Canadian Economic Nationalism
By

Paul Krugman. Geography and Trade. Chapter 3, pp. 90-92. Leuven University Press and The MIT Press, 1991

In 1873, when the various British colonies north of the United States were gathered under a single government, it looked likely that the whole nation would become part of the North American periphery to the already coalescing U.S. manufacturing belt. We are used to thinking of Canada, like the United States, as being a great immigrant nation. In its early years as a nation, however, Canada attracted few immigrants from abroad--and Canadians, especially from impoverished Quebec, were migrating in substantial numbers to the United States. There was little manufacturing in Canada and seemingly little prospect that any would arise. Agricultural expansion was proceeding westward into the prairies, much as it was in the United States, but as in the United States it was not pulling manufacturing and urbanization west with it.

If one had made a guess in 1870, one would probably have predicted an agricultural Canada of perhaps 5 or at most 10 million people--a sort of oversized Nebraska. Most of those people would have been fairly prosperous, much as most U.S. farmers are; but there wouldn’t have been much of a nation.

What happened instead, of course, was a deliberate policy of delinking from the U.S. economy. In 1878 Canada introduced the so-called National Policy, which had two main elements; a tariff wall that in effect forced the Canadian agricultural sector to turn to domestic producers rather than established U.S. suppliers, and a national railway that in effect subsidized East-West traffic in opposition to the natural North-South direction.

Isn’t this simply a standard kind of infant-industry, import-substitution policy, of the kind that has gotten such a bad name in the past forty years? Not quite. Until the 1920’s, Canada and the United States were in a fairly unusual situation with respect to one another: in effect labor mobility between the two was nearly perfect. The reason is that both countries were the targets of large-scale, economically motivated immigration, and so on the margin were competing for workers.

But what that means is that Canadian import substitution could do something that similar policies elsewhere cannot: by protecting the domestic market, they could also enlarge it. Because Canadian farmers were forced to buy Canadian, there were more Canadians than there would otherwise have been and hence a larger Canadian market. In principle, that market would eventually be large enough to be self-sustaining. That is, the Canadian market would eventually become large enough to make it efficient to locate manufacturing there to serve the market even without protection. At that point the economy could throw away its crutches and accept free trade without fear of becoming peripheralized. This is not so much an infant-industry as an infant-country argument for protection.

Was this policy a success? Presumably that depends on one’s objectives. What seems clear is that the policy did more than create a hothouse industrial sector that would die off as soon as it was exposed to the winds of international competition. Canada now is strong enough industrially to accept free trade with the United States without fearing that it will be peripheralized. (Well, okay, some Canadians still fear it, and they could even be right; but they are a minority and are probably wrong.) It seems reasonable to argue that Canada’s nationalistic economic policies were the key factor in creating this strength.

The author argues that the agricultural expansion in Canada

Item 3: depended on the United States industry.