The Truth About Canada (29 page)

During the years 2002 to 2004, only four countries had a greater outflow of direct investment than Canada. In these years, Canada’s outflow was greater than the combined foreign direct investments for all the following countries
put together
: Denmark, New Zealand, the Slovak Republic, the Czech Republic, Poland, Greece, Turkey, South Africa, Hungary, Iceland, Finland, Germany, India, Mexico, Norway, Korea, Brazil, Portugal, and Austria. And it was greater than 10 other countries, namely Russia, Ireland, Australia, Sweden, Italy, Switzerland, China, the Netherlands, Belgium, and Japan.

Between the beginning of the FTA and the end of 2006, Canadian direct investment in the United States increased from $56.6-billion to $223.6-billion. At the end of 2006, it amounted to $59-billion in the United Kingdom, $24.7-billion in Ireland, $16.9-billion in France, and just over $12-billion in the Netherlands. Investment in the United States accounted for 43 percent of the total.

Yet it bears repeating that, contrary to so much misinformation on the subject, Canada’s direct investment in the United States has never been greater than U.S. ownership and control of assets in Canada, and it has always been a very much smaller fraction of GDP.

According to the Conference Board of Canada, more and more Canadian businesses seeking to expand into the U.S. market would rather build new facilities there than increase existing operations in Canada. This despite lower wage, land, utilities, and resource costs in Canada, and corporate taxes that have for some time been generally lower in Canada. And, of course, many of these very companies were exactly the ones so ardently promoting the FTA and NAFTA and the two agreements’ certain lavish investment benefits for Canada.

Until the first year of the FTA, the greatest amount of Canadian direct investment abroad in any one year was under $10-billion. In the years since 2000, it has ranged from a low of $25.6-billion to a high of $66.4-billion in a single year.

While in the free-trade years Canadian direct investment has been pouring out of Canada, the same is also true, in gigantic amounts, for portfolio investment. To the end of 2005, the amount invested outside of Canada came to $368.3-billion.

In the 2005 budget, the federal government allowed RRSP money to be invested outside of Canada. At the same time, Ottawa increased RRSP contribution limits to $22,000 by 2010. There is nothing wrong with allowing Canadians to invest outside of Canada, but it’s totally absurd to give them tax breaks (by means of RRSPs) to do so.

Meanwhile, our Canadian banks, with their record-breaking profits, are pumping money out of Canada into tax havens like Barbados, Bermuda, the Cayman Islands, the Bahamas, and Ireland. Between 1990 and 2003, Canadian assets in tax havens shot up from $11-billion to $88-billion. Canadian banks accounted for $72-billion of that $88-billion. By the end of 2006, total Canadian direct investment in tax havens was close to $100-billion.
¹

In a surprise move in February 2005, the Liberal federal government removed limits on foreign content in pension plan investments, restrictions that had been in place for over 34 years. Some leading investment executives said they were shocked by the unexpected government decision, and financial analysts predicted that a great deal of investment now managed in Canada would be managed in the U.S in the future, making more than a few major investment firms in Canada “an endangered species.” (It’s important to note that few Canadians can take full advantage of the RRSP limits. In Statistics Canada’s most recent report, for 2005, when limits were $16,500, only 31 percent of RRSP investors were able to do so in that year.)

With the elimination of restrictions on foreign investment by pension funds and RRSPs, many large institutional investors have increased — or were planning to greatly increase — their investments outside of Canada. In June 2005, it was revealed that a “secret” Finance Department study estimated that, in the following two years, almost $70-billion would flow out of Canada as a result of the Martin government’s decision to lift the long-standing 30 percent cap on the foreign content of pension funds.

Finance was way out. In 2006 alone, Canadians invested a record $78.3-billion in foreign securities during the first full year when there was no limit on the foreign content of RRSPs and pension plans. So it wasn’t only Canadian direct investment abroad that exploded when NAFTA came into effect. In the 13 years before NAFTA, Canadian portfolio investment abroad in stocks amounted to $51.8-billion. In the first 13 NAFTA years, it increased by over $257-billion, while Canadian investment in foreign bonds during the same years increased from $13.76-billion to $127.1-billion. Canadian investment in foreign bonds was a record $43.6-billion in the one year of 2006, far greater than in all the 13 pre-NAFTA years put together.
²

In sum, we have more and more tens of billions of dollars hemorrhaging out of the country, mostly from our banks and other big corporations, plus the large pension funds, while more and more non-Canadians take over the ownership and control of our country, often using financing they have obtained from the very same banks and financial institutions.

Sheer suicidal lunacy!

And as for the ridiculous claims of the Canadian Chamber of Commerce and the Conference Board of Canada, among others, that we must not tamper with foreign takovers of business in Canada because we need the money, one can only juxtapose such claims with the news of the enormous multi-billion dollar losses by our Canadian banks in U.S. subprime mortgage related securities.

Lastly on the subject of Canadian direct investment abroad, it’s very important to note that a great deal of the so-called “Canadian” investment is not Canadian at all. Foreign firms based in Canada borrow money from Canadian banks and then deduct the interest charges from their profits in Canada to reduce their taxes here. Then they invest the money abroad, often in tax havens. This both inflates “Canadian” direct investment abroad and sharply reduces taxes payable in Canada. Keep this in mind when you repeatedly hear our compradors claim that we shouldn’t be concerned about foreign ownership and control when our “Canadian” investment abroad is so high.

27

THE FREE TRADE AGREEMENT

THE MOST COLOSSAL CON JOB IN CANADIAN HISTORY

A
ccording to recent editorials in the
Globe and Mail
, Brian Mulroney’s “free trade agreement with the United States laid the groundwork for economic prosperity”
¹
and prepared the way for “immense economic benefits.”
²

This has been the
Globe
’s editorial line for as long as I can remember. It’s also been the unquestioning, jubilant refrain from the Canadian Council of Chief Executives (the godfathers of the FTA when they were the BCNI), the Canadian Chamber of Commerce, the Conference Board of Canada, Canadian Manufacturers & Exporters, and of course the C.D. Howe and Fraser Institutes (not to mention the numerous Milton Friedman economists in our universities).

Aside from their blind faith in the “obvious” success of the Canada-U.S. free-trade agreement (FTA), all the above organizations have two important things in common. They are all mostly funded by the same big right-wing corporations (and, as we have seen, a large percentage of these are American). Second, none of them is apparently willing to believe the extensive, detailed documentation of the actual economic results of the FTA produced by Statistics Canada.

No corporation pushed Mulroney’s free-trade agreement with the United States harder than the Royal Bank of Canada (which, of course, now promotes itself as “RBC” so it can more easily invest even more of its, and our, money in the United States).

Is it any wonder that, in the face of the increasing and overwhelming evidence that the FTA failed to produce the results Canadian big business and our negotiators had promised, the bank produced its own laudatory version of the agreement’s results in a widely publicized November 2006 report. “Free-Trade Fears Unfounded, RBC Says” was a headline in the
National Post
. Fears and criticisms are “myths” of the past. And, please note, “Exports have soared and foreign direct investment in Canada has risen substantially.”
³
(No mention of how many billions of dollars the Royal Bank ships out of Canada or how much they lend to foreigners to help them take over Canadian companies.)

During the past decade, a consistent picture has been presented by big business, by almost all of our Liberal and Conservative politicians, and in most of our business pages. The FTA has been an enormous success, producing “massive benefits,”
⁴
a great, unquestioned triumph. Given the large increase in Canadian exports, how could anyone possibly think otherwise? To say that the media in Canada have completely and miserably failed and misled Canadians in respect to the economic results of the FTA is no exaggeration.

It’s too bad that apparently none of these people knows how to operate a simple calculator. And it’s too bad that none of them is familiar with the huge amount of contrary evidence in numerous publications such as Statistics Canada’s
National Income and Expenditure Accounts
, or the excellent Statistics Canada annual,
Canadian Economic Observer: Historical Statistical Supplement
.

Where to begin? Let’s start with GDP per capita. In the 17 years before the FTA, 1972 to 1988, GDP per capita increased by $9,365. During the first 17 years of the FTA, 1989 to 2005, the per-capita increase fell to only $8,354.
⁵
In the 17 years before the FTA, Canada’s overall GDP increased at an annual rate of over 3.66 percent. During the first 17 years of the FTA, it increased at an annual rate of only 2.63 percent. Quite a difference!

In the years before the FTA, Canada’s GDP per capita was as high as 91.5 percent of the U.S. rate. By 2006, it had fallen all the way down to 83.8 percent. During the 1960s, Canada’s annual GDP percentage
increase was greater than that in the United States in eight of the 10 years. In the 1970s, it was greater than the United States in six of the 10 years. However, since the FTA, during the 18 years ending in 2006, the U.S. GDP increase was greater than Canada’s during 12 of the 18 years.

There have been numerous claims that the real objective for Canadian FTA negotiators was to come away with an agreement that would raise the rates of productivity in Canada. In fact, Canadians were frequently promised this result during the free trade debates of the mid-to late-1980s.

Let’s see how we made out. In the 17 years before the FTA, output in the business sector in Canada increased at an average annual rate of 3.31 percent. However, from 1989 to 2005, it increased by only 2.84 percent a year.
⁶
What about output per hour in the business sector in Canada compared to the United States? Before the FTA, it was as high as 90 percent. By 2006, we had fallen all the way down to less than 74 percent.

And how have we made out in terms of the annual rate of change in productivity in the total Canadian economy? In the 17 pre-FTA years, it increased by an average of 3.63 percent a year. In the first 17 FTA years, the annual increase fell to only 2.65 percent. What about labour productivity levels in Canada as a percentage of those in the United States? In 1988, we were at about 90.5 percent of the U.S. level in GDP per worker. By 2006, we were down to under 84 percent. In GDP per hour, we were over 88 percent of the U.S. level in 1988, but down to only 82.4 percent in 2006.

What about the creation of new jobs? In the 17 pre-free-trade years, we created 4.43 million jobs in Canada. In the first 17 years of the FTA, we created only 3.41 million jobs. In the 17 years before the FTA, employment in Canada grew at an annual average rate of 1.76 percent. From 1989 to 2006, the annual growth rate fell to 1.41 percent. Once again, a substantial difference.

In every single year from 1989 to 2005, Canada’s unemployment rate was higher than the OECD average.
⁷

While real exports of goods and services have increased during the free-trade years, employment growth has nowhere near matched exports
in any comparison you can think of. Moreover, job growth in Canada has been much greater in domestically oriented industries than in export-oriented sectors of the economy. In fact, one study prepared for Industry Canada showed that increased trade had actually produced a net loss of jobs, because increased imports displaced more jobs than increased exports generated.

Now let’s turn our attention to how workers in Canada have made out since the FTA came into effect in 1989. In the 10 years before the FTA, compensation per employee in the Canadian business sector increased by an annual average of 7.4 percent, slightly ahead of the total OECD average of 7.2 percent, and also ahead of the U.S. average of 6.1 percent.

From 1989 to 2005, however, the average compensation increase per employee in Canada over the 17-year period was only 3.25 percent, well under half of the average for the decade before free trade, and now below the OECD average of 3.85 percent, and also below the U.S. average of 3.95 percent. Measured another way, negotiated wage settlements in the first 17 years of the FTA produced an average annual increase of 2.34 percent. During the same years, the consumer price increase averaged 2.43 percent.

During the 1980s, the average annual increase in employee wages in Canada was 6.34 percent. From 1990 to 2006, this fell all the way down to 3.27 percent. Many opponents of the FTA and NAFTA have contended that both agreements were primarily meant to drive up corporate profits by suppressing wages, with threats that jobs would be transferred to Mexico or to low-wage U.S. states. Certainly, labour income results support this theory.