade agreements with different standards and rule of origin. According to Chiang, presence of ‘spaghetti bowl’ in free trade results into an increase in the complexity of the trading system. This means that the intended smooth flow of trade between member states is hindered (4).The result is that, the Canadian government is not able to stimulate the rate of economic growth as targeted. In addition, increase in the transaction cost results into a reduction of incentives among business individuals to make use of the free trade agreement. The result is that the Small and Medium Enterprises (SMEs) are negatively impacted by an increase in the transaction cost. In addition, free trade agreements negotiations consume a considerable amount of resources. This means that the government incurs certain opportunity costs by devoting the resources to regional or bilateral trade agreements (Chiang 5).

Free trade limits Canada’s role in ensuring national security and sovereignty

According to Granastein, it is the role of the government to ensure that there is national security and sovereignty within the country (8). However, increased commitment of Canada to free trade undermines its role in ensuring that national security and its sovereignty are maintained. Free trade agreements with other countries results into inequality of trading rights in relation to transnational corporations. This is due to the fact that they are forced to compete and challenge services which are publicly funded by the government such as education, health care, social security, environmental protection and culture. In addition, free trade results into new provisions in relation to competition policy, market access, trade dispute settlement and government procurement (Barlow para.5). This means that the Canada’s role in creation and maintenance of laws, formulation of standards and regulations aimed at enhancing the well being of citizens together with environmental protection is undermined.

In addition, free trade undermines Canada’s role in ensuring national security. This is evident from the fact that, a country is forced to reduce its inspection on various products entering the domestic market from member countries. This poses a threat in number of ways. For instance, Canada’s role of enhancing national security is undermined since there is a high probability of food products which are poorly inspected entering the county from member states. This limits Canada’s role in eliminating bioterrorism. Free trade encourages opening up of borders between member countries. This undermines the country’s role in controlling its borders thus increasing national insecurity (Malcolm & Leslie 190).

In addition, free trade undermines Canada’s sovereignty. This is evident in the fact that Canada has to depend on other trading partners for some products and services through importation. This means that the government is not able to commit itself to attain national sovereignty. In addition, its national security in relation to various aspects rests in hand of the trading partners. In the event of political instability such as war, the countries sovereignty comes under increased risk (Burges Para. 4).

Conclusion

Over the past few decades, the Canadian government has been committed to pursue various public policies. One of the strategies through which the Canadian government has formulated to attain public policy is through increasing its rate of globalization. As a result, the concept of free trade has been incorporated. This has culminated into increased trade liberalization. Through free trade, Canada opened up its economy to incorporate bilateral and multilateral trade. This resulted into an increase in the country’s GDP and hence its economic growth. Despite the benefits arising from trade, increased pursuit of free trade has undermined Canada’s role in a number of ways. For instance, free trade has undermined Canadian’s government role of creating new jobs. This is due to the fact that free trade culminated into an increment in the country’s rate of importation thus harming the domestic industries. This is due to the fact that foreign competition within the local market increased thus affecting local firms. The net effect is increase in the country’s rate of unemployment. In addition, free trade resulted into increased job loss due to increased corporate restructuring. For free trade to thrive effectively, various enterprises are required to meet certain international operation standards. The effect is that there is occurrence of job displacement.

Free trade also undermines Canada’s role of ensuring equitable distribution of income. This is due to the fact that increased unemployment results into a downward pressure on wage levels for other sectors of the economy. Most of the individuals who are affected by inequality in income distribution are those who are in the export and import business and the less educated. However, other sectors are also affected in that the displaced individuals seek jobs in other sectors. As a result, they accept low wages thus pressing down the wage rates in these sectors. Therefore, increment in imports undermines government’s effort in ensuring equitable distribution of wealth.

Canada’s role of enhancing increased investment in SMEs and their participation in international trade is also undermined by free trade. This is due to the fact that free trade raises transaction cost which discourages SMEs from internationalization. This undermines Canada’s role in stimulating its economic growth. In addition, free trade agreements are complex and take a long time for a deal to be arrived at. The negotiations are also costly which means that there is an opportunity cost incurred at the expense of other public policies.

Free trade also undermines Canada’s role of ensuring effective maintenance of national security and sovereignty. National security is threatened through elimination of trade restrictions in relation to trading with other member countries. For instance, inspection of various products such as food products are either eliminated or made less stringent. This increases the countries risk to bioterrorism. In addition, free trade undermines a country’s sovereignty by making the country dependent on other countries for certain products and services through importation. This puts the country at a risk especially in the event of political instability.

Works cited

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