Trade Compliance

GHY discusses changes to international trade regulations and explores cutting-edge compliance strategies.

Reflections on Free Trade and Protectionism in Early Canadian History

Posted June 11, 2015


This past weekend marked the anniversary of the death of Sir John A. Macdonald, a noteworthy date in the Father of Confederation’s bicentennial year. It seems fitting therefore to reflect on the pivotal role international trade policies of that period in history played in bringing about the country’s political union and how the Old Chieftain’s signature economic program helped set the course for Canada’s industrial future.

The British North American colonies that would eventually become Canada, an immense but largely frozen waste sparsely inhabited by fewer than 2 million people, were able to maintain their independence from the United States in large part due to the mercantile trade and navigation privileges of the Empire, which provided a protective mantle for the early pioneer economy and made the transport and sale of colonial products the monopoly of British merchants and shippers.

This beneficial arrangement of imperial preference came to an end however when Britain, at the time nearing the apogee of its global economic dominance, determined that the protective regime of tariff barriers and colonial monopolies was no longer needed and that its interests would actually be better served by free trade. Adam Smith’s gospel, which since it was published to great acclaim in the same year as the Declaration of Independence, had steadily been gaining intellectual traction with middle-class businessmen, industrialists and Liberal politicians, finally triumphed when Sir Robert Peel’s Tory government, over the strenuous objections of many within his own party, repealed the Importation Act 1815 (the so-called “Corn Laws”) in 1846, just as the Irish famine was raging.

The first reaction by the Canadian commercial class to unwinding of the Empire’s mercantile privileges was to seek stronger ties with another empire; quite naturally, the dynamic one in embryo south of the border. Facing threats from the business community in Montréal of annexation to the United States otherwise, the newly arrived Governor General Lord Elgin was strongly urged to swiftly enter into negotiations for a trade deal with Washington to restore some degree of certainty about access to markets for Canada’s resource exports. This was concluded in 1854 by the Canadian–American Reciprocity Treaty (also known as the Elgin-Marcy Treaty) between the U.S. and the British possessions in North America including the United Province of Canada, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland Colony. 

The treaty established reciprocal free trade between Canada and the U.S. on a wide range of raw materials and agricultural produce – especially timber and wheat – thereby ending the American’s 21% tariff on natural resource imports. The treaty’s other principal provision, in fact the one chiefly of interest to the Americans in light of past disputes and diplomatic friction arising from it, was for the admission of U.S. fishermen to the BNA’s Atlantic coastal fisheries and a similar privilege to admit Canadian fishermen into U.S. coastal waters along the northern half of the eastern seaboard.

The ten year period during which the treaty lasted was, coincidentally, a boom time for Canadian commerce and prosperity that witnessed rapid growth of the economy especially in southern Ontario owing mainly to various factors such as the U.S. Civil War, railway construction, and general income and population growth. Even so, trade doubled between the two countries over the course of the decade, with much of the balance in favour of Canada, which saw exports grow by 33% compared to an increase of only 7% for the Americans. Partly due to displeasure at this trade imbalance by protectionist interests and their Republican allies in Congress, but more likely owing to lingering animosity towards Britain for having unofficially supported the Confederacy during the Civil War and a desire on the part of U.S. annexationists to inflict economic hardship on its Canadian colonies — thereby compelling them, so the rationale went, to “come within the magic circle of the American Union,” as the U.S. Secretary of State William Seward put it — the treaty was abrogated by the U.S. in 1866. 

Meanwhile, discussions about forming a political union had been quietly ongoing for a number of years between the British North American colonies through a series of negotiations and conferences. The long-simmering idea was fueled in no small part by growing fears of American domination, arguably not without justification following the annexation of Texas and Oregon in the 1840s and routinely heightened by bellicose rhetoric from expansionist U.S. politicians warning that a similar fate awaited Britain’s remaining colonies as part of America’s “manifest destiny.” Some though questioned whether the “howling wilderness” north of the 49th parallel would really be worth invading. Years earlier, the radical English pamphleteer William Cobbett had quipped that if the United States were to seize Canada it would be the act of a thief who should “steal a stone for the pleasure of carrying it about in his pocket.”

Be that as it may, with an “atmosphere of crisis” from threats of impending annexation, American settlers swarming over the western frontier, border raids by fanatical republican Irishmen based in the U.S., and the Colonial Office in London signaling Britain’s reluctance to continue defending and administering territories that it increasingly regarded as a burdensome drain on the exchequer, abrogation of the Reciprocity Treaty may well have been the final tipping point providing the impetus needed to bring Confederation into being the next year with passage of the British North America Act of 1867. Legislation it’s perhaps worth noting, that according to Macdonald’s memoirs was treated in Westminster as “a private Bill uniting two or three English parishes” and which attracted less interest from MPs than a proposed measure being considered to tax dogs. 

Although now politically strengthened, the newly formed Dominion of Canada remained economically weak and its aggregate domestic market limited. Canada’s population of roughly 3 million was still overwhelmingly rural and merely one-tenth that of the United States. Montréal, the country’s largest city and only significant industrial centre, had a population of just over 100,000 and Toronto about half that number.  Industry was still at the formative stage of local, small-scale manufacturing that was adjunct to other sectors and exports consisted primarily of raw staples and semi-processed resources such as pulp, square timber, sawn lumber and coarse grain or flour. Agriculture was the largest sector of the economy, accounting for 54% of commodity income for Canada as a whole; by comparison, less than 4% of export trade was in manufacturing. 

After easily winning the country’s first general election, the majority of Macdonald’s enthusiasms were focused westward with territorial and economic expansion into a new agricultural frontier that would also set the stage for an envisioned transcontinental railway. Rupert’s Land and the North-Western Territory were both purchased from the Hudson’s Bay Company in 1869 for the tidy sum of $1.5 million. Unfortunately, nobody had thought to consult the ambivalent residents of the Red River Colony, thus resulting in a “rebellion” (in fact, a peaceful resistance movement) that eventually led to the creation of the province of Manitoba in 1870.

That same year, Macdonald faced another contentious dispute, this time with U.S. government over American vessels illegally fishing in Canadian waters. Balking at paying substantially increased license fees, American fisherman had responded by deciding to simply carry on fishing without a license. Accordingly, the Canadian government suspended the license system altogether and dispatched coast guard cruisers and customs agents to police the inshore fishery and seize American schooners if necessary. This “unfriendly and vexatious” behaviour “designed to bear harshly upon the hardy fishermen” of America, seriously annoyed U.S. President Grant who threatened to retaliate by suspending the in-bond transit of goods to the upstart Dominion and barring all of its vessels from U.S. waters.  

In addition to the inshore fishing dispute, the Grant administration had a litany of grievances at the time against Britain and her “semi-independent but irresponsible agent” (as the U.S. president dismissively referred to Canada) that included boundary disputes in the western territories, navigation rights along the St. Lawrence, and outstanding reparations claims against London for its role in aiding and abetting the Southern rebellion during the Civil War. A series of negotiated arbitrations between Britain and the United States convened in the American capital to resolve the “vexatious” differences between the two great powers. These deliberations culminated in the Treaty of Washington, signed in 1871 and ratified in 1873, that settled the various quarrels amicably, but not generally in favour of Canada, which had its indemnity claim for damage incurred during the Fenian raids rejected and was forced to grant the U.S. free navigation of the St. Lawrence, as well as open the inshore fisheries to American vessels for a period of 12 years in exchange for free entry of its fish into the American market.

Although having been appointed to be part of the British delegation – an “ungrateful task” in which he had little real say or influence – Macdonald complained bitterly in private that the other four commissioners from London had made sacrifices “no matter what the cost to Canada,” but which he was compelled to accept nonetheless “for the sake of peace, and for the sake of the great Empire of which we form a part.” On first reading of the bill that would formally ratify the Washington accord the following year, Macdonald starkly outlined the non-choice facing parliament: “Reject the treaty, and you do not get reciprocity. Reject the treaty, and you leave the fishermen of the maritime provinces at the mercy of the Americans. Reject the treaty, and you will find that the bad feeling which formally and until lately existed in the United States against England will be transferred to Canada.” To that end, Macdonald conveyed to MPs a warning from an American statesman that rejection of the treaty would mean war, “Not war tomorrow or at any given period, but war whenever England happened to be attacked from other sources.”

Little wonder in the climate of animosity and bitter recrimination which existed during the period immediately following Confederation, that efforts to re-establish reciprocity of trade with the United States met with little success. In the summer of 1869, Macdonald’s minister of finance Sir John Rose had made an abortive foray to Washington to pitch a wide-ranging trade agreement to Hamilton Fish, President Grant’s secretary of state that would have included the assimilation of customs and excise duties with the U.S. and free trade in certain manufactured products, as well as in natural goods. However, given the strong anti-British sentiment in Congress at the time, these discussions failed to make any further headway and were then shelved altogether during the more pressing Anglo-American arbitration over unsettled Civil War issues.

The matter of trade was next taken up in 1874 when the newly elected Liberal Prime Minister Alexander Mackenzie dispatched fellow newspaperman George Brown; an erstwhile Reform politician and soon-to-be Senator, in addition to being the wealthy proprietor and influential editor of The Globe (where he presided over a “reign of literary terrorism” according to one contemporary journalist), on a mission boost the struggling economy by negotiating a free trade agreement with the Grant administration in Washington. An economic liberal, Brown had long upheld reciprocity and the principle of removing tariff barriers, his own business interests having substantially benefited from it in the past. The draft treaty negotiated over several months by Brown and Sir Edward Thornton, the British minister at Washington, with Secretary of State Fish was to have lasted for 21 years and provided for reciprocal free admission of natural products, agricultural implements and many manufactured wares as well.

Unfortunately for Canada’s plenipotentiary, Grant’s affable but wily representative, in keeping with his general demeanor of being “uninterested, un-cooperative and unenthusiastic” throughout the talks, delayed submission of the treaty to Congress too late for it to be adequately considered, making it available to lawmakers just days before they were set to adjourn for recess. As a result, the Senate simply set the document aside, never even bringing the proposed trade agreement up for debate, let alone voting on it. Even had the issue made it to the floor rather than sliding into limbo, chances are doubtful the treaty would ever have been approved given that Congress was then controlled by a majority of Republicans that, generally speaking, were most often unfavorably disposed towards notions of free trade. Moreover, it should be noted that when details of the draft treaty were made public in Canada, manufacturers and business groups criticized it “emphatically and in detail.”   

While in opposition after the Conservative’s crushing defeat following a notorious bribery scandal connected to financing of the transcontinental railway, Macdonald, who had previously been a free trader, now came to believe that protection was necessary to the development of Canadian industry and was privately critical of the failed attempt to bargain for reciprocity with the Americans. This change of mind was influenced not only by his read of the prevailing public mood, but shaped in large part by reaction to the European fiscal crisis in 1873, which had panicked markets around the world and triggered a global depression that was to last for the remainder of the decade. During the years following the American market crash, the Canadian economy was plunged into hardship, unemployment and general distress. With foreign investment capital in short supply, the Mackenzie government struggled to raise the funds needed to continue building the Canadian-Pacific railway; its failed attempts to make it self-financing and the resulting slow pace of construction leading to claims from the new province of British Columbia that the agreement under which it had entered Confederation in 1871 was potentially in jeopardy of being broken.

Macdonald saw the dramatic hiking of import duties as an expedient solution to the problem of raising the money required to speed up completion of the transcontinental railway; the Customs Tariff then being the federal government’s main source of revenue in the era prior to the introduction of income taxes. The notion of using public funds to subsidize the building of Macdonald’s “national dream” – by any objective measure a fiscal and economic insanity – was perhaps a visionary idea but not entirely novel or one that emerged in a vacuum. The latter half of the 19th century witnessed a tremendous outburst of economic and political nationalism emerge simultaneously in various parts of the world, most often combined with demands from agricultural interests and fledgling industries for the implementation of protective tariff walls to shield them from competition. The view was widely shared by conservative politicians at the time, Chancellor Otto von Bismarck being one such notable example, who felt that a combination of high tariffs, import substitution policies, nationalization of railways, and stimulative spending by the state would promote industrial development and boost economic growth in the newly cobbled together German nation.

After having drifted towards the position for some time, by 1877 raising tariffs was officially adopted as policy by Macdonald and the Conservative party, although the toxic word “protection” should never be used publicly, Macdonald cautioned his colleagues. Instead, it would be referred to on the campaign hustings somewhat obliquely as “a national policy” that would involve “paying the United States in their own coin.” The proposals, made in speeches to boards of trade and at the picnic grounds of Ontario – “infernal things” Macdonald described such political events – to aggressively employ fiscal devices that many felt up to now Canadians had only suffered from being on the sharp end of, were well received by the public and resulted in the Conservatives winning more than a dozen by-elections.

The Mackenzie Liberals by contrast, despite some regional divisions within the party on the matter, were by and large true free traders, adamantly opposed to higher tariffs, even when falling revenue levels necessitated them. Modest tariff increases to the Tariff that the tightfisted Mackenzie government was forced to make during its years in power were regarded by the protectionist business lobbies in Montréal and Toronto as wholly inadequate. Even so, the Liberals never disguised their distaste for such measures, as when finance minister Sir Richard Cartwright pronounced that “every increase in taxation as a positive evil in itself.” Unlike their modern counterparts, Liberals of the time were a rather puritanical, abstemious lot who sought fiscal restraint derived from an ideological concept of minimalist government. In 1877, Cartwright declared that governments could no more influence the business cycle than “any other set of flies on a wheel” – an unfortunate turn of phrase that led Conservatives to deride their Liberal opponents in just that manner as a set of incapable and uncaring flies.

The election of 1878 was a decisive victory for the Conservatives that saw Macdonald redeemed (despite the minor hiccup of losing his own seat, a problem solved by parachuting him into a vacant riding in Victoria, a city he would never visit) and the tone-deaf Liberals, who had badly misjudged the mood of the public, being utterly crushed. The Tories were now empowered to implement a new regime of significantly higher tariffs that they had campaigned for, the first part of an economic development strategy that gradually took on a much broader and more comprehensive scope over the years under the heading of the National Policy.

For now, the new Customs Tariff featured in the Macdonald government’s budget of 1879 was designed to protect and build Canadian industry, with high rates of duty levied on the import of most finished products and tariffs lowered on selected raw materials and sophisticated production equipment used in the manufacturing process. Duties on finished goods were raised from 17.5% to between 30% and 45%, and the free list was considerably reduced. Cottons, woolens, furniture, and iron manufactures were given especially favoured treatment. The production of pig-iron and steel was further encouraged by the introduction in 1883 of a system of “bounties” to act as countervailing measures against the dumping of surplus foreign products below market prices.

Protective tariffs remained a cornerstone of Conservative economic policy for many years, playing an important role in keeping Macdonald in power until 1896. Prime Minister Robert Borden would maintain the policy from 1911 to 1920, as would Prime Minister R. B. Bennett from 1930 to 1935. Even the Liberals under Wilfred Laurier, despite vehement professions in opposition and being harshly critical of the National Policy as a whole during the 1896 campaign, realizing its popularity in Ontario and Quebec, promised to retain key aspects of it. And indeed, once they were in office, apart from adding a few items to the free list and tweaking a few of the classifications for the sake of simplification, the Liberals kept the general tariff at high protectionist rates, even raising the duties on some items. However, when Laurier subsequently ran on a so-called free trade platform in 1911, quite misleadingly described as advocating “unrestricted reciprocity” with the United States, the Grits were decisively swept from power by an apprehensive public.   

Although unquestionably a political triumph in central Canada during its time, it remains less certain whether the National Policy’s trade protectionism was a “dizzying success” from an economic standpoint for the country outside of the “Golden Triangle” along the Montréal-Windsor axis, or was indeed crucially significant as some maintain to Canada’s own industrial revolution in the 19th century. Macdonald was certainly extremely fortuitous in returning to power just as the global economy was emerging from six years of recession in 1879 and cycling back into a four year boom of immense worldwide prosperity, a fact that lifting of all boats has perhaps conferred some unwarranted prestige onto the National Policy.

Opinion by economists and historians remains deeply divided as to whether the Macdonald’s approach to creating a robust national economy was the correct path and whether the legacy of his trade policies have been generally positive or negative. Whatever the case, it is indisputable that the reverberations of the first prime minister’s grand designs are still being felt 136 years after the fact and to some extent are still shaping the debate regarding a number of the most contentious political and economic issues Canada faces in the present day.