FIXING BROKEN TRADE LINKS
Quebec separatists are schizophrenic about Canadian trade. They rail against the federal system and the economic damage they say it has done to Quebec. To them, federalism is an "iron collar" that makes it more difficult for Quebec to compete globally and that must be broken. Yet the Canadian economic union is sacred in their eyes. Quebec's existing trade privileges within the Canadian federation must be preserved. Any suggestion that Quebec separation will alter Quebec's preferential access to the Canadian market is heresy. But while espousing the economic union, they worry that the internal trade agreement signed by the provincial premiers and the prime minister in July 1994 will impose constraints on Quebec government policies that now favour Quebec companies.
This desire by separatists to retain the parts of the Canadian union they like is backed by provocative talk. Will Canada continue to buy milk from Quebec? Certainly, you are required to by the General Agreement on Tariffs and Trade (GATT), says Jacques Proulx, the sovereigntist leader of the Union des producteurs agricoles du Québec, which supplies almost half of Canada's industrial milk. Never mind that American milk is half the cost or that Canadian dairy producers are chafing under production quotas and would be glad to step up production.
Taking another tack, sovereigntists often threaten that if Canada won't buy milk from Quebec, Quebec won't buy grain and beef from Western Canada. The rub is that Western grain and beef are sold at world market prices and not under government-imposed supply management at inflated prices. If Quebeckers didn't buy Western grain and beef, they could be sold elsewhere and Quebec would still have to pay the same price for these commodities from other suppliers. If the rest of the country decided to stop buying Quebec-produced cheddar and yogurt and instead purchased import low-cost dairy products from the United States and New Zealand, Canadian consumers would save lots of money and Quebeckers would be stuck with a huge surplus of dairy products priced well above world prices. Their farmers would be forced to slash production or Quebeckers would have to get used to eating a lot more cottage cheese and ice cream.
Will Canadians still provide the same high degree of protection for the Quebec textile and clothing and footwear industries from third world competition? Yes, reply Quebec sovereigntists. With a customs union, you will have to get us to agree to any changes in Canadian commercial policy. Forget that Canadians may prefer cheaper shoes, jeans and dresses to more wrangling with Quebec over protection for their industries.
Will the Canadian government still buy much of its military hardware from Montreal companies and let these same companies benefit from purchases by the Pentagon under the Defence Production Sharing Agreements? Naturally, answer sovereigntists, who don't want Quebec to spend much on defence and don't expect to have much to offer in any agreement; Quebec suppliers have long-established business relationships with the Department of National Defence. They overlook that much of defence spending is politically motivated, focusing as much on the high technology industrial benefits covetously eyed by all the provinces as on actual defence needs. The CF-18 maintenance contract awarded to Canadair in 1986 still makes Western Canadians see red almost a decade later.
Separatists respond sanctimoniously to any suggestion that trade relations will not be the same after separation. Canada as we know it may die as a political entity but it will continue to thrive as an economic unit, according to their rose-coloured crystal ball. There is so much trade between Canada and Quebec and the economies are so closely interconnected that it is in no one's interest to cut off trade, they say. True enough, but that doesn't mean it's not in Canada's interest to further free up trade with the rest of the world by scrapping trade barriers that benefit Quebec above all. The choice is not black and white, between trade and no trade. It is how best to restructure trade once Quebec is no longer a partner in the hard-fought political compromises that have shaped the existing trade regime.
Divide and conquer is another favourite separatist strategy. The Western provinces may not have much to lose from ruptured trade links, the separatists concede, but Ontario is so closely tied to Quebec that it would never allow any weakening of trade bonds. So a deal with Ontario on trade comes first. This is a ploy that may work in federal-provincial negotiations where coalitions among provinces determine the outcome. It is not as likely to wash between sovereign states. The Canadian government will have already brokered the interests of the provinces before sitting down to the bargaining table with Quebec. It's one thing to be on the inside trying to make deals, quite another to be on the outside looking in. We must not allow an independent Quebec to play one province's interests off against another's.
North-south trade with the United States has been increasing more rapidly than east-west trade within Canada, even before the Free Trade Agreement. Globalization has made international trade flows more important than interprovincial trade flows. With the North American Free Trade Agreement (NAFTA) and the new GATT, there is less reason for Quebec to worry about losing markets in Canada, the separatists argue. They are especially pleased with having helped get the FTA passed in the late 1980s over the objections of Ontario nationalists, taking special satisfaction at having been able to get one-up on their rival province.
Quebec and the rest of Canada are, in fact, two of the world's most interdependent trading partners. In 1989, two-way trade valued at $68-billion crossed the Quebec border. The rest of Canada had a small $1.7 billion deficit in trade with Quebec. An independent Quebec would be Canada's second largest trading partner after the United States and Canada would be Quebec's largest trading partner. Trade between Ontario and Quebec is particularly heavy, amounting to over $40 billion a year, with Ontario enjoying a surplus of $3.4 billion. Yet Quebec is much more dependent on trade with the rest of Canada than the rest of Canada is on trade with it. In 1989, Quebec exported 23.3 per cent of its gross domestic product to the rest of Canada, whereas the rest of Canada only exported 6.6 per cent of its production to Quebec.
The giant rigs that rumble down Highway 401 from Quebec factories are loaded with clothing and textiles, paper and lumber products, dairy products, primary and fabricated metals, transportation equipment, electrical and electronic products, and chemical products. In return, Quebec imports crude petroleum and natural gas, and food products from the West; food, paper and lumber products, iron ore and electricity from the Atlantic provinces; and electrical equipment, cars and trucks and just about everything else from Ontario.
Interprovincial trade has been a powerful generator of wealth in Canada. By creating a large national market, it has enabled Canadian businesses to be more productive and efficient, to specialize and take advantage of economies of scale. This has permitted Canadian businesses to compete with the best in the world in both foreign and domestic markets. Consumers have also benefitted from the greater variety of goods and services available and better prices.
Any new barriers to interprovincial trade would make both Canadians and Quebeckers worse off. But the gradual elimination of existing international barriers that protect the Quebec producers from foreign competition would be to the advantage of Canadian consumers and to the disadvantage of Quebec producers. This is the economic reality of secession. The political implications less clear. If the removal of international barriers against products such as clothing or milk leads the injured partner to impose retaliatory barriers, we could get caught up in tit-for-tat trade actions. However, as the smaller player, Quebec would surely be the loser in any trade war. With an economy more than three times that of Quebec's and a more varied list of customers, Canada would have much more economic muscle if it came to a confrontation. As Canada knows too well through its trade relations with the U.S., the smaller player is the one that is most vulnerable if trade disputes become nasty.
WHAT DOES QUEBEC WANT?
A June 1994 Angus Reid/Southam News poll revealed that eight in ten Quebeckers supports an economic union between an independent Quebec and Canada. It should not be surprising that Quebec speaks with one voice on what it wants in a new trade regime. Whether it is the Bélanger-Campeau commission, the National Assembly committee on sovereignty, or the PQ platform, the answer is the same. If Quebec gets its druthers, the new trade regime will be nothing other than the old trade regime dressed up with a new name. Quebec would continue to have unfettered access to the Canadian market under the same terms as if it were a province. Canada and Quebec would still maintain an economic union that would allow for the free flow of goods and services, people and capital. No border control posts would be needed for customs and immigration because Canada and Quebec would form a customs union and Canadians and Quebeckers would be as free to move to work on both sides of the border as they are in a united Canada.
A customs union is an agreement to maintain a common external tariff structure and commercial policy. In other words, Canada and Quebec would not only have free trade with each other, they would jointly set tariffs and restrictions on imports from other countries.
There are even higher levels of economic association than a customs union. A common market also includes the free movement of labour and capital. An economic union goes even further and closely harmonizes economic and social policy. An economic and monetary union, as we have now in Canada, adds a common currency. It will be desirable to maintain some aspects of these higher levels of integration, as we discuss in other chapters, but a customs union is definitely something to be avoided.
A Canada-Quebec customs union would mean that Quebec would get automatic entry into GATT and NAFTA. Canada and Quebec would function as one unit in the international trade arena. In the old days of René Lévesque, this used to be called Sovereignty-Association. Now it is just sovereignty with the association taken as given. The assumption is that the association doesn't need to be negotiated because Canada will be forced to accede to Quebec's demands. Regardless of what it's called, it is just as unacceptable now as it always was. A small majority of Canadians living outside Quebec rejected an economic union between Canada and an independent Quebec in an Angus Reid/Southam News poll reported in June 1994.
In the real world, Quebec's fallback position would be a free trade agreement with Canada and membership in GATT and NAFTA. This is a more reasonable starting point for negotiations. But let's not give away access to our market and assistance in getting into NAFTA and GATT without getting something in return.
CANADA-QUEBEC FREE TRADE AGREEMENT
While Quebec will be asking for a customs union, it is not in our interest to accept anything more extensive than a free-trade zone between Canada and Quebec, comparable to the free trade arrangement that we have with the U.S. A customs union would require the Canadian government to sit down with Quebec to decide on tariffs and commercial policy, so that there would be a joint approach to trade relations with the rest of the world. Everytime we sat down with any foreign country, however small, to negotiate any tariff change, however trivial, we would have Quebec looking over our shoulder telling us what to do. While the Canadian government would not have go along with all the proposed changes suggested by Quebec, the Quebec government would be much more involved in the making of Canadian commercial policy than the provincial governments. Why should Canada give Quebec as an independent state more say over our commercial policy than it has as a province? The provinces certainly wouldn't accept this and neither would most Canadians.
It would also be very difficult to come to agreement on all aspects of commercial policy. Under a customs union, Canada and Quebec would be forced to act as one in GATT and NAFTA. After the pain of a costly and unnecessary breakup, this would be very hard to take.
A more positive reason for not establishing a customs union is that the separation of Quebec would provide a unique opportunity to reform our existing tariff structure and commercial policy by reducing or removing trade barriers. These changes could be made in return for concessions from our other trading partners or could be introduced unilaterally. Quebec, the main beneficiary of some of these barriers, would naturally enough resist the needed reforms.
The political forces that led to the creation of these barriers in the first place would be greatly weakened by Quebec's departure because, free-trade rhetoric aside, some of the strongest protectionist lobby groups in the country represent Quebec interests such as the textile and clothing industry and dairy farmers. Western Canadians, including farmers, ranchers and oil men, enjoy little trade protection on the goods they produce and have long opposed the high tariffs that mainly benefit central Canadian producers. Consumers across the country, who pay higher prices because of tariffs and trade barriers, also support freer trade. Groups calling for trade liberalization would have a larger voice in the determination of Canadian commercial policy if Quebec interests were no longer involved.
The two trade barriers that are most costly to Canadian consumers are: the high tariff rates and voluntary quotas for textiles and clothing agreed to with other nations; and supply management in the dairy, poultry and egg industries. Supply management limits agricultural production through quotas and prices that are set at high enough levels to ensure that producers make a guaranteed return on their investment.
While a formal customs union with a sovereign Quebec does not make any sense, Canada might want to offer to maintain the existing trading arrangements for a period of up to three years to minimize the economic disruptions in the short run. Quebec would favour this move but it would also benefit Canada by giving us time to decide what changes are needed in such areas as our commercial policy on dairy, textiles and clothing, and footwear, and to negotiate changes with our NAFTA partners.
But this would only be a temporary arrangment and would depend on how responsive Quebec is to Canadian demands on other issues, most notably division of the federal debt.
But rather than sign a two-way trade deal with a sovereign Quebec, it might be better to organize our trade with Quebec through NAFTA. The separatists want to join NAFTA in any event for the access it will give them to the U.S. market. Although we may be tempted to try and punish Quebec by keeping it out of NAFTA, there would be advantages to organizing our trade relations with Quebec through NAFTA. For one thing, a free trade agreement such as NAFTA which has two other partners, has the advantage of putting some needed distance between Canada and Quebec and putting Canada-Quebec trade relations on a legal international footing that would avoid frictions with our other trading partners.
While including Quebec in NAFTA might ease the transition to separation for Canada, it would be absolutely essential for Quebec. It is a necessary condition for free trade with Canada. Furthermore, 75 per cent of Quebec's exports outside of Canada go to the United States. Despite claims by the separatists, Quebec would not automatically become a member of NAFTA, but would need the unanimous agreement of the three existing members. Parizeau's claim during the election campaign that he was given "private assurances" by the Americans that an independent Quebec could join NAFTA was quickly shot down by the State Department. The Americans have obviously promised nothing to Parizeau or the separatists.
Canada's ability to keep an independent Quebec out of NAFTA, in effect blackballing its membership, is an important advantage that Canada would have in trade negotiations with Quebec. The United States and Mexico would be unlikely to oppose the entry of a sovereign Quebec into NAFTA, but for the short term at least would probably follow Canada's cue. "If Quebec opts for sovereignty, the U.S. will want to continue to pursue close relations with both Canada and Quebec, including extension of the current Canada-U.S. FTA [now NAFTA]," writes American Canada watcher Joseph Jockel in his book If Canada Breaks Up: Implications for U.S. Policy. However, Quebec's admission to NAFTA as an independent signatory would be a lengthy process extending over several years and involving some hard bargaining.
Quebec would have to make some concessions to join NAFTA. As a national government, it could no longer hide behind its status as a province to avoid some requirements of the agreement. It would no longer be able to discriminate against non-Quebec firms bidding for contracts with Hydro-Québec, for example. The United States might also seek concessions from Quebec when it comes to the dairy and other farm sectors, cultural industries, subsidies, and restrictions on foreign investment. Quebec might find itself face to face with U.S. negotiators seeking changes in the restrictive rules governing the distribution in Quebec of English-language versions of Hollywood movies. An upside would be that Canada could benefit from any additional concessions that the United States would be able to extract from Quebec.
A downside for Canada would be that the United States might be encouraged to seek further concessions from Canada or even that the entire deal could be opened up as when Mexico joined NAFTA.
Even though Quebec leaders talk incessantly about their desire to be part of North American free trade, the Parti Québécois is apparently oblivious to how its policies could prove an obstacle to that NAFTA membership. In discussing its plans for free trade, the PQ platform seeks further protection for Quebec's cultural industries and its financial institutions against foreign investment as well as maintenance of a preferential purchasing policy for the Quebec government and public institutions. The PQ also wants to continue using Quebec's pension-fund manager, the Caisse de dépôt et placement du Québec, and its industrial development agency to provide more aid to Quebec industries.
Canada will have to keep a close eye on an independent Quebec to make sure that its interventionist plans do not introduce additional trade barriers or discriminate against Canadian firms. That may not be so difficult. We'll have the Americans on our side. If Quebec wants to become a member of NAFTA, it will have to play by the rules. It won't be able to run a Quebec-first policy inside a North American Free Trade Agreement.
TEXTILES AND CLOTHING
A wall of high tariffs and import restrictions has long protected the Canadian textile and clothing industry from the full force of competition from low-wage developing countries. Customs duties can be a whopping 21.5 per cent on textiles and 24.7 per cent on clothing, which add substantially to the costs borne by consumers. Canada has also negotiated agreements under the Multi-Fibre Arrangement with 28 developing countries that limit their exports of cheap clothing and textiles to Canada.
Quebec is the heart of the Canadian textile and clothing industries. In 1989, 48 per cent of Canadian textile production came from Quebec and 61 per cent of clothing. About 40 per cent of Quebec's production of textiles and clothing was sold in the rest of Canada. The textile and clothing industries are labour intensive - 27,000 Quebeckers were employed in the textile industry in 1990 and 59,000 in clothing.
Yet even if we want to punish a newly-sovereign Quebec and stop protecting these industries overnight, world trading practices and a rational pursuit of our self-interest won't allow it. If Quebec becomes party to a free-trade agreement with Canada, something that would be of benefit to both sides, Canada won't be able to introduce new tariffs on Quebec.
Because of these international trade deals, Quebec-made clothing and textile producers will continue to benefit from preferential access to the Canadian market. But Mexican and American producers, who are still subject to Canadian tariffs on their textiles and clothing, will probably demand equal treatment with Quebec. And why not give it to them? With a smaller domestic industry to protect, the federal government would find it easier politically to lower tariffs on textiles and clothing from the United States and Mexico, and Canadian consumers would benefit from cheaper clothes. Likewise, on an international level, Canada would be more inclined to phase out voluntary export restraints more quickly, which would also lower the price of clothing. So while Quebec may keep its protected access to the Canadian market for its clothing and textiles in the very short run, it will soon be faced with a lot more low-priced competition in Canada from North American and overseas producers.
Of all the agricultural sectors protected by the federal government, it's the dairy industry where by far the most is at stake. Quebec has 14,500 dairy farmers operating under the shield of what's known as supply management through provincial marketing boards and the Canadian Dairy Commission. Quebec farmers produce $1.2 billion of milk every year and they hold milk production quotas -- essentially permits to produce milk -- valued at $2.2 billion. This includes 47.5 per cent of the Canadian quotas for industrial milk (the kind of milk used in processing rather than for the fluid milk on your kitchen table) which is twice Quebec's market share. Almost half of Quebec industrial milk production is sold to other provinces at double the international price. The federal government also pays dairy producers a direct subsidy through the dairy commission equal to about 12 per cent of their production costs, a total of $226 million in 1993-94. Half of this subsidy was paid to Quebec's farmers.
Although there are dairy farmers in all provinces who benefit from the same system, it's Quebec farmers who have most fiercely resisted any changes that would open up the system to lower prices and erode the strict production controls. Despite fears by the farmers that the supply management system would be destroyed by the recently-completed GATT round of trade talks, dairy, egg and poultry farmers did remarkably well from the deal. Although the door to imports was opened a crack, with subsidies due to decline and consumers expected to get a bit of a price break, the dairy industry will still be able to operate its domestic quota system behind a high protective wall of tariffs for the foreseeable future. In the case of dairy products, those tariffs on imports will be as high as 351.4 per cent on butter, 289 per cent on cheese and 283.8 per cent on milk.
If Quebec separates, there would no longer be any reason for Canada to treat Quebec dairy products any differently than those imported from Vermont, New Zealand or France. As agricultural imports subject to restrictions still permitted under GATT and NAFTA, they should attract the same tariffs as dairy products from elsewhere. In addition, any direct federal subsidy through the Canadian Dairy Commission would be eliminated.
Dairy farmers in the rest of the country would see Quebec's departure as an ideal opportunity to increase their own quotas and production to take up the slack left by Quebec producers. Cut off from a protected market for its high-priced product, the Quebec dairy industry would be devastated. Angered at these moves, Quebec would file a trade complaint against Canada with GATT, which could take years to resolve. More likely, Quebec would retaliate against a Canadian industry, leading us into the downward spiral of trade confrontation and retaliation.
A more rational approach would be to treat the issue of industrial milk quotas as part of a larger trade agreement. At the outset, Quebec will have to be told that the status quo as far as milk is concerned is unacceptable and that if Quebec farmers want any continued protected access to the Canadian market, they will have to be at significantly reduce their total share of the market and lower prices. Since Quebec farmers are dependent on markets in Canada, Canada would obviously have the upper hand in any negotiation.
As a condition to keeping at least some access to the Canadian market, Quebec might be told that its milk quota would be scaled back so that Canadian producers could expand production. Allowing Quebec to keep a large proportion of the Canadian dairy market risks touching off an angry response from the United States, which may insist that their dairy products be treated the same as imports from Quebec. That might force Quebec to give up an even larger share of its quotas to satisfy the Americans.
In the longer run, the system of supply management is probably doomed in any case. But we have buried supply management many times in the past and it keeps coming back from the grave to haunt us. Canadian dairy farmers are by no means a spent political force without their Quebec comrades at their side. Nevertheless, with Quebec dairy producers no longer part of the Canadian political equation, it should at least be possible to lower tariffs on supply managed agricultural products much more quickly, benefitting Canadian consumers.
The Canadian brand-name pharmaceutical industry is centred in Montreal, where almost half of its research and development is done. This was not solely the result of a private business decisions, but of deliberate Canadian government actions. Under pressure from the United States, the Conservative government under Brian Mulroney agreed to increase protection to the manufacturers of patent drugs by eliminating compulsory licensing for pharmaceuticals. In return, the international drug companies vowed to increase research and development spending in Canada. Backed by the Quebec government and the Tory Quebec caucus in Ottawa and lured by the most generous R&D incentives in Canada, the companies were encouraged to undertake this activity in Montreal.
The increase in patent protection was vehemently opposed by the generic drug industry, which happened to be concentrated in Toronto, as well as by consumer groups. The generic drug industry had benefitted from the shorter term of patent protection under the old act and from compulsory licensing provisions which allowed them to make low-cost knockoffs of popular prescription medications. But under NAFTA we're likely stuck with greater patent protection for the brand-name companies, and can't threaten to provide relief to the generic drug industry.
Nevertheless, if Quebec separates from Canada, the whole rationale for the international drug companies expanding their activities in Montreal would no longer be valid. The drug companies expanded these activities for patent protection in a market of 29 million people, not one of 7 million. It would only be natural for the Canadian government to try to hold the drug companies to their commitment to spend 10 per cent of their Canadian sales on R&D in Canada. Since close to half of this spending of over $500 million in 1993 was in Quebec, we could seek to repatriate over $200 million in R&D.
WHO'S MOST VULNERABLE UNDER THE AUTO PACT?
The concentration of the Canadian automobile industry in Ontario, where 90 per cent of production is located, has long been a sore point with Quebec governments of all stripes. The auto pact, which was signed with the United States in 1965, is seen as having disproportionately benefited Ontario. Separatists claim that the Canadian automobile industry would be vulnerable if Quebec separated because the United States would take the opportunity to renegotiate the auto pact to our disadvantage. In their view, the U.S. only entered the auto pact because the federal government could offer access to the entire Canadian market, including Quebec. With Quebec gone, Canada's justification for the auto pact would partly disappear too.
While Canada did enjoy a surplus of almost $14 billion in trade in motor vehicles and parts with the United States in 1993, it was not because of the safeguards in the auto pact. The Canadian automobile industry has attracted billions of dollars of investment because of its strong competitive position. It's not because of access to the Quebec market that Ford is building the Windstar minivan in Oakville and Chrysler is assembling its LH cars in Bramalea. A low Canadian dollar, tax-supported medicare and a high quality labour force have all served to lower costs at Canadian auto plants for the Big Three automakers as well as for Japanese transplants.
If there were major changes to the auto pact, the Quebec automobile industry would be much more vulnerable than Ontario's. The only North American car producer with an assembly plant in Quebec is General Motors of Canada Ltd. at Ste. Therese, outside of Montreal, and it has survived only because of federal financial aid. Having a plant in Quebec hasn't helped GM's market share, which is the lowest for any province aside from British Columbia. Quebeckers have a greater preference than other provinces for imports. If Quebec were not to remain part of NAFTA and the auto pact, there would be no Quebec automobile industry at all.
The market is simply too small to support a local automobile parts or vehicle assembly industry. As Dennis Desrosiers, Canada's leading automobile industry analyst, told the National Assembly committee on sovereignty, "The only trade regime that would not provide additional costs to the Quebec industry, is one where Quebec would continue as part of Canada" for auto-pact purposes. The automobile industry is not our Achilles' heel, but just another one of Quebec's exposed body parts.
With the degree of integration in the auto industry, it would make sense for all sides if Quebec joined the auto pact, but it's not an area where Canada will have to give up anything.
Bell Canada is the main provider of telecommunication services in Ontario and Quebec. Its rates are set by the CRTC for the whole central Canadian region. An important feature of the rate determination process is the cross subsidy between long distance and local services. This means that the price charged the consumer for local phone service is considerably less than the true cost to phone companies of providing these services, with the difference made up by charging more for long-distance services.
Since Quebec francophones have fewer contacts outside their home province than anglophones from the rest of the country, they are less likely to make long distance calls. Quebeckers account for only 29 per cent of the toll calls in the Bell Ontario-Quebec region. As a result, they benefit more from the subsidy of local service. Marcel Côté and John McCallum estimate that basic telephone rates for the average Quebec subscriber would have to go up by about 25 per cent if rates were to be set separately for a newly established Bell Quebec. On the flip side, this means that basic telephone rates for the average Ontario subsriber would have to go down by 14 per cent. These numbers will become less dramatic over time as long-distance competition heats up and the CRTC allows Bell to compensate by raising local rates.
Hydro-Québec has the right to purchase all but 300 megawatts of the 5,225 megawats of power produced by Churchill Falls in Labrador under a 65-year contract signed in 1969. This electricity, which is purchased for less than $10 million a year, is resold to U.S. power authorities or to Quebec electricity users for an annual profit estimated at $800 million. If this money were to go to the Newfoundland government, it would have a major impact on the finances of Canada's poorest province, equal to about half the fiscal transfer payments received from Ottawa.
Quebec was able to negotiate such a one-sided deal because Newfoundland had no way to get Churchill Falls electric power across Quebec to markets in other provinces and the United States. Quebec was prepared to block that transmission until Newfoundland agreed to its demands. The federal government could have used its authority to establish a power corrider through Quebec to get Churchill Falls electricity to market, but did not want to antagonize the Quebec government.
The unfairness of the Churchill Falls deal has long rankled Newfoundlanders. Because of growing demand for electricity in the 1970s and the need to generate high cost oil and coal-fired thermal electricity , Newfoundland tried unsuccessfully to get back 800 megawats of Churchill Falls electricity for its own use by passing legislation allowing it to expropriate the water rights held by the Churchill Falls (Labrador) Corp.
After a series of legal battles in Newfoundland and Quebec courts, the Supreme Court of Canada finally decided unanimously in May 1984 that the Newfoundland legislation was unconstitutional because it interfered with the property rights of Hydro-Québec in Quebec to receive hydroelectric power under the terms of the 1969 contract with the Churchill Falls (Labrador) Corp. The Newfoundland government could have broken a contract to supply power entirely within the province of Newfoundland, but not one that extended outside the province like the Churchill Falls contract.
The federal government has always been reluctant to intervene and take sides in the dispute between Quebec and Newfoundland even though Quebec's action was clearly contrary to the spirit of free trade within Canada. But if Quebec were to become independent, the federal government would no longer have to remain neutral and it could use its clout to get a fair deal for Newfoundland as part of the overall separation negotiations.
If worst came to worst, the federal government could threaten to use its legislative or administrative authority to cut off the power. Although Canada can no longer restrict energy exports to the United States under NAFTA, there is nothing to prevent it from imposing restrictions on the export of energy to Quebec for reasons of security of supply. Getting a fairer deal for Newfoundland on Churchill Falls power will be important in getting Newfoundland's agreement to Quebec separation.
BORDER CONTROL POSTS ARE ESSENTIAL
Whatever the exact shape of post-separation trade arrangements, border control posts between Canada and a sovereign Quebec would be absolutely essential. Quebeckers who think otherwise are deluding themselves. If there were a free trade agreement between Canada and a sovereign Quebec, there would be border control posts just as there are between Canada and the United States. Even in the European Community, where the level of economic integration is much higher than even within a free trade area, there are still border control posts. So even if Canada and Quebec were to maintain a customs union, a common market or even an economic union, there would still be a need for border control posts.
What would be the purpose of border posts? Even if there were no duties to collect on Quebec produced goods, it would still be necessary to make sure that Quebec wasn't bringing in semi-processed goods from other countries, processing them further and trying to pass them off as duty-free Quebec-made goods in Canada. Sales taxes on goods would have to be collected. Finally, as we discuss in more detail in Chapter 11 on citizenship, there will be a need to control the flow of people across the border. Quebeckers will no longer automatically be citizens of Canada and will need to complete at least some paperwork to take up residence in Canada. Quebec residents may be required to obtain permits to work in Canada. Immigrants and refugees must not be able to use Quebec as a back-door entry point to Canada. These border control posts need be no more troublesome than those already on the Canada-U.S. border. But they are indispensable.
Border posts and separate customs rules would probably require some rearrangement in trade flows. Retailers and wholesalers who supply both Quebec and Canada might have to rethink their arrangements. Companies like Canadian Tire might have to set up separate Quebec distribution companies to ease the process of doing business in the new country. But border posts should not do much harm to trade between the Atlantic provinces and the rest of Canada. Trucks laden with paper from Irving-owned mills in New Brunswick could drive through Quebec in bond on the way to Toronto and points west. Quebec, needing to keep its trucking routes clear through Ontario to Michigan and beyond, wouldn't have any incentive to do otherwise. Driving through Quebec on the way to the Maritimes would be no different than driving from Ontario to New Brunswick through New England, except that the gasoline would cost more.
A NEW NORTH AMERICAN TRADE REGIME
The economies of Quebec and the rest of Canada are highly integrated. And the economies of Canada and the United States are only slightly less so. Trade is the most important link joining us all. It is in the interests of Canada as well as Quebec to promote trade and to establish a new North American Trade regime.
The best way to promote trade would be to maintain free trade between Canada and Quebec within the framework of an expanded NAFTA. An added benefit would be that this would provide an opportunity to pressure Quebec to drop many of its existing and proposed protectionist policies. The level of economic integration would be less than currently and border control posts would be unavoidable. But market access would be preserved and trade would not be disrupted. Our trade relations with Quebec would be close, but be under international rules, as befits the relations between two independent countries, just as they currently are with the United States.
Canada should also do what it can to make the transition from province to nation as smooth as possible for Quebec because upheavals in Quebec hurt us too. This would include offering to maintain the existing trading arrangements for a period of up to three years and offering to facilitate Quebec's entry into NAFTA and GATT.
But Quebec will have to realize that there is a price for this co-operative approach. Quebec stands to lose the most if existing trade ties are cut and we may have to play on this vulnerability to get what we want in other areas such as the division of the debt. Only after the situation stabilized would it be in our interest to take advantage of the opportunity to lower trade barriers that largely benefit Quebec industries such as the textile and clothing and dairy industries. Then, finally, Canadian consumers would get some benefit from Quebec separation through lower prices.