Economic Integration in North America

FOR MORE THAN 70 YEARS NOW, the Couchiching Institute on Public Affairs has been bringing Canadians together with the purpose of asking some thought-provoking questions and encouraging lively, stimulating debates and action on a variety of key public policy issues. For example, it was at Couchiching, 56 years ago, where the idea of creating a North Atlantic Treaty Organization (NATO) was first floated publicly by Escott Reid, then a senior official with the Canadian Department of External Affairs. NATO was established a year and a half later, reflecting almost exactly the vision that Reid outlined in his speech at Couchiching.This year's conference theme, Continentalism: What's in it for us? is a topic that is thought-provoking and, some might say, provocative. Yet, before I venture any thoughts on the subject, let me make it clear that I am not here as an advocate for greater North American integration. This is very much a political decision for Canadians and their elected governments. It is a big decision, and all of us, as a democratic society, will have to determine what we really want. I am not a politician; I am an economist. So, what I intend to do is to lay down some parameters for an appropriate discussion of the issues relevant to greater economic integration in North America.First, I would like to review the benefits and costs of economic integration. By economic integration, I mean the free movement of goods and services, capital, and labour, and the harmonization of the rules governing the operations of these three key markets. I will briefly review the progress that Canada has made on each of those fronts as well as the benefits we have derived from opening up our markets to international competition and to the free flow of capital. I will then outline the remaining impediments to fuller economic integration and briefly discuss where we might go from here.THE ECONOMIC BENEFITS AND COSTS OF OPEN MARKETSFree tradeInternational trade in goods and services takes place because countries have different resource endowments and labour skills, and because consumer tastes vary from country to country. David Ricardo, a 19th century British economist, argued that a country could gain from trade even when another country had an absolute advantage in producing all goods and services. He argued, rightly, that by concentrating on producing those goods and services in which a country was relatively more efficient, and by importing those products in which it was relatively less efficient, it could increase its national income. This would be the case even if that country was absolutely less efficient in producing all products. This is the famous principle of comparative advantage. It is on this principle that economists base their view that barriers to trade reduce economic welfare in all countries. When countries export goods and services in which they are most competitive and import those in which they are less competitive, consumers everywhere, benefit, the potential output of all nations increases and so does the global standard of living.Opening up national borders also opens the door to greater global competition; this acts as a potent incentive for businesses everywhere to become more efficient and productive. To relate this to Canada, international competition puts pressure on our domestic market to be more competitive, even in industries where the optimal scale may have only one or two Canadian firms operating. In the end, competitive pressure leads to greater efficiency, greater productivity, and higher standards of living.Clearly, there are economic benefits to greater economic integration with the rest of the world. Of course, there are also adjustment costs to be borne as barriers to trade are removed. Some firms and some industries will not be able to meet the foreign competition and will die or contract. This is part of the process of releasing resources--both human and physical--to those industries or firms that are taking advantage of new markets abroad. …

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