Canada's Free Trade Phobia

As Canada prepares for its Oct. 25 national elections, many Canadians remain convinced that the 1989 U.S.-Canada Free Trade Agreement was a poor deal. Their reaction is understandable, if misguided.

Free trade helped spark the widest restructuring of the Canadian economy in years. More than 300,000 manufacturing jobs were lost, pushing unemployment to a stunning 11.3%. But now, the benefits of free trade are becoming increasingly apparent. A new Canada is emerging, dominated by companies focusing on the North American market.

Many of these export-oriented companies are having remarkable success in the U.S.--so much so that Canada's merchandise trade surplus with the U.S. could hit a record high this year. Add to this an inflation rate that is running under 2%, with productivity increasing smartly, and Canada's prospects haven't looked so good in years.

Unfortunately, this bright future is still jeopardized by Canada's bloated federal and provincial governments. For years, these governments have run huge deficits to support a generous network of social programs, from baby bonuses to universal health care. Such spending has now pushed Canada's net government debt to nearly 90% of gross domestic product. The next government must either cut spending or risk a financial crisis.

As the election approaches, there is growing concern that it will produce a government too weak to tackle the debt problem. We hope not. Like free trade, cutting Canada's deficits will require some short-term pain. But it can only make the country more competitive around the world.

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