rose steadily and economic output declined substantially. In addition, the Tokyo Round of multilateral trade discussions, which began in the mid-1970s, was concluded in 1979, to very mixed reviews. Although it helped bring down customs duties, for example, a number of seemingly intractable problems were left unresolved.44
In this context of economic and legal uncertainty, protectionist forces in the United States advanced an increasingly salient message that beguiled a far wider audience. Indeed, a steady increase in the US trade deficit provoked widespread despondency with multilateralism in general and the world trading system in particular. Early on, therefore, the Reagan administration—under strong pressure from a Congress determined to halt what was perceived as the unfair trading practices of America’s major trading partners—was politically obliged to introduce a series of aggressive measures designed to curb imports despite Reagan’s own free-trading instincts. While the US trade actions largely targeted Japan, the threat of sweeping import duties and quotas produced significant alarm in Canada. For the first time in decades, both business and government were forced to reassess the value to Canada of secure and enhanced access to the US market.45
As the country’s economic prospects continued to darken relative to those of our southern neighbour, and the need to expose complacent Canadian business to the bracing shock of some continental competition became undeniable, Mulroney and the business establishment came to embrace free trade. An agreement was reasonably quickly struck with the sympathetic administration of Ronald Reagan and endorsed by a Congress by then in a rather different mood than in its most aggressive Japan-bashing days. Now they were imbued with the optimism of the president and buoyed by what seemed to be a resurgence of American power. It also helped that Canada, in the eyes of American policymakers, was not Japan but instead a friendly and trusted neighbour who seemed much less threatening.
Free trade was not to be an easy sell at home, however. Just as in 1911, and in earlier elections where free trade had been a central issue, feelings ran high. The parties might have reversed their respective positions—the Tories in favour of free trade, the Liberals opposed—but otherwise the script had been used before.
In June 1988, John Turner “took almost everyone by surprise” when he announced that he had instructed his senators not to allow the passage of the facilitating legislation until the Canadian people had been given a chance to vote on the issue.46 The government could not postpone matters to 1989 if free trade was to be implemented on schedule in January. Therefore, on September 30, Prime Minister Mulroney called on the governor general and proposed an election for November 21.
Mulroney’s election call precipitated one of the most emotionally charged campaigns in Canada’s history.
In the months leading up to the election, the NDP’s vociferous opposition to the agreement had contributed to that party’s growing support in the polls. As the campaign commenced, Turner was determined to recapture potential voters who opposed free trade, and therefore, “It was the Liberals who gave it a higher profile once the campaign began.”47 By turning free trade into “the fight of [his] life,” Turner plunged into the campaign with more zeal and passion than he had shown during his previous four years in opposition.48 In one dramatic confrontation, he accused Mulroney of repudiating Canada’s independence: “I happen to believe that you have sold us out.” Ignoring Mulroney’s reprimand and repeated interruptions, Turner, as historian Stephen Azzi eloquently points out, “found the words to tap into English Canada’s perennial fear of falling into Uncle Sam’s grasping hand”:
We built a country East and West and North. We built it on an infrastructure that deliberately resisted the continental pressure of the United States. For 120 years we’ve done it. With one signature of a pen, you’ve reversed that, thrown us into the north–south influence of the United States and will reduce us, I am sure, to a colony of the United States, because when the economic levers go, the political independence is sure to follow.49
The Mulroney Tories—and not John Turner’s Liberals—won the election, however, and were able to use their parliamentary majority to pass the enabling legislation. Free trade was now a reality.
The agreement was not perfect, and in particular has proven frustratingly weak in its ability to put limits on America’s unilateralist instincts. Still, it has proven a boon to the Canadian economy, and the higher degree of certainty that it introduced in Canadian business decision-making vis-à-vis US markets is reflected in subsequent significant increases in cross-border trade.50
Three-quarters of a century after his bitter defeat over this very issue, the building block that had always eluded Laurier in his plan for Canada was finally put in place.
In tandem with the drive for free trade, the Mulroney Tories pursued another Laurier tenet: tax reform, both for efficiency’s sake and to regain lost competitiveness with the United States.
Laurier, we recall, wanted to avoid taxes and tariffs being higher in Canada than in the US, while also reforming the tariff to be less damaging in its effects on the Canadian economy.
While the structure of taxes evolved significantly over the intervening decades, the principles that Laurier sought to preserve and promote could not have been more apposite to the situation confronting Canada.
By the mid-eighties, federal revenues came chiefly from three sources: the manufacturers’ sales tax, the personal income tax, and the corporate income tax.51 Each was in severe need of reform.52
On the income tax front, Ottawa had allowed both corporate and personal tax loads to become uncompetitive compared with rates in the United States, and because of President Reagan’s proposed tax reforms, that lack of competitiveness risked becoming acute if Ottawa did not act.
Regarding personal income taxes, Ottawa saw that the Reagan tax reforms were going to cut taxes by at least 30 per cent across the board.53 Such a policy was in line with the advice many economists and the Department of Finance had been giving for years54—and that Laurier would instinctively have understood was right. Income taxes, especially ones that are highly progressive—i.e., where the tax rate on your income rises steeply as your income grows—fall most heavily on three highly valuable factors: effort, entrepreneurship, and productivity. As you work harder, and earn more as a consequence, your tax burden doesn’t rise in lockstep with your income. It increases faster than your income. If the country’s top rates are too high, then the reward for working harder and longer falls below what is needed to sustain that extra effort. As any economist will tell you, if you tax something, you’ll get less of it. And in Laurier’s plan, what Canada needed was more effort, more hard work, more risk-taking, more people striving to build the country, not less.
The finance minister at the time, Michael Wilson, didn’t need much convincing that if the top rate on personal income had fallen to 28 per cent in the United States, Canada could not long attract and keep its most talented workers with top rates of over 50 per cent.55 Accordingly, the 1987 federal budget outlined comprehensive personal tax reform, reducing the number of brackets to three from ten and lowering the marginal rates significantly.
Wilson’s legislation to put these changes into effect, Bill C-139, broadened the tax base for personal income while reducing the tax rates. In the place of the traditional tax exemptions, the new regime relied on tax credits while getting rid of a number of personal income tax deductions.56
The situation was similar in the corporate income tax field. Economists were increasingly coming to the view that heavy taxation of corporate profits was undesirable because, among other things, it suppressed investment, left less money available for wages, reduced income for pension plans workers would rely on for their retirement, and caused multinational
