“Free Trade”: Neither Free nor about Trade

Christopher D. Merrett, Black Rose Books; 1996

Reviewed by Emil Bjarnason

Christopher Merret has produced the definitive scholastic study of the US/Canada Free Trade Agreement and NAFTA. It is unlikely that any future writer on the subject will match it for depth of theoretical and historical exposition nor for the breadth and depth of its statistical and analytical documentation of the conclusions reached.

The book examines in depth the following matters:

1. Free trade and social change

2. Continentalism versus Nationalism

3. The Canadian Economy and Free Trade

4. Canadian labour and free trade

5. The Canadian Welfare State and Free Trade

On the first point above, Merrett develops in outline the relationship of free trade doctrines to the dynamics of North American economic and political relations. Here he introduces a concept which he calls “Fordism” – a term he attributes to Gramsci – which many readers will probably object to while agreeing with its content. He explains that Henry Ford “introduced the radical idea that mass production of automobiles or any other product could be sustained only if accompanied by mass consumption. In order to have mass consumption, the minimum wage had to be raised to allow workers to buy more than just the bare necessities.” Having thus established its definition, throughout the book he uses the term Fordism to refer to the Welfare state and in particular to the social legislation that sustained relative capitalist prosperity during the first thirty postwar years.

He goes on to argue that United States “Fordism” begins with the Wagner Act of 1935 which gave workers the right to organize in exchange for non–interference in the realm of production. The ruling class was willing to accept such a bargain to save capitalism from the consequences of the great depression, but only with the caveat that labour’s traditional militancy must be curbed. This was accomplished by McCarthyism, the Taft Hartley Act and other anti-labour measures designed to curb radicalism.

However, even the welfare state could not forever contain the contradictions of capitalism and from the point of view of the capitalists, by the 1970’s new ways had to be found to nourish the profits of capital. Thus the Keynesian economics of Fordism had to be abandoned in favour of traditional free enterprise doctrines for which government interference , regulation of business, environmental controls, health and safety standards and all other impediments to investment were anathema. For both Canada and the United States, free trade was a subtle strategic approach for achieving these goals.

In the chapter on Continentalism versus Nationalism, Merrett discusses in depth the “genealogy” of free trade theory, pointing out that while its proponents have been more or less consistent in upholding the doctrines of Adam Smith and David Ricardo, their objectives have been political rather than economic and their advocacy of the classical theories directed to political ends. Moreover, however true the theory of comparative advantage might be, it rested on assumptions of perfect markets and other conditions that are rarely found in practice. In the specific case of Canada, for example, it is easily shown that Canada has a “comparative advantage in the extraction of minerals and other raw materials and therefore rigorous adherence to free trade could only reduce Canada to a country of hewers of wood and drawers of water.

Apart from that there is the fact that Canada, as a country, has always been critically dependent on an east to west orientation of trade. Once free trade is adopted, it is replaced by a north south orientation which is a recipe for the fragmentation of Canada. Free trade also means the abolition of the subsidies to transportation and regional development as well as interregional transfers of income, which have held the country together, but which in American eyes are regarded as subsidies and therefore as impediments to free trade.

The propaganda which led up to free trade featured smooth–talking lies about the objectives of free trade and the supposed protections built into the agreements which in practice have been repudiated as rapidly as they were raised. It is not easy to forget Simon Reisman’s assertion that the opponents of free trade were Nazis who used Goebbel’s technique of the Big lie to spread anti-FTA propaganda nor Mulroney’s assurance that Canada’s welfare legislation was a sacred trust.

The Canadian Economy and Free Trade

It is one thing to draw conclusions about what would be the consequences of a particular set of policies. It is usually more difficult to prove one’s conclusions. Merrett has done yeoman work in testing and demonstrating everything he has said about the subject of free trade and in particular about its effects on Canada. He begins this chapter with the assertion that “In seeking and negotiating the Canada-United States Free Trade Agreement (FTA), the Progressive Conservatives initiated a process whereby Canadians voluntarily surrendered broad powers to control their economy, maintain the Welfare State and promote cultural sovereignty without gaining commensurate supranational power at a continental level. The FTA opened up the less efficient Canadian private sector to possible takeover by American competitors. Free trade also initiated a process whereby Canadian economic and social policy could be harmonized with that of the United States.”

The concessions to U. S. capital began even before the agreement to negotiate free trade. In Mulroney’s determination to implement continentalism, he had already given in to U.S. demands 1)to revalue the Canadian dollar to make Canada’s exports less competitive with the U. S. 2) to dismantle the Foreign Investment Review Agency, under which foreign investors were required to show how many jobs would be created by their investment, and what expenditures they intended to make for research and development and 3) to abolish the National Energy Policy which laid down rules for the development of Canada’s oil resources, including requirements of Canadian ownership. In short Mulroney set out to convince the U.S. that it would be an obsequious partner in a free trade pact. But the pact itself opened the way to unrestricted takeovers of Canadian industries and resources. Already by 1989, the percentage Canadian control of resources had dropped from 48 percent to 42 percent. After the adoption of FTA mergers and takeovers proceeded apace. An appendix to Merrett’s book lists 196 takeovers involving job relocations from Canada to the United States and Mexico, involving a total of 42,062 jobs. That process continues unabated.

According to the advance propaganda, free trade was supposed to improve Canada’s foreign trade balance by opening up the U. S. Market to Canadian goods. Actually, Canada’s balance of payments with the U. S. is shown in the book to have been lower in every year from 1985 to 1994 than in the last year before FTA. On the other hand it is shown that for 19 leading industries, the U.S. share in the Canadian market increased between 1987 and 1991 by percentages ranging from 1 to 20 percent.

Contrary to the claims of proponents of free trade, Canada’s growth rate of industrial production which, until 1988 had been consistently above that of either the United States or the average of the OECD countries, began a precipitous fall until by 1993 it had dropped to about one percent while both the U.S. and OECD averages were up by 16 percent.

The sad fact is that free trade has trashed Canada’s manufacturing industries which, in index form are down two percent since the beginning of free trade, while in both the U.S. and OECD manufacturing had increased by 20 percent. In 1989 employment in Canadian manufacturing was 1,900,000 persons and only three years later it was down to 1,493,000, a reduction of 21.4 percent.

Contrary to the assurances that were given to Canadians before the FTA was signed, the American government has with considerable success targeted our steel industry, auto industry, softwood lumber, agriculture and fishing industries as victims of its tactics under the umbrella of the FTA.

Canadian Labour and Free Trade

It is by now perfectly clear that the main purpose of FTA and NAFTA has been to raise the profitability of capital at the expense of labour. In the United States that has been much more easily accomplished than in Canada, since the American labour force is only 15% unionized compared with 35% in Canada. Moreover, after being lashed for fifty years by anti-communist, anti-labour and anti-welfare legislation the US labour movement has been thoroughly cowed. The objectives of both U.S. and Canadian capitalists are therefore to use the provisions of FTA and NAFTA to impose American standards on Canadian labour.

Unemployment rates have usually been somewhat higher in Canada than in the U.S.A. But the difference has widened drastically since the adoption of the FTA. Merrett refers to the fact, well–known in Canada, that the Bank of Canada under both John Crow and Gerald Bouey promoted high interest rates for the explicit purpose of increasing the rate of unemployment. The bank has been quite open about the fact that it uses high unemployment to curb wage increases and keep them below the rate of inflation.

Not only does “free trade” result in lowered wage rates in Canada, but it also encourages further processes by which the earnings of Canadian workers are depressed: These are encompassed in the innocuous sounding phrase Job Flexibility. This includes the promotion of part-time work and home work, both of which are important ways of saving money at the expense of workers. But more devastating than either of these is the restructuring of the economy from goods-producing to service-producing industry. The statistics quoted in Merrett’s book show a roughly 20 percent transfer of jobs from the former to the latter. Since goods producing jobs are relatively high-paid and a considerable proportion of service jobs are either at or near minimum wage levels, the result is a drastic fall in overall average wages.

The Canadian Welfare State and Free Trade

“With its more overt focus on capital accumulation, the State has allowed greater social inequalities to develop in the name of economic growth”. Following this statement, Merrett goes on to develop his theory that economic crisis beginning in the late 60’s undermined the foundations of the welfare state as a mechanism for mediating the class struggle. Monetary policies designed to control inflation, operated mainly through high interest rates. This made it difficult to continue legislated full employment and other social security guarantees. Within the North American context Canada found itself especially targeted for the new paradigm, because of its much more highly developed welfare institutions. Nothing but “free trade” would suffice to “bring down the ‘social wage’ and create a more flexible and compliant workforce”.

The book then goes into great detail to describe the cuts to social programs of health, unemployment insurance, education, etc. Accompanying such cuts was a restructuring of the taxation system to greatly increase its regressive nature. There is no mystery about the coincidence of the GST with the FTA. Nor is there any mystery about the fact that the Liberals, having attained power by attacks on the Mulroney free trade and GST policies, proceeded to carry them forward and accompany them with even more savage cuts in social programs. They are, after all, simply the alternative wing of the capitalist ruling class. What confuses innocent voters is the fact that provincial NDP governments have largely bought into the new “economic reality.”

Christopher Merrett’s book is, of necessity a gloomy read, but it is a necessary one for all who desire to develop Marxist answers to neoconservative continentalism, and to arm themselves with the facts and arguments to support such answers.

Spark! #10, pp.45-49