Canada: Globalization - General Overview As Seen From Developed Countries - Part 1

General Observations and a Case Study – Canada and the U.S.
Last Updated: September 22 2006
Article by James Farley

Most Read Contributor in Canada, September 2018

Delivered to the Third East African Magistrates and Judges Association Judicial Conference, Dar es Salaam, Tanzania on January 21, 2004.

Globalization is a tool. It can be well used and therefore be to the advantage of those affected – i.e. affected in a very positive way. It may also be ill used and therefore be to the disadvantage of those affected – initially this will have the negative effect upon the weaker countries or regions of the world but eventually all will have the problem of letting an opportunity slip through their collective fingers of sharing a maximized wealth. That is, both the stronger and the weaker will be poorer than they otherwise could be. I will deal with this topic through the eyes of a judge working in a Commercial Court which deals with many cross-border cases, both insolvency and non-insolvency related. Please refer to www.ontariocourts.on.ca/superior_court_justice/notices/toronto_region/commercial.htm to access our Commercial List Practice Direction. Please also see my paper for the World Bank Global Judges Forum on Commercial Enforcement and Insolvency Systems, held May 19-23, 2003, entitled "Efficient Court Administration: Value Added Techniques for Real Time Litigation, Court Administration and Case Management – The Need for Effective, Efficient and Timely Delivery of Justice – The Superior Court of Justice Experience in Toronto, Ontario, Canada" at http://www.iiiglobal.org/country/canada/commercial_enforcement.pdf as to the operations of our Commercial List in Toronto. The www.iiiglobal.org general website contains a wealth of material concerning insolvency related topics worldwide.

The Need for Globalization and the Cancún Talks

Globalization in its purest sense is the process by which countries (or regions) and their constituents have the greatest choice as to whether or not to produce a certain thing (including goods and services) and whether or not to acquire a certain thing produced either domestically or in a foreign country. Thus a person is able to decide whether he has a better efficiency in producing, say, wheat than in producing automobiles or space vehicle rockets. That person may then choose to produce the wheat and buy the automobile from an exporter in another country, but not choose to buy any space vehicle rockets at all. The prudent purchaser will of course wish to ensure that the automobile purchased will stand up to local conditions in his home country and that he will be able to get parts and service.

Stanley Fischer (formerly of the International Monetary Fund and the Massachusetts Institute of Technology) in his paper "Globalisation and Its Challenges, AEA Papers and Proceedings", American Economic Review, Volume 93, Number 2, May 2003, makes a compelling case that globalization has been assisting poorer countries to catch up with the wealthier, particularly if one looks at matters on a per capita basis so that the enormous strides made by China and India are recognized. This was contrasted with the difficulties which countries in sub-saharan Africa have had with economic integration. Indeed many of the world’s highest trade barriers are those imposed by poorer country governments on trade with other poorer countries compounded with a lack of security or stability.

The book review in that well regarded periodical The Economist of Ending Hunger in Our Lifetime: Food Security and Globalization, by C. Ford Runge, Benjamin Senauer, Philip G. Pardey and Mark W. Rosegrant (Johns Hopkins University Press) in its August 23, 2003 edition at pp. 68-9 stated:

Many of the hungry in poor places are farmers themselves. Their failure to grow–and earn–enough stems from a variety of reasons, from a lack of access to modern farming tools to environmental constraints to poor roads which prevent them from reaching markets. The book offers a clear explanation of the agricultural problems confronting the world’s hungry. But its value lies in putting these physical challenges in a wider social context, looking at other factors, such as women’s education, which affect household food security.

As the authors acknowledge, there is little chance of business-as-usual halving the number of hungry by 2015, a goal enthusiastically endorsed by world leaders in 1996. But with the right "pro-poor" policies, the book predicts that the number of malnourished children in the world could fall almost threefold, to 57m by 2025; if such steps are neglected, however, that number could rise to 178m, with Africa bearing the brunt.

As Ernesto Zedillo, the former President of Mexico stated at p. 35 of the September 1, 2003 edition of Forbes Magazine (www.forbes.com) in his article "To Be or Not to Be at Cancún":

The GATT/WTO multilateral trading system has been a powerful engine of prosperity during the last half-century, delivering a twentyfold increase in world trade. Throughout its existence, however, this system has been more an instrument of progress for developed countries than for developing countries. The trade playing field is tilted against the latter. The remaining protectionism of industrialized countries is concentrated in sectors of big export interest to developing countries, and the system has been increasingly loaded with rules that are more an impediment than an incentive to developing countries’ engagement in international trade.…

Rather than muddling through the meeting at Cancún, trade ministers should use it as an opportunity to reassess the entire process of multilateral trade liberalization. If the objective is to build a system with the greatest potential to support the economic growth of both developed and developing countries, the ministers should conclude that in the long run the system must have two essential features. First: It must achieve the total removal of barriers–tariff and nontariff–to all trade in goods by both developed and developing countries. It must also accomplish substantial, across-the-board liberalization of trade in services. Second: To be equitable to all participants, the system must provide universal enforcement of the principles of reciprocity and nondiscrimination. However, this does not preclude the implementation of special and differential provisions to help developing countries adjust more smoothly to free trade. But these provisions must be strictly temporary.

It is very unfortunate for all in the world – rich and poor alike – that the Cancún talks broke down. As indicated in their joint letter to the editor of the Financial Times (London, England) in the September 6/7, 2003 edition, The Earl Cairns (Chairman, Friends of Africa Business Group), Cyril Ramaphosa (Chairman, Millennium Consolidated Investments) and Dr. Mohan Kaul (Director-General, Commonwealth Business Council) noted that the World Bank and the International Monetary Fund have estimated liberalization of trade in agricultural products would increase developing countries exports by at least $30 billion U.S. a year and possibly by as much as $100 billion U.S. They went on to state:

Since 1995, protection and subsidisation in countries in the Organisation for Economic Co-operation and Development has doubled. They now spend close to $350bn every year to support their agricultural sectors, far more than the $50bn spent on aid.

Between 2001 and 2002, farmers from the US, the EU and China (the biggest cotton producers in the world) received cotton subsidies worth an estimated $4.9 billion. African producers, despite many competitive advantages, simply cannot compete in such a distorted market. These subsidies cost Benin, Burkina Faso, Chad, Mali and Togo $250 million a year in lost export earnings.

It would seem that farmers in the United States, the European Union and Japan have great political clout notwithstanding that it does not make economic sense to support their activities to the extent these countries have in the past – and continue to do in the future. But votes are important in getting governments in democracies reelected. Thus it appears that the U.S. spends about the same in cotton subsidies and protection for its domestic producers as the crop is worth.

Apparently Canada is not an innocent: According to the OECD’s calculation of producer subsidy equivalent which gauges total support for agriculture as a percentage of the value of production, the European Union support is at 36%, Japan 59%, the U.S. 18% and Canada 20% (up from 14% in 1997). Canada has significant protection for its dairy, poultry and egg producers while at the same time complaining of U.S. trade barriers to Canadian wheat.

It appears that the Cancún talks faltered because poorer countries refused to let the WTO craft a deal which only offered mild cuts in the richer country farm subsidies and at the same time would have forced the poorer countries to consent to starting negotiations on proposals to stop developing countries from controlling foreign investment and multinational activity within their borders. The unfortunate fallout from this is that according to the World Bank, over 70% of the benefits that poorer countries might see from the Doha round would come from freeing trade with each other and without any agreement flowing from the Cancún talks, the poorer countries came away with none of this benefit. In my view all countries would benefit from a return to the bargaining table.

Canada and the United States of America

Allow me to turn to Canada and the U.S. The U.S. has a mature broad-based economy which enjoys considerable depth. Canada is very much the junior partner in this relationship. The Canadian economy is mature and broad-based to a fair degree but nowhere near as much as that of the U.S. Given the U.S./Canada population ratio of 10:1 and the earlier business development of the U.S. coupled with a lesser dominance of resource based enterprises, it is not surprising that the Canadian economy does not have as much depth as that of the U.S. However the people of Canada have benefitted greatly from an increased liberalization of trade in goods and services with the U.S. We in Canada can do what we can do best – and yet we still have the ability to choose from a very expansive menu of goods and services which would not be available to us if we attempted to be self reliant to a much greater degree than we presently are.

The 15-year experience with NAFTA (North American Free Trade Agreement) has weeded out non-competitive companies and indeed industry sectors. However, our GDP, employment and social fabric support system has increased very significantly as a result of our competitive businesses and sectors having full access to the U.S. (and Mexican and now Chilean) market together with the benefit of lower cost imports.

Has it always been milk and honey when dealing with the U.S.? No, certainly not; we have our thorny issues with the U.S. from time to time – and in the case of softwood lumber, it appears that this, at least in recent years, has been with us forever. However, the two economies – and the social structure support in each country for those involved in that economy – are strong enough that there is no risk of being overwhelmed in the sense of domination dictating our ways of life. Indeed the increased economic activity has allowed for a larger and stronger tax base to bolster our existing societal framework safety nets and to foster our separate but similar cultural development. It was, however, a fairly uneasy time in the 1970s and early 1980s, particularly when the Canadian government adopted very tough national self-reliance rules for business operations and investment by the passage of the Foreign Investment Review Act (FIRA) and the implementation of the National Energy Policy (NEP). Both FIRA and NEP have been essentially modified out of existence but there is always the spectre of a new government reintroducing elements of these programs notwithstanding that that possibility is very remote given that there have been two changes of government since, including a return of the government which introduced these programs. The danger is that foreign investors have perceptions which die hard notwithstanding recent extensive experience. It is that concern which raises the cost of foreign capital, if it is to be had at all, over and above what pure business and economic reasons would dictate. If domestic capital is scarce and foreign capital expensive, then the local economy will be starved for capital (– and technology and know how transfer) resulting in a tendency towards an uncompetitive economy.

Instead I would advance the proposition that it is better to have a vibrant economy which will generate income – profits and wages for local entrepreneurs and workers, all of which can be taxed to pay for necessary social programs. Businesspersons and investors crave certainty; they also require that they be dealt with fairly and reasonably; and further that they have access to courts which dispense non-discriminatory predictable justice on a timely basis. That condition is true to a very high degree in the relations between the U.S. and Canada. Possibly the greatest bone of contention between these two countries in the question of access to justice is that there are concerns by Canadian business persons that if they are sued in the U.S. state courts (as opposed to the U.S. federal court system including the U.S. Bankruptcy Courts), they will suffer from the "local jury syndrome" which may result in an "out of stater" being regarded as fair pickings for the local litigants. An example of this would be the Loewen Funeral Homes case where a Mississippi jury awarded a half billion U.S. dollars as punitive damages against a Canadian company in a breach of contract case worth at the maximum $5 million U.S. The fallout of that was Loewen went insolvent and had to engage in restructuring. However, it would be fair to observe that a New York firm in similar circumstances may well have been treated the same way by a Mississippi jury. I note that the state of Mississippi ranks last in per capita income and its social programs leave much to be desired; it has not experienced the benefit of a resurgent southern economy.

Restrictions or No Restrictions and Other Concerns

Foreign investors and those who trade into the local economy reasonably require that they will not be discriminated against merely on the basis that they are foreign. Paying local creditors in priority to similarly situate foreign creditors cannot be defended. If business is doing well then there usually is no need to resort to the courts. But if business turns sour, then both domestic and foreign investors and creditors need concrete assurance that there will be a workable system of an insolvency regime which incorporates the ability to advance credit on the basis of taking legitimate security. If that condition does not exist, then investment, advancing credit and trade to that country’s economy will be like going to the casino. One may win big sometimes but one often loses and in the long run one always loses given the house odds.

Should a country have no foreign ownership restrictions on any sector of its economy? Perhaps the best case can be made for certain restrictions in the banking and media sectors (which are two areas in which Canada has restrictions). One may posit that the media sector (including print, radio, TV and movies) is a heavy influence on a country’s culture, perhaps the more dominant influence is the way in which people in a locality have developed and interact over a long period of time. Perhaps this can be most readily demonstrated by observing that it is reasonable to expect that even if Canada were to be incorporated into the United States it is extremely likely that the existing (but ever evolving) culture of the various regions of Canada would survive as distinct recognizable cultures in the same way that it can be said that there is no one homogenous culture in the United States but rather identifiable and continuing regional cultures notwithstanding a fairly centralized media sector. I would also add that the mainstay of the Canadian State TV operation is U.S. made programs.

What of the banking sector? It is possible to advance an argument here based upon the linkage between these financial institutions and government monetary policy. However, that leaves open the question of whether the amount of desirable control in this regard could be adequately achieved by certain regulations dealing with ongoing business relations – or indeed more appropriately dealt with on the basis of residency as opposed to citizenship.

The Economist in its May 3, 2003 edition at p. 3 of "A cruel sea of capital: A survey of global finance" recognized the need for a restrained balance about having some control in the financial sector:

Rapid globalisation has done nothing to undermine the confidence liberals have always placed in trade. No serious economist questions the case for international integration through flows of goods and services, though there is a lively argument over how integration through trade can best be brought about. Trade is good. But even the most enthusiastic advocate of economic integration may be starting to wonder whether unimpeded flows of capital are quite such a blessing.

Essentially the same logic applies to international finance. Just as a closed economy can consume only what it produces, it can invest only what it saves–no more, no less. Trade in capital makes it possible for countries to separate their saving and investment choices. They can invest more than they save by borrowing the difference from abroad; or they can invest less than they save by lending out the surplus. Changes in the price of capital will ensure that global supply and demand match up, just as changes in the prices of goods bring exports and imports into global balance.

Debts are also a main reason why mistakes in financial markets, when they happen, can have bigger consequences than errors in an economy’s less excitable parts. Losses may cascade across a series of lenders, many of which may not even have realised that they were exposed to the risk. A surprise that is big enough and bad enough may perturb the mood of self-justifying expectations that had up to then been propping valuations across an entire class of investments, and at worst across the economy as a whole.

A close-run thing
Trade in goods and services is simple: what governments need to do, through the World Trade Organisation, through this or that regional trade agreement, or best of all unilaterally, is abolish their barriers. When it comes to finance, there is no such straightforward advice. "Let capital flow where it may" is bad policy. Finance must be intelligently regulated, at home as well as internationally, in ways that ordinary commerce does not require. When capital flows are liberalised, it needs to be done cautiously and within prudent limits. To that extent, global finance must indeed be impeded.

Governments and their advisers are a long way from understanding how this should ideally be done, let alone from putting any such understanding into practice. There is no detailed consensus on the right approach to international financial regulation, any more than there is on the domestic sort: there is plenty of activity, but for the most part it is co-operation without conviction.

The risks of international finance need to be frankly acknowledged, and then reduced so far as possible. That means weighing the costs and benefits of different kinds of capital mobility, and setting policies accordingly. It means abandoning certain orthodoxies of international economic policy. The danger cannot be eliminated altogether, but the remaining risk is worth taking because the potential gains from international capital flows are large, especially for the world’s poor countries.

To ignore that potential would be an even greater mistake than to liberalise recklessly. The global capital market is a treacherous aid to economic growth, but in the end, above all for the poor, an indispensable one.

Market liberalization is commendable; it allows the economy to grow at the maximum rate – and in theory for the benefit of all. However, it seems to me that market liberalization – and the opening up of the market to foreign investors and traders – can only take place without undue strain on the social fabric of a country if it is done on a reasonable announced and predictable phase-in basis and with safety nets to avoid transitory disruptions such as currency fluctuation. In this regard I note the 13% change in the exchange rate between the Canadian and U.S. dollars over the past year. Canadian exporters have coped remarkably well, notwithstanding being caught off guard. No doubt some will have extreme difficulty in the coming year. However, consider the situation if the Canadian economy and particularly the very vital export sector were not so resilient – massive unemployment and bankruptcy with all the seeds of social unrest, stress and strife that would bring. Indeed and especially for lesser-developed countries it is important that there be a financial and political commitment (both externally and internally) to aid the transition of traditional institutions in a measured way so as to minimize the risk of such social disruption. One may well posit that greater attention should be paid to the maintenance of these domestic institutions by the WTO, the World Bank and the International Monetary Fund which have previously mainly stressed economic concerns. An example of such a problem would be the late 1990s financial crisis in Indonesia where it appears that the IMF may not have appreciated that the infrastructure in place would not support the IMF requirements for financial assistance as neither the courts nor the bar were then (rather instantly) capable of handling the task presented to them.

Allow me to cite at length a rather well reflected column in the Financial Times, supra, where Michael Prowse observed in his piece "Wealthy countries can afford to be big-hearted when it comes to trade":

A remarkable shift has occurred in the globalisation debate. Until recently, ministers and officials from rich western democracies and international organisations faced no serious intellectual opposition. Their own arguments might often be flawed, but this did not matter because their opponents’ arguments were always far worse. The anti-globalisers could break windows and disrupt meetings but they seemed not to grasp even the elementary principles of market economics.

Yet as trade delegates and protestors converge on the Mexico resort of Cancún for next week’s World Trade Organisation meeting, the logical gap has narrowed. Many elements in the self-styled "global justice movement" could benefit from a course in economics. There are, for instance, "localisers" who believe passionately in an extreme form of protectionism in which nations (or perhaps regions within nations) only import goods and services that they cannot provide for themselves. This would certainly fatally undermine global capitalism, but it would also plunge most of the world into abject poverty.

Yet the more rational voices within the global justice movement now understand that an attempted reversal of globalisation is neither desirable nor possible. The process is just too advanced. They see that globalisation has entered a phase in which services are being reallocated across national boundaries in response to the logic of comparative advantage, just as commodities were a century ago. British architectural practices now outsource technical work to staff in Vietnam and Wall Street banks are shifting analysts’ work to India. Nobody can halt, and still less rewind, such a rapidly progressing division of labour.

Yet what the better advocacy groups now grasp is that one can believe in market economics without necessarily endorsing the arguments of the richest nations. For instance, ardent globalisers regard the removal of trade and investment barriers as sufficient in itself. Their Luddite opponents oppose any deregulation. Both parties miss the main point, which is that market opening offers the greatest benefits only when accompanied by a range of other social policies.

In fact it is often politically possible only as part of a package that includes redistribution and higher investment in public services such as healthcare, education and poverty relief. On the international stage, this balance is hard to achieve because the most powerful agencies – the ones that really influence the internal policies of poorer nations, such as the International Monetary Fund, WTO and World Bank – have a primarily economic rather than social focus.

If you imagine a nation trying to manage the social aspects of economic growth with staff mostly seconded from its finance ministry, central bank and trade ministry, you will see the scale of the problem. Today economic specialists are largely overseeing the growth of a globally integrated market, but that task, seen as a whole, is really little different from that of managing a domestic economy. The problem lies not with globalisation per se but rather with the one-sided character of the political instruments available for managing it. Social justice is never likely to be a primary concern when the agencies in the driving seat have a largely economic focus.

On the issue of how best to draw the poorest nations into the global market – the supposed focus of the present Doha trade round – the position of advocacy groups such as Oxfam is more logical in some respects than that of rich nations. The latter are wedded to strict reciprocity: in discussing tariffs and other barriers, they insist on a pound of flesh for a pound of flesh. We will make a concession, they say, but only if you make at least as big a concession in return. Thus they justify their policy of imposing much higher tariffs on imports from poor countries than they do on imports from their rich counterparts, by pointing to the high tariffs that poor countries themselves impose. Yet while reciprocity might be a sensible stance for negotiations between equals, does it make sense when one party is vastly stronger than the other?

Rich, stable nations find it hard to deregulate in politically sensitive areas. Look at agriculture, where industrialised countries spend more than $1bn a day subsidising their farmers, six times their total foreign aid payments. Or look at textiles and garments, where tariffs and quotas remain high in spite of promises to remove barriers. Yet rich countries have long-established welfare states: they have the capacity to offer income support to the victims of economic change and to provide a wide range of public services in fields such as healthcare and education.

By contrast the poorest nations are far less capable of coping with the transitional social problems created by deregulation. Here social dislocation is felt by individuals who are more vulnerable if they lose their livings than their counterparts in rich nations. The network of welfare provision is patchier, where it exists at all. It follows that economic liberalisation poses a bigger political challenge. And this means the rich nations’ "pound for pound" demand is misplaced.

A "big-hearted" strategy of offering much larger trade concessions to developing nations than they demand of them would make greater sense. At present, the rich nations expect the poorest to respect liberal principles that they themselves constantly flout. Might a little less hypocrisy be in order? After all, if the US and European Union believe their own economists, trade "concessions" are not really concessions at all. Most liberal economists argue that unilateral import liberalisation more than pays for itself, because it allows resources to shift into sectors where rich countries have a genuine comparative advantage.

The big-hearted strategy would also be historically realistic. In practice, most nations (and this applies to the US, European states and east Asian tigers) were reluctant to open their markets either to goods or foreign investment before achieving a measure of economic security. Even if protection is illogical in the poorest nations, the desire for it is understandable and, to a degree, forgiveable. The same cannot be said of the richest nations. Hence the right strategy would be to open up unilaterally, and let the poorest countries enjoy the benefits. Once they experience the practical benefits of increased trade, they will be that much keener to integrate fully into the global economy.

Again let me reiterate that a return to the bargaining table, local political concerns notwithstanding, will be to the benefit of all countries, richer and poorer. The residents of all countries will be better off than they are now.

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If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions