Canadian Policy Responses to US Protectionism

By Ian Keay, Professor, Queen’s University

After tearing up a long-standing trade agreement between the United States and Canada, a deeply divided, Republican controlled Congress dramatically raises US tariff rates on products predominantly imported from Canada. The federal government in Canada is faced with an acute policy dilemma – there are strong domestic interests pushing for rapid and dramatic retaliation, while other groups, including farmers and landowners, are not nearly so enthusiastic about the prospect of a trade war with our largest and fastest growing trade partner. To complicate matters further, Canada’s European allies are keen to promote the continued globalization of international markets by keeping trade barriers low. The Canadian government ultimately decides to respond to these conflicting forces by re-writing virtually every line in the domestic tariff schedule, explicitly adopting protectionism as a primary policy goal, and increasing average tariffs by more than 50%.

This series of events probably sounds very familiar to Canadians today, but this particular episode in Canada-US trade relations took place over 150 years ago, during the late 1860s and 1870s. John A. Macdonald’s Conservative government introduced the National Policy tariffs as a response to US protectionism just months after his party won the 1878 federal election. Economists and historians have long understood that this response marked a sharp U-turn in Canada-US relations. However, our understanding of this policy, and its consequences for Canadian growth and development, has been hindered by researchers’ reliance on incomplete evidence.

Since confederation in 1867, the minister responsible for international trade has been required to publish information about every good that crosses the Canadian border. These trade tables are fantastically detailed, and over the late 19th and early 20th centuries, they fill hundreds of pages, covering thousands of products, in the federal government’s Parliamentary Sessional Papers. Working with Patrick Alexander, a recently graduated Ph.D. student from Queen’s, now working at the Bank of Canada, we have digitized these tables for every year between 1867-1913. The information now available to us, allows us to study Canadian trade flows and tariff levels at the finest level of disaggregation – individual products.

What we find is that Canadian trade policy during this volatile historical period was remarkably subtle and complex. Tariffs were not changed uniformly across all products, or even broad categories of product-types and industries. Specific products were narrowly targeted by the policy changes, with tariff increases disproportionately applied to foreign imports with close domestically produced substitutes, particularly if these domestic substitutes were produced by large, politically influential firms in voter-rich urban ridings. When the federal government began to step back from peak protectionism during the 1890s and early 1900s, again I find evidence of tariff changes that carefully discriminated among import products in ways that raised the benefits from protection, while avoiding the most costly aspects of protectionist policy.

Surprisingly, Patrick Alexander and I find that although multilateral trade liberalization would have been the best policy for Canadians during the late 19th and early 20th centuries, given the US government’s commitment to trade protection, unilateral retaliation may actually have slightly improved Canadian welfare in 1879. In the longer run, work I have done with Frank Lewis and Richard Harris suggests that the National Policy tariffs may also have helped foster output expansion and productivity improvement among Canada’s newly industrializing, more technologically advanced firms. Of course, we must keep in mind that international market conditions were quite radically different between 1870-1913 than they are today. The lessons we can learn from this period in Canada’s history must be interpreted with caution, but the parallels are clear, and the evidence now available to us is extensive and compelling.