One of the benefits promised for Canada from a free trade deal with the United States was that we would attract billions of dollars of investment, creating great numbers of new jobs, from foreign multinationals that would build operations in Canada to serve the U.S. market.
It didn't happen.
The reason, according to Simon Fraser University economist Richard Harris, a strong proponent of the trade deal, is that "perfectly secure access to the U.S. market was not achieved." Indeed, Harris said, "small countries within regional free trade agreements with uncertain or imperfect market access are at a clear disadvantage in attracting inward foreign direct investment whose purpose is to serve the regional market."
Harris, who was speaking at a recent University of Toronto symposium honouring Ed Safarian, one of the world's leading scholars on foreign investment, noted Canada's share of foreign direct investment in the three countries of the North American Free Trade Agreement has shrunk to 13 per cent last year from 21 per cent in 1990.
This number has to be taken with a grain of salt. The data include the value of foreign takeovers of local companies. We don't want foreign investment that just takes over Canadian companies. A better comparison would be which countries are getting the greatest investment to build new factories or other business activities, such as Toyota Canada's expansion to build the Lexus in Canada.
Even in the absence of hard numbers, however, there are good reasons why the free trade agreement discourages investment in Canada to serve the North American market. As long as the United States can impose anti-dumping or countervailing duties on imports from Canada, or engage in other forms of trade harassment, many companies will find it more attractive to locate in the United States and serve Canada from the United States, rather than vice versa.
Nor does the United States have any incentive to change the system.
A survey of Japanese companies operating in Canada, conducted by the Japanese consulate in Toronto in the early 1990s, found few planned additional investments in Canada because of NAFTA. Low-cost production would take place in Mexico, while production requiring a company to be close to its customers would take place in the United States, the Japanese companies said. Investments in Canada were more likely to be in resources or in companies with highly specialized technologies.
An added problem is that U.S. trade measures are often highly political. As Harris noted, "the existence of a NAFTA trade-dispute-settlement mechanism does not guarantee that, when political economy pressures arise in the U.S., Canadian exporters are guaranteed access to the U.S. market." Moreover, he said, "cases such as softwood lumber and the threat of steel tariffs last year contribute to the general worry that Canadian market access is less than perfectly secure."
Border restrictions since 9/11 only reinforce this concern.
Speaking at the same conference, Maureen Molot of Carleton University argued some North American content rules also work against investment in Canada. NAFTA requires, for example, cars, light trucks, engines and transmissions to have 62.5 per cent North American content to move across the Canadian, U.S. and Mexican borders duty free. Some assemblers, such as Mercedes-Benz and BMW, have North American content of roughly 35 per cent. It makes sense for them to build their assembly plants in the United States and supply Canada from the United States.
At the same time, as Molot pointed out, generous subsidies by U.S. states and municipalities are pulling automotive-industry investments into the states, forcing Ontario to announce a $500 million incentive fund for the sector. Pressure is on the federal government to come up with a similar program.
Canada does have some advantages. General Motors Co. pays about $1,400 US a vehicle on health-care costs for U.S. workers. Canadian colleges and universities produce good graduates. The level of research and development in Canadian industry has been rising, and tax incentives here are generous.
If Canada is to attract more companies to build businesses in Canada for the North American market, we must focus on improving these strengths, rather than pinning our hopes on NAFTA, while working with other countries through the World Trade Organization to curb U.S. abuse of trade remedies.Hamilton Spectator (Ontario, Canada):
