Economic Nationalism

Economic Nationalism

Economic nationalism, in Canada, is a movement aimed at achieving greater control by Canadians of their own economy. In recent years it arose in response to the high degree of foreign (especially American) control of the Canadian economy. Two separate strands of economic nationalism can be distinguished. The first, protectionism in trade - the establishment of a system of tariffs to favour domestic production of goods and to discourage imports - dates at least to the National Policy of 1879. The policy was partly intended to encourage the creation of an industrial base in Canada by protecting so-called "infant industries" against the competition of larger and more established firms abroad. The second strand is concerned with the ownership of Canadian businesses by foreigners and is largely a post-WWII phenomenon, although some foreign direct investment did exist prior to 1940 as a classic 1936 study, Canadian-American Industry, revealed.

Rise of the Multinational

The rapid increase of foreign ownership in the Canadian economy after WWII was linked to the rise of the multinational corporation. Various multinationals realized they could bypass tariff restrictions by building and operating their own branch plants (or subsidiaries) inside Canada. As these foreign-owned corporations proliferated, economic nationalists became concerned with the special problems created by this type of investment, particularly the stunted and distorted pattern of economic development. Such investment also tended to shift control over economic decision making outside Canada to the head offices of these foreign corporations. Economic nationalists began to demand legislation to monitor the activities and to restrain the growth of foreign ownership in the Canadian economy.

Antinationalists generally responded to both strands of economic nationalism by emphasizing the benefits of a "free and unhampered" trade with all nations according to the doctrine of economics known as the law of comparative advantage. Economic growth will be maximized when government restraint, eg, tariffs on trade flows, is minimized and all countries specialize in the goods they produce best and trade freely with each other. Although this argument is only relevant to trade protectionism, it was extended to cover foreign direct investment - foreign-owned firms would succeed in establishing themselves in Canada only to the extent that they could produce their goods more cheaply than local firms, thus benefiting Canadian consumers and the Canadian economy; therefore foreign investment ought to be freely permitted for the same reason as free trade. This argument depends implicitly upon the assumption of a competitive economic environment with free markets where flexible prices prevail for flows of both goods and of capital. It is this very assumption that economic nationalists questioned by indicating the peculiar economic and political features of the extension of multinationals and of the American presence in the Canadian economy.

The concerns of economic nationalists were articulated in a series of 4 government-sponsored reports drawn up over the past several decades. The first, on Canada's Economic Prospects (1955-57), known as the Gordon Commission after its chairman, Walter L. Gordon, was established in response to the growing tide of foreign ownership in the Canadian economy, estimated at that time to be about 40%. The Gordon report was moderate; it noted the growth of foreign direct investment, concluded that perhaps "legitimate Canadian interests" were being compromised in the process, and recommended that Canadians be permitted at least part ownership in foreign-owned subsidiaries operating in Canada.

The governments of that period did not pay much attention to the report. Throughout the early 1960s the antinationalists, best represented by Professor Harry Johnson, dominated the debate. Johnson argued that nationalism "has been diverting Canada into a narrow and garbage-cluttered cul-de-sac" and that economic nationalism was an emotional reaction founded upon selfish, middle-class interests. Canada and Canadian workers in particular, he argued, would benefit by the removal of all restrictions to trade and foreign direct investment, for nothing would raise the level of economic activity and boost incomes more rapidly.

Dependence on the US

However, a new current of economic nationalism emerged in the 1960s, best exemplified by some of the essays published by the University League for Social Reform in Nationalism in Canada(1966). The book was followed by 3 more government-sponsored reports in the late 1960s and early 1970s which described various problems created by foreign-owned subsidiaries operating in Canada. For example, Canadian branch plants generally did not conduct research and development and lacked the facilities to do so. They also lacked full-fledged marketing and purchasing departments because these functions would often be managed by the parent firm in the US or Europe.

Consequently, Canadian initiatives in developing new technology and in the design and marketing of products were retarded. Because the companies were directed from abroad, Canadian managers and management were not able to develop to their full potential. A dependence on various US capabilities was slowly being built into the structure of Canadian industry, leaving it less able to adapt to change and international competition. There were other problems also, including the lack of Canadian directors on the boards of foreign-owned subsidiaries, and the tendency of branch plants to purchase their production inputs from the parent firm's suppliers abroad, thereby reducing the number of orders for Canadian companies. The ability of the head office to establish prices for both inputs and outputs ("transfer prices") of their subsidiaries made it possible to manipulate balance sheets to reduce taxes payable to the Canadian government.

Extraterritoriality - the tendency of the American government to assert legal jurisdiction over the branch plants of US-based firms operating in other countries - is a major political problem. Under the Foreign Assets Control Regulations (Trading with the Enemy Act), the Sherman Act and s7 of the Clayton Anti-Trust Act, the American government retained for itself the primary jurisdiction in deciding which countries its foreign subsidiaries could or could not trade with, when they might or might not discuss mergers, and various other functions. Canadian sovereignty in this regard has been compromised, for despite various negotiated administrative accommodations the US has successfully retained primary jurisdiction over its subsidiaries abroad.

In response to these various problems, a number of policies were recommended in 3 government studies. The Watkins Task Force, in its 1968 report Foreign Ownership and the Structure of Canadian Industry, recommended the creation of a special agency to co-ordinate government policies and programs dealing with multinational corporations. One of its tasks would be the gathering of more information on their activities in Canada, enabling the government to better monitor their behaviour. The Wahn Report, published in 1970 (The Eleventh Report of the Standing Committee on External Affairs and National Defence Respecting Canada-US Relations), reiterated this recommendation, suggested that Canadians attempt to secure 51%ownership in foreign firms, and recommended, as the Watkins Report had done, stringent laws to countervail American extraterritorial jurisdiction. These laws would effectively make it illegal for corporations operating in Canada to refuse legitimate export orders from any country, regardless of the nature of that country's diplomatic relations with the US. It also proposed that any future takeovers of Canadian businesses by foreign-owned firms should require the consent of a control bureau such as the one outlined by the Watkins Report, and that certain "key sectors" of the economy should be identified "where no further takeovers would be allowed."

The 1972 Foreign Direct Investment in Canada, known as the Gray Report after its chairman, Herb Gray, again recommended the creation of a "screening agency," but also specified the particular areas that should be considered in the decision to permit or forbid a foreign direct investment proposal. For example, a foreign firm contemplating the purchase or erection of a plant in Canada might be questioned about the need for its particular products (would it only duplicate products already available in Canada?); about the nature of the technology to be employed in comparison with technology available in Canada; about employment possibilities; and about its plans for research and development, its product innovation in Canada, and its plans for purchasing materials, components and services in Canada.

On the basis of these reports, nationalist sentiment crystallized in Canada in various ways in the 1970s. Several organizations and lobby groups arose, eg, the Committee for an Independent Canada (CIC), which was formed in 1970. Its members, from a broad array of professions and geographic locations and from all 3 major political parties, wanted to involve concerned citizens in a campaign to influence governments across Canada to adopt the "legislative policies that will significantly diminish the influence presently exerted by outside powers ... on Canadian life." The CIC produced a number of books on economic nationalism and provided an important forum for nationalist policy proposals.

As a result of recommendations in the Watkins, Wahn and Gray reports, the Foreign Investment Review Agency (FIRA) in 1974 began to review all proposals for foreign takeovers of existing businesses or the creation of new foreign-owned businesses in Canada, for the purpose of ensuring maximum benefits to Canadians from these enterprises. FIRA was structured very closely upon the recommendations of the Gray Report, and Herb Gray became its first chairman. However, because Canadian and foreign businesses complained that FIRA's lengthy review procedures effectively impeded new foreign direct investment, its procedures were revised in 1982. The shorter and less complicated "small business" review procedure applied to all proposals involving businesses with less than $5 million in gross assets and less than 200 employees (in contrast with the previous ceiling of $2 million and 100 employees).

The National Energy Program (NEP), established by the Liberal government in 1980, also emerged from the movement for economic nationalism. It was created to guarantee the security of Canada's energy supply (in particular, to end Canadian dependence on world oil and gas supplies) and to provide Canadians with the opportunity to increase their ownership of the energy industry. The original goal was 50% ownership of Canadian oil and gas production by 1990. With the revenues from a new tax imposed upon all oil and gas producers in Canada, the government funded the Petroleum Incentives Program, under which monies were redistributed to Canadian companies investing in the energy industry. Canadian control of the energy sector increased from 22.3% to 33.1% in the first 2 years.

The NEP was heavily censured by critics of the Liberal government, who claimed that the purchase of foreign assets under the NEP was made at inflated prices and extremely high interest rates. They also asserted that the NEP financially crippled Canadian energy companies by overextending their investment capabilities and that it was itself nothing more than a gigantic "revenue grab" on the part of the federal government. Advocates of the program conceded that bad luck and high interest rates dogged the NEP, but insisted the program itself was necessary in order to allow Canadians to share in the tens of billions of dollars of profits that would otherwise have flowed almost exclusively into foreign hands. This program was dismantled by the Conservative government of Brian Mulroney, which launched a new initiative for free trade with the United States.

Economic nationalism, it is important to realize, can best be understood in the broader context of Canadian dependence on the US. In entertainment, publishing, magazines, education, defence, the media, etc, American influences have threatened to become overwhelming, adding impetus to the arguments of economic nationalists who understood themselves to be fighting for the survival of a Canadian way of life. What was seen by antinationalists as self-interested protectionism at the expense of the economic welfare of the Canadian public, could better be regarded as a countermovement for the protection of Canadian society and sovereignty.