Frances Woolley is a professor of economics at Carleton University
Trade ties are like gravity. They are strongest when economies are large and close. Canadian goods and services are pulled south by the size and proximity of the American economy. But if U.S. protectionist rumblings turn into serious trade barriers, Canadians will need to find someone else to trade with – defying gravity – if we are to avoid economic catastrophe.
Canada's previous attempts to defy gravity have failed. Yet, the Canada of today is not the Canada of the past. Every generation of immigrants brings new skills and connections, infusing Canada with fresh human and social capital – 150 years ago, immigrants built Canada's railroads; 100 years ago, they opened the prairies. Fifty years ago, Canada introduced the point system, and started welcoming highly educated immigrants from across the globe. Today, those immigrants, and their children, could change Canada's economic ties with the rest of the world.
The economic tensions Canada and the United States are experiencing today are not new. The 1920s also saw profound technological change and economic displacement. Electrification caused productivity to soar. Then, as now, real wages failed to keep up. Firms were able to produce goods in unprecedented volumes, but consumers lacked the purchasing power to buy them.
In the United States, economic pressures compounded with toxic politics and bad policy politics led to the 1930 Smoot-Hawley Tariff Act, which attempted to prevent goods from being imported into the United States by imposing sweeping, extreme tariffs.
It was a disaster for Canada. In three years, from July, 1929, to July, 1932, Canadian exports to the United States fell by two-thirds. The R.B. Bennett government responded by trying to revive Imperial trade ties. At a 1932 meeting in Canada's capital – the Ottawa Conference – the self-governing countries in the British Empire negotiated a series of bilateral tariff-reduction agreements, with the aim of reinvigorating their economies with intra-Empire trade.
It didn't work. Simon Fraser University economist David Jacks has studied the Ottawa Conference. He concludes it was a failure from the Canadian perspective. Current research in trade theory suggests one possible reason why.
The gravity model of trade says that it is easier to trade with someone closer to you. Yet, economic distance is not measured in miles. Closeness also means being able to communicate with and understand someone – and that is easier when people share a common language, culture, or values.
The Ottawa Conference attempted to defy not only the pull of distance, but also the pull of culture. In the early years of the 20th century, Canada was slowly becoming less British. The number of Canadians claiming Asian origins tripled between 1901 and the mid 1920s; the number of Italian-Canadians increased eightfold. While the numbers of Canadians claiming British ancestry continued to grow, many of these were second-, third- or fourth-generation Canadians, with fading ties to the mother country.
Economists now believe that immigration and trade patterns are connected. Looking at the 1970s through to the 1990s, UBC economists Keith Head and John Ries found that, when Canada admitted more immigrants from a country, especially more independent immigrants, trade with that country rose. Other researchers have unpacked the immigrant-trade connection, and found that what really matters is the number of immigrants in business networks, especially the number of highly educated immigrants.
It is possible to change the flow of trade. We can do it if we can reduce trade costs. That means reducing not just transportation and tax costs, but also overcoming cultural and language barriers, in addition to all the other costs of deal-making.
Canada has the human and social capital. Our immigrants are entrepreneurial, starting businesses at a faster rate than the native-born. Yet, the overwhelming majority of Canada's immigrant-entrepreneurs can be found in domestically focused industries such as professional services, retail trade, accommodation and food services, transportation, and construction. Immigrant-entrepreneurs in these industries are creating Canadian jobs. But it is less obvious these industries can drive Canadian exports.
For Canada to use its immigrant advantage to change the terms of international trade, new Canadians need to be welcome in the country's corner offices, as well as its corner stores. Unfortunately, they're not. Repeatedly, studies have found that job applicants with Asian names are less likely to be called for an interview than applicants with Anglo-Canadian names – even if the Asian candidates have Canadian qualifications.
Yet, as long as our corporations look like old Canada, we will continue to have the same old economic vulnerabilities. And that means if the elephant on our southern border decides to roll over in bed, we'll all get squished.