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A new housing development is under construction in the northwest end of Edmonton on Feb. 8, 2012. (Ian Jackson/Ian Jackson for The Globe and Mail)
A new housing development is under construction in the northwest end of Edmonton on Feb. 8, 2012. (Ian Jackson/Ian Jackson for The Globe and Mail)

Economy Lab

A lesson from the census: The perils of protectionism Add to ...

We all learned about Sir John A. Macdonald’s National Policy and its system of high tariffs in our high-school history classes. It declined in health during the post-Second World War decades, and it finally died in 1988 when the Canada-U.S. free-trade agreement went into effect.

The National Policy was misnamed from the start: a better title would have been the ‘Ontario Policy’. When it was adopted in 1879, Canada had a comparative advantage in natural resources and a comparative disadvantage in manufacturing -- and things haven’t changed much since then. The beneficiary of the tariffs on manufactured goods was the manufacturing sector based in Ontario, and the losers were everyone else.

This is of course an old story and has been repeated around the world. The National Policy was sold -- and continues to be defended -- as an important, if not crucial element in nation-building. For generations, Canadians were told that it was their patriotic duty to pay higher-than-world prices for manufactured goods, but that it was somehow okay to pay world price for goods that weren’t produced in the Ontario heartland. And for most of its history, the National Policy wasn’t even accompanied with a mechanism to redistribute at least some of the gains to other provinces; the first equalization programs began in the 1950s.

After the tariff walls finally came down, and after a period in which a severely-depreciated Canadian dollar gave it a temporary competitive edge, the Canadian manufacturing sector joined its counterparts around the world in its secular decline. Even China can no longer count on manufacturing as a source of employment growth.

Canadians in search of work now move to western Canada, which has become the new economic heartland. Yesterday’s release of the 2011 census population count -- reflecting the relative decline of Ontario and the increasing demographic weight of the western provinces -- was the National Policy’s requiem.

For more of Stephen Gordon's recent posts, click here.

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