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Regional effects of Canadian protectionism and its influence on the relative trade positions of British.. 1968

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REGIONAL EFFECTS OF CANADIAN PROTECTIONISM-AND ITS INFLUENCE ON THE RELATIVE TRADE POSITIONS OF BRITISH COLUMBIA AND EASTERN CANADA by PHILLIP ASHLEY GEORGE B . S c , U n i v e r s i t y of B r i t i s h Columbia, 1966 A Thesis Submitted i n P a r t i a l F u l f i l m e n t of the Requirements f o r the Degree of MASTER OF BUSINESS ADMINISTRATION i n the Department of COMMERCE AND BUSINESS ADMINISTRATION. We accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA May, 1968 I n p resenting t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the requirements f o r an advanced degree a t the U n i v e r s i t y of B r i t i s h Columbia, I agree that the l i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r reference and study. I f u r t h e r agree that permission f o r extensive copying o f t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the Head of my Department or by h i s r e p r e s e n t a t i v e s . I t i s understood that copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l g a in s h a l l not be allowed without my w r i t t e n permission. Department of Commerce and Business A d m i n i s t r a t i o n The U n i v e r s i t y of B r i t i s h Columbia Vancouver 8, Canada May 20, 1968 i i ABSTRACT The t a r i f f barrier protecting secondary manufacturing in Eastern Canada depresses the relative trade position of Br i t i sh Columbia. This situation arises , in part, from the industrial character in the latter region. The abundant natural resources and the production level well beyond Canadian demand guides the major portion of Br i t i sh Columbia products into foreign markets. These markets, therefore, are an impor- tant source of income for Br i t i sh Columbia. However, the archaic t a r i f f system in Canada, along with the manufacturers' sales tax and various excise taxes, restr icts the flow of foreign imports into Br i t i sh Columbia and, in turn, enhances the inflow of high-priced merchandise from Eastern Canada. In this way, the real income position of Br i t i sh Columbia residents is curtai led. By constructing the terms of trade for both regions from 1948- 1965, i t was possible to elucidate further effects of the t a r i f f on Br i t i sh Columbia. For instance, the Net Barter Terms of Trade (export-import price ratio) was found to be more favorable for Eastern Canada when the Canadian dollar appreciated in the 1950's. This condition resulted from the superior buying power of the Eastern Canadian dollar relative to the Br i t i sh Columbian dol lar , since the latter region was compelled by the t a r i f f to continue purchasing secondaries in Eastern Canada where no direct exchange rate benefits could be real ized. i i i As a test of the relative buying powers ofvBritish Columbia and Eastern Canada, the Income Terms of Trade were constructed. This index, by combining import-export price movements with export volume changes, attempts to measure the regional import capacity. It was found to be more favorable for Bri t i sh Columbia over the 18 year period, but as an indicator of the real relative import capacity i t was a poor index indeed. Because of the superior buying power of Eastern Canadian dollars in the 50's and the re lat ive ly low tar i f f s on primary manufacturers, the import quantity indexes turned out almost identical over the test period. On a positive note, the recent Kennedy Round of t a r i f f reduc- tions on machinery promises to lower costs in many Bri t i sh Columbia indus- tr ies , whether or not this w i l l increase the international competitive- ness of her products remains to be seen, since they were se l l ing well pre- Kennedy. Nevertheless, the duty reductions constitute a step in the right direction towards more l ibera l trade policies in Canada. iv TABLE OF CONTENTS CHAPTER PAGE 1 INTRODUCTION 1 2 HISTORICAL BACKGROUND 3-5 3 THE INCIDENCE OF PROTECTION 11 4 TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA, 1948-1965 23 Export Price Indexes of British Columbia and Eastern Canada, 1948-1965 28 Import Price Indexes of British Columbia and Eastern Canada, 1948-1965 35 Net Barter Terms of Trade of British Columbia and Eastern Canada, 1948-1965 40 Income Terms of Trade of British Columbia and Eastern Canada, 1948-1965 47 5 CONCLUSIONS '. 55 BIBLIOGRAPHY 60 APPENDICES 65 A CALCULATION OF THE NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA 65 B CALCULATIONSOF THE NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA WITH SUBSTITUTION OF SECONDARY MANUFACTURES FROM THE UNITED STATES 80 V TABLE OF CONTENTS (cont.) PAGE C CALCULATION OF THE INCOME TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA 84 D CALCULATION OF THE IMPORT QUANTITY INDEXES OF BRITISH COLUMBIA AND EASTERN CANADA 88 E CALCULATION OF EASTERN CANADIAN FOREIGN TRADE DEFICIT AND BRITISH COLUMBIAN FOREIGN TRADE SURPLUS 93 v i LIST OF TABLES PAGE I ESTIMATED PERCENTAGE THAT TOTAL COSTS IN EACH INDUSTRY ARE HIGHER IN CANADA BECAUSE OF THE CANADIAN TARIFF PROTECTION OF MACHINERY AND EQUIPMENT.1 (1958) 15 II WEIGHTED TARIFF PROTECTION ON MACHINERY AND EQUIP- MENT IN CANADIAN INDUSTRIES(1958) 16 III PRICE INDEXES FOR THE WOOD PRODUCTS AND NON- FERROUS METALS INDUSTRIES, 1948-1962. (1948 = 100) 30 IV PRICE TRENDS IN CANADIAN AND WORLD MANUFACTUR- ING PRICES DURING POST-WORLD WAR II RECESSIONARY PERIODS 33 V PRICE OF UNITED STATES DOLLAR IN CANADIAN FUNDS, 1948-1965 39 VI EXPORT PRICE INDEX OF BRITISH COLUMBIA, 1948-1965 66 VII PERCENTAGE OF CANADIAN INDUSTRY LOCATED IN EASTERN CANADA, BY SELLING VALUES OF FACTORY SHIPMENTS(1960) - 68 VIII PERCENTAGE OF CANADIAN EXPORTS ATTRIBUTABLE TO EASTERN CANADA, BY COMMODITY GROUPS. 69 IX VALUE OF EASTERN CANADIAN FOREIGN EXPORTS, 1948-1965, BY COMMODITY GROUPS 70 X FOREIGN EXPORT PRICE INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) 71 v i i LIST OF TABLES (cont.) PAGE XI WHOLESALE PRICE INDEX OF FULLY AND CHIEFLY MANUFACTURED GOODS, CANADA, 1948-1965. (1948 = 100) 72 XII PERCENTAGE OF EASTERN CANADIAN CONSUMPTION OF TOTAL CANADIAN PRODUCTION LESS EXPORTS, BY COMMODITY GROUPS. 73 XIII EASTERN CANADIAN DOMESTIC EXPORTS, BY VALUE, 1948-1965 74 XIV EXPORT PRICE INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) 75 XV IMPORT PRICE INDEX OF BRITISH COLUMBIA, 1948-1965. (1948 = 100) 77 XVI IMPORT PRICE INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) 78 XVII NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA, 1948-1965. (1948 = 100) 79 XVIII UNITED STATES WHOLESALE PRICE INDEX OF FINISHED GOODS AND THE BRITISH COLUMBIA IMPORT PRICE INDEX WITH AMERICAN MANUFACTURES, 1948-1965. (1948 = 100) 81 XIX IMPORT PRICE INDEX OF BRITISH COLUMBIA WITH AMERICAN MANUFACTURES SUBSTITUTING FOR EASTERN CANADIAN GOODS, 1948-1965. (1948 = 100) 82 v i i i LIST OF TABLES (cont.) PAGE XX NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA WITH AMERICAN MANUFACTURES SUBSTITUTING FOR EASTERN CANADIAN GOODS, 1948-1965. (1948 = 100) 83 XXI EXPORT VALUE AND QUANTITY INDEX OF BRITISH COLUMBIA, 1948-1965. (1948 = 100) 85 XXII EXPORT VALUE INDEX AND QUANTITY INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) 86 XXIII INCOME TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA, 1948-1965. (1948 = 100) 87 XXIV IMPORT VALUE INDEX AND QUANTITY INDEX OF BRITISH COLUMBIA, 1948-1965. (1948 = 100) 89 XXV PERCENTAGE OF CANADIAN IMPORTS CONSUMED IN EASTERN CANADA, BY COMMODITY GROUPS J 90 XXVI VAEUETOF EASTERN CANADIAN IMPORTS, 1948-1965, BY COMMODITY GROUPS.' 91 XXVII IMPORT VALUE INDEX AND QUANTITY INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) 92 XXVIII FOREIGN TRADE DEFICIT OF EASTERN CANADA, 1948-1965. O..948.-T.1.00) 94 XXIX FOREIGN TRADE SURPLUS OF BRITISH COLUMBIA, 1948-1965 95 LIST OF FIGURES ix PAGE 1 NET FLOWS OF MERCHANDISE AND PAYMENTS AMONG BRITISH COLUMBIA, EASTERN CANADA, AND REST OF WORLD. 2 2 EXPORT PRICE INDEXES OF BRITISH COLUMBIA AND EASTERN CANADA, 1949-1965. (1948 = 100) 29 3 EASTERN CANADIAN FOREIGN AND DOMESTIC EXPORT PRICE INDEXES, 1949-1965. (1948 = 100) 32 4 EASTERN CANADIAN AND WORLD iMANUFACTURING PRICE INDEXES, 1949-1965. (1948 = 100) 34 5 IMPORT PRICE INDEXES OF BRITISH COLUMBIA AND EASTERN CANADA, 1949-1965. (1948 = 100) 38 6 NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA, 1949-1965. (1948 = 100) 42 7 PRICE INDEXES OF SECONDARY MANUFACTURES IN THE UNITED STATES AND CANADA, 1949-1965. (1948 = 100) 44 8 IMPORT PRICE INDEX OF BRITISH COLUMBIA, WITH AMERICAN MANUFACTURES SUBSTITUTING FOR CANADIAN MANUFACTURES, 1949-1965. (1948 = 100) 45 9 NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA, WITH AMERICAN MANUFACTURES SUBSTITUTING FOR CANADIAN MANUFACTURES, 1949-1965. (1948 = 100) 4 6 LIST OF FIGURES (cont.) PAGE 10 EXPORT QUANTITY INDEXES OF BRITISH COLUMBIA AND EASTERN CANADA, 1949-1965. (1948 = 100) 49 11 INCOME TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA, 1949-1965. (1948 = 100) 51 12 IMPORT QUANTITY INDEXES OF BRITISH COLUMBIA AND EASTERN CANADA, 1949-1965. (1948 = 100) 52 1 CHAPTER 1 INTRODUCTION In order to buy goods from Eastern Canada, B r i t i s h Columbia must s e l l her products to foreign countries. Unlike other regions i n the United States and Canada, the purchasing power of B r i t i s h Columbia i s thereby af f e c t e d to a high degree by world prices for primary products, and by the a b i l i t y of her businessmen to compete su c c e s s f u l l y i n foreign markets. In contrast, other regions l i k e Ontario and Quebec (Eastern Canada) are not so vulnerable to world conditions since a large portion of t h e i r products are sold on the domestic market. This market, however, did not develop n a t u r a l l y , but was a r t i f i c i a l l y created by the protec- t i v e t a r i f f f i r s t introduced by the Conservative government i n 1879. Cl e a r l y , then, factors outside the Canadian national p o l i c y such as the v a r i a b l e world demand for raw materials or the increasing competition from foreign primary producers w i l l a f f e c t the economic a c t i v i t y i n B r i t i s h Columbia to a greater degree than i n the East. The model i n Figure 1 w i l l help c l a r i f y this s i t u a t i o n and d i r e c t a ttention towards c e r t a i n East-West problems which a r i s e as a consequence. Three regions are represented i n the model; B r i t i s h 2 Columbia, Eastern Canada, and Rest of World. The Prairie and Maritime regions are irrelevant to the study and are not to be considered as part of Rest of World. FIGURE 1 NET FLOWS OF MERCHANDISE AND PAYMENTS AMONG BRITISH COLUMBIA, EASTERN CANADA, AND REST OF WORLD Secondary REST OF WORLD 3 The model depicts two net flows -- merchandise and payments. The average annual merchandise trade d e f i c i t of Eastern Canada with Rest of World from 1948-1965 was $517,000,000 represented i n the model by a dollar-outflow to the l a t t e r region. In contrast, the dollar-inflow from Rest of World to B r i t i s h Columbia represents a $297,000,000 annual 1 foreign trade surplus over the same period. A tendency towards equilibrium i n the merchandise balance of payments of the three regions over the 1948-1965 period would suggest that there i s a heavy dol l a r flow Eastward from B r i t i s h Columbia, and a cor- responding merchandise backflow. This i s further evidenced by the Waybill Analyses of railway freight movements indicating a strong East-West flow of goods originating i n the Eastern section (that i s , wheat movements from 2 the P r a i r i e s to the West Coast are excluded). There i s nothing wrong with this two-way flow per se. Neverthe- les s , a problem appears when merchandise prices and quantities are injected into the model. Largely as a resu l t of the Canadian protective t a r i f f , secondary manufacturing i n Eastern Canada i s characterized by high costs and high prices. By r e s t r i c t i n g the inflow of goods from Rest of World into B r i t i s h Columbia, then, the t a r i f f has enhanced the East-West flow of high- priced secondaries, and i n this way has depressed the r e a l income position of B r i t i s h Columbia. See Appendix E for calculation of these trade figures. Board of Transport Commissioners for Canada. Waybill Analysis; Carload A l l - R a i l T r a f f i c . Ottawa: Queen's Printer, annually. 4 Furthermore, the prices of B r i t i s h Columbia imports from Eastern Canada tend not to follow world price trends i n recessions. As expected, sensitive world prices of primaries decline i n these times. However, Canadian secondary prices r e s i s t this trend, and the obvious resu l t i s a f a l l i n the quantity of B r i t i s h Columbia imports. Chapter IV uses Terms of Trade analyses to investigate the trends i n import and export prices of B r i t i s h Columbia and Eastern Canada from 1948-1965. Various other problems including transportation costs, property values, managerial s k i l l , p r i c i n g p o l i c y , and absolute levels of prices are dealt with i n Chapter I I I . 5 CHAPTER II HISTORICAL BACKGROUND The protective element of the Canadian t a r i f f , that i s , the element of discrimination in import duties to exclude certain foreign imports, is commonly thought to have had i ts beginning with the National Policy introduced by the Conservatives in 1879. However, this is not the case. In the spring of 1858, sixty two merchants, manufacturers, and newspapermeni:formed in Toronto, the Association for the Promotion of Canadian Industry, " . . . f o r the purpose of recommending such a readjustment of the t a r i f f as would place the manufacturers of Canada on a footing of greater equality with those of the United States." 1 They sent a delegation to the government to ask that the t a r i f f on certain manufactures be increased. Cayley and Gait, successive Inspectors-General, raised the t a r i f f rates in 1858 and 1859 part ia l ly in l ine with the manufacturers' suggestions. The duties on iron and hardware, machinery, S. D. Clark, The Canadian Manufacturers' Association. Toronto: University of Toronto Press, 1939, p. 1. 6 cotton and woollens were increased from 15 percent to 20 percent; those on 2 clothing and leather advanced to 25 percent. Although a l l the suggestions of the Association for the Promotion of Canadian Industry were not provided for in the new t a r i f f policy of Cayley and Gait, the government did react to the s p i r i t of the suggestions, that i s , that increased protection from the low cost, eff icient American industries must be provided by a discrim- inatory t a r i f f on goods with a high degree of manufactured content. By these actions, then, the federal government gave recognition to the concept of a protective t a r i f f in Canadian economic development. The t a r i f f revisions, of course, were not incorporated without jus t i f i ca t ion , as the government was aware that consumer prices would r ise as a consequence. It was lef t up to Alexander Gait to provide the rationale and he did so by bringing up the question of the costs and benefits of improvements in transportation f a c i l i t i e s undertaken by the federal govern- ment. Gait argued that railways and canals were costly in young countries l ike Canada, but beneficial to consumers in lowering the cost of imports and to producers of exports in rais ing their net returns. Tar i f f s , he maintained, were a reasonable way for the government to recoup a part of i t s development outlay and Gait described the 1859 t a r i f f policy as D. C. Masters, The Reciprocity Treaty of 1854, London: Longmans, Green, and Co. L t d . , 1937, p. 14. 7 primarily a revenue policy and only indidentally as a protective policy 3 for Canadian manufactures. At this point, a word on revenue and protective t a r i f f s is in order. With revenue t a r i f f s , public expenses are partially provided for and the adoption of this policy leads governments to set duties on goods for which home demand is inelastic, as far as the demand is measurable. In this way, the consumer w i l l purchase almost as much as before the t a r i f f was imposed with the resulting effect that the total sum spent for the articles w i l l be greater than before and the government w i l l secure a large revenue from the duty. On the other hand, i f the duty is placed on goods with highly elastic demand, the consumer w i l l lessen his purchases consider- ably and the total revenue declines. Imports decline and the tax revenue to the government becomes correspondingly less. The 1858 and 1859 t a r i f f revisions involved increases on a wide range of highly manufactured, luxury goods for which the demand is generally elastic. Clearly, then, i t could not have been the revenue potential which concerned the government at that time but rather the stimulation or creation of domestic industries. By curbing the inflow of foreign goods, the pro- tective t a r i f f s stimulated Eastern-based industries but at the same time involved a revenue loss to the government. (It is clear that the protective and revenue aspects of a t a r i f f are inversely related). In effect, then, the loss in tax revenue which could have benefited a l l Canadian regions V. C. Fowke, The National Policy and the Wheat Economy. Toronto: University of Toronto Press, 1957, p. 64. 8 provided for the establishment or expansion of Eastern industries. Nevertheless, the t a r i f f p o l i c i e s of the 1859's were mild i n com- parison to the National Policy inaugurated by the Conservative government i n 1879. I t was this policy of r e s t r i c t i v e t a r i f f s which they brought into effect after only a year i n o f f i c e that designates the h i s t o r i c mile- stone at which Canadians abandoned the idea of t a r i f f s for revenue only and deliberately set foot on the pathway marked "protection." The change i n emphasis from primarily revenue t a r i f f s to p r i - marily protective t a r i f f s was essential to the National Purpose. The con- struction of a P a c i f i c railway would f a c i l i t a t e the development of B r i t i s h Columbia as well as the other western provinces and the t a r i f f s would divert international trade, to i n t e r p r o v i n c i a l trade. Railways were to integrate the ex panding area of economic a c t i v i t y and t a r i f f s were to ease the burden of improvements i n transportation by providing railway t r a f f i c and a more d i v e r s i f i e d economy as a source of tax revenues. The railway was to ward off the threat of American annexation of parts of Western Canada and to provide Canadian manufacturers i n Eastern Canada with exclu- sive rights to the t o t a l Canadian market. In as much as the National Policy increased certain consumer prices, i t was a prime target for the opposition L i b e r a l p o l i t i t i a n s , especially i n Western Canada where the extractive and a g r i c u l t u r a l industries f l o u r - ished. In t h e i r Western Canadian campaign of 1893, the Liberals firmly rejected the protectionist policy inaugurated by the' Conservatives. In 9 Winnipeg, S i r W i l f r i d Laurier said: "I denounce the policy of protection as bondage -- yea, bondage; and I refer to bondage i n the same manner i n which American slavery was bondage."4 However, when f i n a l l y elected i n 1896, the Liberals repudiated thei r 1893 t a r i f f platform against the wishes of the many Liberals who went to the p o l l s i n f u l l support of their l o w - t a r i f f platform of 1893. In 1897, the new L i b e r a l government appointed a t r a v e l l i n g t a r i f f commission to investigate the problems involved i n protection. Unfortunately for Western Canada, manufacturers formed the majority of the witnesses who appeared before the commission and curiously, the commission did not go west of Winnipeg. In defining the position occupied by the Western provinces i n the protective framework b u i l t by the National P o l i c y , the L i b e r a l leader, S i r W i l f r i d Laurier l e f t us with a clear statement; "They w i l l require clothes (Western Canadians), they w i l l require furniture, they w i l l require implements, they w i l l require shoes -- and I hope you can furnish them to them (sic) i n Quebec -- they w i l l require everything that man has to be supplied with. I t i s your ambition also, that this s c i e n t i f i c t a r i f f of ours w i l l make i t possible that every shoe that has to be worn i n those p r a i r i e s s h a l l be a Canadian shoe; that every yard of cloth that can be marketed there s h a l l be be a yard of cloth produced i n Canada..."-' Changes i n the structure of the Canadian t a r i f f a f t er 1896 were mainly attempts to appease the low t a r i f f interest of the growing exporting E. P o r r i t t , Sixty Years of Protection i n Canada, 1846-1907. London: Macmillan & Co. Ltd., 1908, p. 212. From a speech made to the Canadian Manufacturers' Association, Quebec City, 1905, quoted i n Canadian Annual Review of Public A f f a i r s , 1905, pp. 149-50. 10 industries of the West while at the same time to maintain protection against the United States manufactures. The strategy was, then, to bring about East-West economic integration, interdependence, and flow of traf f ic over the costly transcontinental transportation f a c i l i t i e s , and i t appears that Canadian National Policy has been successful in this regard.^ J . Deutsch and others,. "National Tar i f f PSl icy," Canadian Economy: Selections. Toronto: Macmillan Company of Canada, L t d . , 1965, p. 472 11 CHAPTER III THE INCIDENCE OF PROTECTION Behind the t a r i f f has developed a wide range of secondary manu- facturing in Eastern Canada- The firms are, in general, highly diversif ied and subject to many inefficiencies of short production runs in servicing a small, domestic market; frequent changeovers, less specialization of labor, slower machine speeds, increased unit costs of low-volume buying, high ad- ministration and supervisory costs, and so on- The high cost nature of these industries, the retal iatory foreign t a r i f f s , and the high provincial and federal taxes have generally restricted the scope of their markets to the domestic sphere. Canadian businessmen, as a result , have avoided the s t i f f com- petit ion that prevails in seeking world markets for secondary manufactures. With smaller rewards open to them, i t is reasonable to assume that the incentive to innovate in Canadian secondary manufacturing is below, perhaps well below, the degree of managerial s k i l l displayed by other trading nations whose manufactures are vulnerable to the discipl ine of international marketing. In the event of future policies toward freer trade, 12 the Canadian businessman may feel the pinch that is currently warded off by the girdle of protective t a r i f f s . In addition to permitting the survival of a multitude of small- scale producers, the Canadian t a r i f f supplies each industry with a ready- made formula for eliminating price competition without overt collusion or, indeed, any direct communication. The obvious price is the United States price plus the Canadian t a r i f f (adjusted for the exchange rate) . Industries which follow this pattern gain a high measure of security: i f they realize that less efficiencies involve higher costs, they w i l l probably also realize that the additional costs are borne by the Canadian consumer. The fact that certain Canadian companies do price in this manner is suggested by the following exerpt from a form-letter sent out by the Canadian subsidiary of the Heath Company of Benton Harbour, Michigan; "...we maintain a firm l ine that the price to the Canadian consumer w i l l be no higher than his cost would be i f he purchased direct ly from Benton Harbour and imported i t himself paying a l l taxes and duries. This policy is always followed within a small fraction either way, the variation being caused by fluctuations in exchange rates and shipping costs." In addition, the same pricing policy may have been used by the automobile industry in 1962 when the average Canadian price was 16.2 percent higher than the United States price for one manufacturer and 17.3 percent higher for another. 1 The Canadian t a r i f f on automobiles imported from the United States is 17.5 percent. R. J . Wonnacott, and P. Wonnacott, Free Trade Between the United States and Canada, Cambridge: Harvard University Press, 1967, pp. 229-35. 13 In the case where a few large firms are responsible for a sizeable portion of the industry output, o l igopol is t ic pricing may be in effect even though the prof i tab i l i ty of these firms appears no greater than the pro f i tab i l i ty of the parent, assuming foreign ownership. This con- dit ion may arise i f the subsidiary is overcharged for industrial materials fabricated at the parent operation. With the high degree of foreign owner- ship in Canada, clearly the potential for o l igopol is t ic practices of this nature is great. In Br i t i sh Columbia, the effect of duties on inputs is to cur- t a i l a wide range of industrial importation, part icularly from the United States and to replace them with higher-priced Eastern Canadian products. To the extent that this has happened, Canadian secondary industry has ex- panded to a greater extent than would otherwise have been the case and, at the same time, production and l iv ing costs have been increased. Since, for geographical reasons, the greatest industrial opportunities are con- centrated in the St. Lawrence region, the expansion in industrial act iv i ty attributable to t a r i f f protection has taken place in Eastern Canada. On the other hand, the resources of Bri t i sh Columbia lend themselves to profitable export production. The t a r i f f , then, has the effect of curtai l ing the expansion of export act iv i ty because of the pronounced increase in capital costs to which i t gives r i se . Of particular importance to the economy of Bri t i sh Columbia is 14 the pulp and paper industry. However, i t is precisely this sector that has experienced the greatest increase in total costs as a result of the t a r i f f on machinery and equipment. By calculating the average Canadian t a r i f f on the machinery and equipment used in each major industry and by applying this result to an estimate of the depreciation in the corresponding industry, the Wonnacott brothers estimated the degree to which.tariff protection on goods of this 2 type raised total costs in each sector. Their results , reproduced in Table I indicate that the greatest additionato total costs resulting from this t a r i f f is incurred by the pulp and paper industry. This re lat ive ly large addition may be, in part, due to the heavy usage and high cost of machinery and equipment in this industry. But this is not the whole answer. Since t a r i f f rates di f fer for various types of machinery and equipment, i t is necessary to determine the level of pro- tection afforded by the t a r i f f in each industry in order to estimate what part of this addition can be attributed solely to this factor. The Wonnacotts estimated the weighted t a r i f f for each industry and the results , Table II , indicate the machinery and equipment used by the pulp and paper industry is more heavily protected than that of any other manufacturing sector. The Kennedy Round of t a r i f f negotiations provides for Canadian reductions on machinery effective January 1, 1968, with an understanding I b i d . , p. 411. TABLE I ESTIMATED PERCENTAGE THAT TOTAL COSTS IN EACH INDUSTRY ARE HIGHER IN CANADA BECAUSE OF CAN- ADIAN TARIFF PROTECTION ON MACHINERY AND EQUIPMENT Manufacturing Sector Percentage Food and Beverages 17 Tobacco and Tobacco Products 10 Textiles and Knitting Mi l l s 16 Apparel and Related Products 07 Lumber and Wood Products 17 Pulp and Paper Products 93 Printing and Publishing 05 E lec tr i ca l Machinery and Apparatus 18 Chemicals and Products 57 Petroleum and Coal Products 03 Rubber and Plastic Products 20 Leather and Leather Products 06 Non-Metallic Mineral Products 39 Metall ic Products and Non- Elec tr i ca l Machinery 33 Transportation Equipment 19 Miscellaneous Manufactures 23 TABLE I I MACHINERY AND EQUIPMENT IN CANADIAN WEIGHTED TARIFF PROTECTION ON IHINE INDUSTRIES Manufacturing Sector Percentage Food and Beverages 13.3 Tobacco and Tobacco Products 10.8 Textiles and Knitting M i l l s 7.8 Apparel and Related Products 7.8 Lumber and Wood Products 12.0 Pulp and Paper Products 19.7 Printing and Publishing 3.7 E l e c t r i c a l Machinery and Apparatus. 10.4 Chemicals and Products 13.5 Petroleum and Coal Products 11.8 Rubber and P l a s t i c Products 13.5 Leather and Leather Products 12.0 Non-Metallic Mineral Products 12.3 Me t a l l i c Products and Non- E l e c t r i c a l Machinery 15.3 Transportation Equipment 13.5 Miscellaneous Manufactures 13.5 17 that the average l e v e l of Most Favored Nation duties w i l l not exceed nine percent."* Although this reduction lowers the average t a r i f f l e v e l for these goods by approximately 25 percent and w i l l probably cause a decline i n the t o t a l cost increment due to the machinery t a r i f f , i t w i l l not a l t e r the r e l a t i v e position of the pulp and paper industry. This manufacturing sector w i l l continue to suffer most from the machinery t a r i f f . I t was previously stated that the t a r i f f tended to raise consum- er prices and i t i s this effect to thich attention must be directed. The Economic Council of Canada compared the Canadian and American prices for a number of manufactured goods and published the following general r e s u l t s ; (a) Half of the items under consideration had prices 20 percent or more higher i n Canada than i n the United States. (b) A quarter of them had prices 35 percent or more higher i n Canada than i n the United States. Although these results provide for the conclusion that Canadian prices are substantially higher than American prices, they do not provide information pertaining to the interregional disparity i n consumer prices. With the exception of Newfoundland which joined the Dominion i n 1949 and did not begin to enjoy f u l l economic benefits u n t i l that time, the Economic Councillof Canada, Fourth Annual Review, Canadian Economy from the 1960's to the 1970's. Ottawa: Queen's Printer, 1967, p. 159. 6 I b i d . , p. 156. 19 consumer price index for B r i t i s h Columbia was the highest i n Canada each year from 1950 to 1964 inclusive. In p a r t i c u l a r , a comparison with Canada's manufacturing regions of Ontario and Quebec reveals that the consumer price index i n B r i t i s h Columbia i s 5 to 7 percent i n advance of Quebec's and 8 to 10 percent higher than that of Ontario. 7 Although the t a r i f f i s ultimately responsible for the East-West consumer price difference, the immediate cause of the disparity may be at- tributed to the costly transcontinental transportation f a c i l i t i e s . Trucks and railways move almost a l l the commodities to the Western provinces, and since railways account for the greatest share of freight movement, i t i s worth considering the connection between this system and the Canadian t a r i f f . Western development of any extent would have been impossible without railway f a c i l i t i e s , especially for the p r a i r i e provinces, so i t i s usually argued that the t a r i f f structure assures the East-West movement of goods which, i n turn, serves as the paying t r a f f i c for the Canadian railway system. Although this i s an argument which connects t a r i f f s and railways, i t s conclusion rests upon the assumption that Western development required f a c i l i t i e s for freight movement. I t would be incorrect to assume, however, that Western provinces would be without adequate railway f a c i l i t i e s had the Canadian transcontinental systems not been b u i l t . One of the chief concerns of the early railway policy of Canada Economic Council of Canada, Staff Study No. 14. Interregional Disparities i n Income, Ottawa: Queen's Printer, 1966, p. 88. 20 was the exclusion of American railways from Canadian territory to the west of the Great Lakes. The mangement of the Northern Pacif ic and Great Nor- thern railways stubbornly persisted, from the 1860's to the end of the century, in their attempts to build into the Canadian territory west of the Lakes. As far as Western provinces are concerned, Canadian railways 8 are expensive alternatives to American railways. Railways and tar i f f s , then, are both functionally and causally related in Canadian history. The railways provided only the physical f a c i l i t i e s for freight movement and did not, in themselves cause manufactur- ing in Eastern Canada to supply distant regions l ike Br i t i sh Columbia. Without protective measures of some kind, manufacturers in Eastern Canada would have had to compete with the highly eff icient mass-production indus- tries in the Eastern and Mid-Western United States in order to secure and to hold markets in outlying regions. Whether they could or not was never tested. A policy of t a r i f f protection was instituted in Canada before there were any significant outlying markets to supply, and before there was any great body of industry to supply them. When considering the relative economic position of two regions whose common trade is created by a protective tar i f f , transportation costs become an important factor. In the Canadian realm, they have had a highly adverse effect on the real income position of Br i t i sh Columbia. 8 V. C. Fowke, op. c i t . , p. 69. 21 The flow of goods for the external trade of B r i t i s h Columbia i s most naturally a north-south flow i n terms of transportation costs, com- modity prices, and available markets. However, the Canadian t a r i f f has diverted a large portion of this trade into an east-west flow for her import goods, while ensuring a north-south flow for her export goods. The low t a r i f f s on primary imports exclude a large portion of B r i t i s h Columbia's products from the Eastern Canadian market since high transpor- tation costs n u l l i f y any advantage gained through t a r i f f protection. The disadvantages i n this arrangement are obvious. Imports, which would otherwise have been shipped from the manufacturing plants i n the P a c i f i c Northwest and Southwest regions of the United States now arrive from a region over twice the distance by much c o s t l i e r modes of transportation. Coastal shipping from San Francisco and Los Angeles (950 and 1450 miles respectively) i s far less expensive than sending merchandise by r a i l or truck over 3000 miles of d i f f i c u l t t e r r a i n . Transportation costs are par- t i c u l a r l y relevant i n forwarding heavy, bulky products l i k e automobiles, since r e t a i l trade i n this industry i s now second highest i n the province. In addition to the higher transportation costs there are problems involving slower delivery, higher communication costs between wholesalers i n the East and r e t a i l e r s i n B r i t i s h Columbia, greater insurance costs, more product spoilage, and less control over inventories. Furthermore, the t a r i f f on secondary manufactures which was re- sponsible for the diversion to east-west trade causes r e t a l i a t o r y foreign 22 tar i f fs on Canadian products, including those of Br i t i sh Columbia. In effect, then, part of the cost of the t a r i f f on secondary imports is shared by the Bri t i sh Columbia export industries by virtue of the decline in foreign demand for her products. It is this sacrif ice of world markets for Br i t i sh Columbia's products which has helped foster manufacturing in Eastern Canada. 23 CHAPTER IV TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA, 1948-1965 There are a number of different measures of terms of trade, none of which involves a l l factors influencing the economic position of a region. For example, the Net Barter Terms index, Pe/P^, indicates only the r e l a t i v e changes i n export and import prices and says nothing of the volume changes which so often accompany price movements. In addition, the Net Barter price indexes are usually expressed i n terms of a base year, constant or moving, or i n terms of a multi-year base period. In so far as the r e a l income position of a region i s affected by the absolute l e v e l of export and import prices i n the base years as well as the r e l a t i v e changes between them over time, the Net Barter index i s a less than perfect indicator of regional differences i n r e a l income. This shortcoming i s p a r t i c u l a r l y relevant to the realiincome position of B r i t i s h Columbia since, as the previous chapter indicated, this area i s subject to a r t i f i c i a l l y i n f l a t e d import prices from Eastern Canada. Nevertheless, a study of the terms of trade can well be used to open up the analysis of a region's economy and direct attention to impor- tant determinants of a region's economic position. The Net Barter index 24 points towards the causes of the behavior of import and export prices, while the Income Terms of Trade, (Qe) (P e/P^) , indicates the import capacity of a region by including the quantity of exports as well as the r e l a t i v e changes in import and export prices. Indexes such as the Single and Double Fac- t o r a l Terms of Trade incorporate productivity of export industries i n the f i r s t case, and productivity of both export and import industries i n the second. In this way, r e l a t i v e gain may be compared for two regions i n terms of s a c r i f i c e of input factors i n export industries, assuming other things equal. In this chapter, then, only the Net Barter and Income Terms of Trade w i l l be considered, since productivity of factor inputs needed i n calculating the Single and Double Factoral indexes of B r i t i s h Columbia and Eastern Canada are almost impossible to measure s a t i s f a c t o r i l y . Besides, the Net Barter index i s most important i n suggesting pressure on regional balance of payments. With respect to balance of payment problems, changes i n export-import price ratios w i l l be of greater significance to B r i t i s h Columbia than to Eastern Canada since external trade i s far greater i n r e l a t i o n to t o t a l trade i n the former region. Before presenting the Net Barter index for the two regions, i t i s necessary to keep i n mind certain problems which crop up i n the analysis using this index. F i r s t , only price indexes for merchandise trade w i l l be considered. I t i s true that the balance of payments can be affected by other " i n v i s i b l e " exports and imports such as travel expenses, interest and 25 dividends,,freight and shipping costs, and insurance, but a l l of these are extremely d i f f i c u l t to measure regionally, and none w i l l have as great an impact on the balance of payments as the merchandise transactions. In addition, a region may enjoy more favorable Net Barter terms as the result of an increased foreign demand for her export goods and this probably means an improvement i n her economic position. However, there are exceptions to t h i s . For example, an increase i n world demand for lumber may send i t s price up, but a p a r t i c u l a r lumber-exporting region may be worse off owing to a succession of strike s i n the industry. I t i s true that she would be i n a s t i l l worse position had the price of lumber not r i s e n , but the fact remains that the Net Barter terms index, without further data, i s an unreliable indicator of the change which has taken place i n her general economic position. A region may also enjoy more favorable Net Barter terms because of a f a l l i n world demand for the kinds of goods which she imports. The countries exporting such goods c l e a r l y lose, but what about the importing regions? They may get, on balance, the same volume of imports as previously, giving i n return a smaller volume of exports. But i f the factors i n the export industries are s p e c i f i c , and cannot be diverted to other industries, the re s u l t may be heavy unemployment of labor and i d l e capacity i n the export industries. In any case, the gain from more favorable Net Barter terms i n such instances w i l l often be less than appears owing to increased unemployment i n the region's export industries and to certain d i f f i c u l t i e s 26 of adjustment. In so far as British Columbia depends on foreign markets to a much larger extent than Eastern Canada and since her primary export indus- tries are typically characterized by highly specific land and capital, the problem of immobile factors and unemployment bears more heavily on this region than on the manufacturing centers in Eastern Canada. For example, certain areas in British Columbia are suitable only for the production of primary wood products and a decline in quantity demanded would make these timberlands unproductive as a consequence. On the other hand, industrial sites in Eastern Canada are usually equally productive in the manufacture of a wide range of secondary goods. Therefore, the f a l l in quantity deman- ded of a particular commodity w i l l not appreciably affect the productive capacity of these sites. The concept of productivity is important when considering relative regional standards of living or "equilibrium rates of exchange." Clearly, when terms of trade are equal for two regions but one increases productivity, then the gains from trade are increased for the more productive area. Less factors are committed to the export industries to produce the same quantity of output and the excess factors may be ut i l i z e d in domestic production, assuming reasonable factor mobility. The Net Barter index, then, may not indicate the increase in gains from trade in this situation. Also, when a region's productivity is increasing at a rapid rate, a movement in the Net Barter terms against i t is quite compatible with a 27 1 movement of the Double Factoral index i n i t s favor. On the other hand, the price of manufactured exports is influenced by the price of imported raw materials. Therefore, i f the price of raw materials r i s e s , the Double Factoral terms may turn against the area i n much greater proportion than the Net Barter terms, an i m p l i c i t constraint on an i n d u s t r i a l region's relationship with an "internal colony" with respect to i n e l a s t i c items. Although the Factoral terms are not calculated i n this study, i t i s important to r e a l i z e that the Net Barter index i s not a completely r e l i a b l e indicator of a region's r e a l trade position but serves only to relate imports and exports through prices and exchange rates. F i n a l l y , quality changes are not reflected i n price indexes and, consequently, the Net Barter index may be misleading i n this aspect. In pa r t i c u l a r , the bulk of B r i t i s h Columbia's exports consist of standardized products, the q u a l i t i e s of which do not change appreciably over the years. This i s i n contrast with the nature of many manufactured imports for which quality improvements have been great. When quality has improved, the import price index overstates the true price increases, That i s , for exactly the same quality i n imported a r t i c l e s of this type, the price would be less. This suggests, therefore, that B r i t i s h Columbia's r e a l Net Barter terms i s actually more favorable than indicated by merchandise price r e l a t i o n - ships alone. 1 This index i s defined as the Net Barter index multiplied by the r a t i o of domestic export productivity to foreign import productivity. 28 Export Price Indexes of Br i t i sh Columbia and Eastern Canada, 1948-1965. These indexes, Figure 2, are composite, weighted price indexes estimated by a procedure outlined in Appendix A. It is evident from the graph that export prices for Bri t i sh Columbia have been increasing since 195'1, but at a slower rate than the price increase in Eastern Canada. The divergence is largely due to the price movements of two commodity groups, wood products and non-ferrous metals, which make up different proportions of the total exports of each region. The forest products industry which accounted for 60 to 65 percent of Br i t i sh Columbia's exports by value over the 1951 to 1965 period, exper- ienced a steady downward trend in prices as indicated in Table III . However, this trend was countered by a dramatic price increase in the non- ferrous metals industry which makes up 13 to 15 percent of Bri t i sh Columbia exports. On the other hand, Eastern Canada's export price index has not been as severely affected by the price drop in forest products since only 25 percent of her total exports are in this category. In addition, the non-ferrous metals sector contributes another 25 percent to total exports and has raised the export price index of Eastern Canada considerably, in fact, to a greater extent than i t has for Bri t i sh Columbia. A comparison between the foreign and domestic export price indexe 29 FIGURE 2 ] iXPORT PRICE INDEXEi 3 OF BRITISH COLUMBIA AND EASTERN CANADA, 1949- 1965. (1948 — 100)* 1 1 c 145 140 4 4} 0 * 0. 135 # 0 —— - # 125 i # • # i j i / ««. »# 11 i n i l i t ii t l i l t l J- 1 w i l 105 100 9 50 51 52 i )3 * 55 5 6 5/ 5, 3 5 9 61 61 6 I 63 6 4 6i 1 EASTERN UUij u CANA 2 S P P Armpnd Lx A fo-r method c f calcula tion. 30 3 TABLE I I I PRICE INDEXES FOR THE WOOD PRODUCTS AND NON-FERROUS METALS INDUSTRIES, 1948-1962 (1948 = 100) Year Wood Products Non-Fer Metals 1948 100.0 100.0 1949 97.9 105.8 1950 105.0 115.1 1951 122.4 137.9 1952 122.4 142.6 1953 118.3 135.0 1954 116.3 134.6 1955 118.0 149.4 1956 120.1 165.0 1957 119.9 153.9 1958 119.3 143.6 1959 120.2 145.6 1960 118.5 148.8 1961 116.0 152.4 1962 116.6 159.9 19 3 Dominion Bureau of S t a t i s t i c s , Exports by Commodities, Vol 1: Summary and A n a l y t i c a l Tables, 1956, 1961, and 1963, Table 38. 31 of Eastern Canada, Figure 3, reveals that the foreign index increased more rapidly than the domestic index over the 1948-1965 period. This was a con- sequence of the composition of exports in the two sectors. For example, foreign exports consisted mainly of primary iron, non-ferrous metals, and wood products: the f i r s t two of these commodity groups had the greatest price movements upwardsof a l l Canadian exports. Domestic exports, however, consisted primarily of secondary manufactures and their price increase was less pronounced than that of foreign exports. The abrupt r ise in both the Br i t i sh Columbia and Eastern Canada price index in 1951 was largely due to inflationary pressures after the outbreak of the Korean War. "Military needs and precautionary buying increased the demand for many important industrial materials such as wool, t i n , manganese, rubber and wood pulp, and the increased raw material prices, in turn, af- fected the costs and prices of manufactured goods. The prices of raw materials generally reached their peak in the f i r s t half of 1951 and declined there- after, contributing to the s tabi l izat ion of other prices and to some declines. The recession in commodity prices in the late 50's was related to the decline in industrial act iv i ty in North America and Western Europe and to the productivity increase in these regions. There were also changes in stock-pil ing policy and market structure, especially in the non-ferrous metals commodity group. As a result , the rate of increase in export price Canada Year Book, Ottawa: Queen's Printer, 1952, p. 922. FIGURE 3 FOREIGN EXPORT PRICE INDEX DOMESTIC EXPORT PRICE INDEX See Appendix A for method of calculation. 33 indexes of Br i t i sh Columbia and Eastern Canada slowed down in this period. When Eastern Canadian secondary prices are related to world sec- ondary prices over the 1948-1965 period, an interesting trend appears in recessionary periods. Figure 4 displays the two price indexes and Table IV relates the world manufacturing price trends and Eastern Canadian price trends during the post-war recessions. TABLE IV PRICE TRENDS IN CANADIAN AND WORLD MANU- FACTURING PRICES DURING POST-WORLD WAR II RECESSIONARY PERIODS Recession Canadian Pr. World Pr. 1948-1949 rise f a l l 1953-1954 f a l l f a l l 1957-1958 same f a l l 1960-1961 rise r ise Canada Year Book, Ottawa: Queen's Printer, 1959, p. 965. 34 ] TGUR E 4 EASTER N CANADIAN I AND WORLD MANUFACTURIN * 7 PRICE INDEXES .949- = IUU ) 7 130 115 110 105 ^ •> 100 — * * - -f» < I i — V V * * * 95 # > * i » / 90 » X / / X/ 85 30 r9 5 D 5 E 5 2 5. 3 5 - 5 5 5 6 5 7 5 8 5 9 60 6 L 6 2 6 3 6̂  6i n\ AT A T\T A AT E INDEX 7 World Index Source n . L~\R . C.ana rli ? ed Nations J 1 ' U I U L learDooK, lyoo, i aoie in Sourc e: Canada Year Book, Canada Year Book. 1 Q ̂7 Ottawa n. 942 : Que Printer. 1957. v. 1075 1967 35 Incidentally, in 1960 secondary prices rose in Canada by a greater percentage than in the world market. Nevertheless, i t appears that Eastern Canadian manufactures do not follow the trend of world manufacturing prices in recessions, and this condition has contributed to both the inflated import index of Br i t i sh Columbia and to the inflated export price index of Eastern Canada in these times. The export price index graph, Figure 2, indicates that the index for Eastern Canada tended to be more stable than the Br i t i sh Columbia index in every post-war recession, reflecting the influence of less vo lat i le pricing in the protected market. Import Price Indexes of Bri t i sh Columbia and Eastern Canada, 1948-1965. Monetary income in Br i t i sh Columbia depends largely upon the a b i l i t y of export producers to market their product, the quality of these products, and the price at which the goods are sold. However, real income depends not only upon the above factors but also upon the prices of goods which Br i t i sh Columbia purchases from home and abroad. In this l ight , then, the real income position of Br i t i sh Columbia has been depressed in proportion to the incremental cost of Eastern Canadian merchandise over world prices. While the effects on real income of buying and se l l ing prices are both readily discernible, i t is nevertheless true that Bri t i sh Columbia 36 exporters are more l ike ly to show concern over the latter than the former. This is understandable because they s e l l far fewer kinds of goods than they buy. The probability of regional control of this latter "diffuse- price phenomena" is sl ight indeed. It is easy to see why most concern over prices in Br i t i sh Columbia industries is directed towards the se l l ing prices rather than the numerous buying prices. This condition suggests that perhaps not enough attention has been directed to the effect of import prices on the real income position of Br i t i sh Columbia. Any substantial advances in welfare for Bri t i sh Columbia w i l l more readily result from import price reduction lobbies than from unified marketing programs for Br i t i sh Columbia export goods. But, as indicated above, the l ikelihood of serious action in this endeavour is sl im, indeed. Although the absolute level of Br i t i sh Columbia import prices is seriously affected by the Canadian t a r i f f , the import price index w i l l not ref lect this condition since the base year, 1948, is after the inception of Canadian protectionism rather than before i t . Therefore, any affect of the Tar i f f w i l l be evident only in the trend of the indexes and not in their absolute levels. One obvious indication is the degree to which Eastern Canadian import prices f e l l relative to those of Bri t i sh Columbia after the Canadian dollar 37 was allowed to float freely in the international market. The dollar was set loose in October, 1950, and reflected supply and demand conditions in i t s exchange rate u n t i l May, 1962, at which time i t was pegged at 92.5 cents to the United States dol lar . It is clear from Figure 5 and Table V that Eastern Canadian import prices stayed below those of Br i t i sh Columbia every year in which the Canadian currency was at a premium relative to the United States dollar between 1950 and 1962. The reason for this may be part ia l ly explained by the degree to which the Canadian Tar i f f diverts Br i t i sh Columbia dollars from the international to the domestic market. F ir s t of a l l , i t is necessary to point out that there is no exchange rate between a Br i t i sh Columbia dollar and an Eastern Canadian dol lar . Therefore, as the Canadian dollar appreciated on international exchanges from a general increased demand for raw materials, Eastern Canadian secondary prices on the domestic market appreciated also in a "real" sense. In terms of Bri t i sh Columbia dol lars , therefore, Eastern Canadian prices experienced no change due to an appreciating Canadian dol lar , and as a consequence, the buying power of Br i t i sh Columbia did not increase on the domestic market as i t did in the international scene. On the other hand, Eastern Canada purchases a far greater proportion of her imports from foreign countries than does Bri t i sh Columbia and, consequently, was able to take better advantage of the increased purchasing power of the Canadian currency in those years. Therefore, the import price index of Eastern Canada f e l l to a greater extent than did the Bri t i sh Columbia index. FIGURE 5 8 See Appendix A f o r method of c a l c u l a t i o n . 39 9 TABLE V PRICE OF UNITED STATES DOLLAR IN CANADIAN FUNDS, 1948-1965 Exchange Rate (avg yearly) 1948 100.0 1949 106.5 1950 107.0 1951 105.3 1952 97.9 1953 98.3 1954 97.3 1955 98.6 1956 98.4 1957 95.9 1958 97.1 1959 95.9 1960 97.0 1961 101.3 1962 106.9 1963 107.9 1964 107.9 1965 107.8 Canada Year Book, 1956. Ottawa: Queen's Printer, 1956, p. 1121. Canada Year Book, 1966. Ottawa: Queen's Printer, 1966, p. 1079. 40 A second, and perhaps less interesting, trend is the rate of increase in the two import price indexes. Although the depreciating dollar in the 1960's par t ia l ly caused the convergence of the two indexes for op- posite reasons from those given above, there is another factor which con- tributed to the import price equalization. By far the greatest component of Eastern Canadian imports is iron products, and these commodities have undergone the greatest price increase of a l l Canadian import groups. Other metal products have also experienced rapid price increases and the current trend for Eastern Canadian prices has been reflect ing these upturns. Br i t i sh Columbia also imports a large amount of iron products and has been subject to the same price increase as Eastern Canada. However, the proportion of this import class in Bri t i sh Columbia is not as great and, as a result , the upward influence on the index has not been as severe. In addition, the Br i t i sh Columbia index is pulled down by the prices of agricultural and animal products which make up a large portion of her imports. This latter commodity class has shown a re lat ive ly slow price increase over the period under study. Net Barter Terms of Trade of Bri t i sh Columbia and Eastern Canada, 1948-1965. The Net Barter index, Figure 6, is simply a ratio of the export 41 and import price indexes presented in the f i r s t part of this chapter. Therefore, any trends in this trade index may be explained in terms of the relative trends of those price indexes. The import price index increased more rapidly for Eastern Canada than for Bri t i sh Columbia. However, the export price index also increased more fapidlyl for Eastern Canada and i t appears that this latter movement more than compensated for the relat ively unfavorable import price changes in that region. Therefore, the Net Barter Terms of Trade appear to diverge s l ight ly from 1952 onward. As indicated ear l i er , the export price index of Eastern Canada does not follow the world price trend during recessions. When world manu- facturing prices f e l l , Eastern Canadian prices usually went against this trend and when they rose, the r ise in Canadian secondaries was greater. Consequently, import prices for Bri t i sh Columbia were raised relat ive to her export prices in recessions because of this influence from Eastern Canada. Figure 6 shows how the Net Barter terms for Br i t i sh Columbia deteriorated relative to that of Eastern Canada; (1) In 1948, the index for Eastern Canada rose while that of Br i t i sh Columbia f e l l . (2) In 1953, the index for Br i t i sh Columbia dropped by a greater percentage than the drop in Eastern Canada. (3) In 1957, the index for Bri t i sh Columbia again dropped more severely than for Eastern Canada. (4) In 1960, the index for Br i t i sh Columbia f e l l in the same relative way as the two previous recessions. i +2 FIGURE 6 N E T AND E A K T E K 1 E K M S Ui" FASTERN CANADA, X K f t . D E U r J J K l T i b H (JUL Ur l i i i A IQ/.Q I Q A E ; n o / . g _ 10 112 i 1 \ \ 110 1 v. \ > r \ \ • i / / \ 108 1 \ I i l J \ • w 1UO 11 l l i / \ 1U4 r f II \ \ l l \ _ l U i II % \ 1UU \ V T O \ 98 96 94 92 L ,9 50 51 L 52 5. 3 5< 5* 5( 5 1 5 8 59 6 0 61 62 63 64 65 BRITISH EASTERN COLUMBIA CANADA 10 See Appendix A for me thod of calculation • 43 I t i s not argued that the influence from Eastern Canada i s the sole cause of B r i t i s h Columbia's r e l a t i v e l y unfavorable position during recessions, only that the drop i n the Net Barter terms index would not be as pronounced i f Eastern Canadian prices follow world prices during those times. Figure 7 compares the United States and Canadian indexes for secondary manufactures over the 1948-1965 period. The Canadian index ap- pears to be increasing at a more rapid rate than the American index, and this factor suggests that the possible B r i t i s h Columbia import index, and ultimately the Net Barter Terms of Trade, would improve i f secondary imports from the United States were substituted for Eastern Canadian goods. The s e l l i n g price, of course, would have to be adjusted for the exchange rate indetermining the possible B r i t i s h Columbia import price index and this is done i n Figure 8, comparing the index shown e a r l i e r with the price index substituting American secondaries. Clearly, the effect of the f l o a t i n g exchange rate on the B r i t i s h Columbian and Eastern Canadian import indexes i s again abvious. The two indexes diverge when the Canadian dollar.was at a premium and converge when i t s international value dropped i n the early 60's. The superior buying power of Canadian currency i n the hands of B r i t i s h Columbia importers was allowed to seek more advantageous markets and the result i s a lower import price index in those years. There are factors other than the exchange rate which enter into the price of the American imports, but these affect only the absolute price 44 T f J l f R l 7 E -LVJUiAJ j / P K l U i UNITED ; I N D E X E S UJ? S E U J N D A K Y M A N U r A (Si U K E S I N THE = 100 rtlN IJ VjrtJ.Nrt.Utt. , - 1 7 U J ; i q - u I J J 130 1ZD 1 £ U mm* mm _ ,«•• p ™ - * —, mm mm mm 113 11U r - _ 105 i 1 — • , m m — — *" / 100 / / / 95 49 50 51 52 5: 5 54 5 5 5 6 5 7 5 8 59 6 0 6 1 62 6 3 6 EA< CANADA ' U N I T E D SXA0.ES 11 n / . o 1957- 1958, n . P d £ 1075. States, , p . . VjCtllclUct l e c t j . DUUtV, S l - a f--i c t i na 1 khct-rar-t n f tho Unite 1957. Wa shing 7, p. ton, 1957 352. A l , P- 32 7. 2S Alsc are i ), Abstract, IS 62 > P« 34 6 £ mc Abstract , 196 L index idjus ted to bas e ; L948- 12 See Appendix B for calculation of Br i t i sh Columbia import price index. FIGURE 9 13 See Appendix B for calculations. 47 level and w i l l not show up on the price index graph. Such charges as the manufacturers' sales tax, the various excise taxes, and the duties on machinery and equipment would raise the import prices determined at Br i t i sh Columbia points of entry while the less costly transportation f a c i l i t i e s and i n i t i a l price advantages would tend to lower them. Nevertheless, only the trend in the two Br i t i sh Columbia import price indexes appears in the graph and no indication of absolute prices is possible. The more favorable import price index with American secondaries was divided into the Br i t i sh Columbia export price index to obtain a pos- s ible Net Barter index from 1948-1965, Figure 9. In thigrgraph, Bri t i sh Columbia is allowed the advantage of the currency premium, an advantage enjoyed quite fu l ly by Eastern Canada, and the consequence is a favorable movement in the Net Barter index relat ive to that of Eastern Canada. Income Terms of Trade of Bri t i sh Columbia and Eastern Canada, 1948-1965. The Net Barter index deals with the gain from a unit of trade and, therefore, does not indicate changes in total gain which depend upon the volume of merchandise traded as well . It is possible that an export price drop may be attributable to an application of cost-reducing methods of manufacture to export industries. In this case, the Net Barter terms 48 may deteriorate as a result while exports increase considerably, and w i l l leave a region better, rather than worse off, in command over foreign goods. It is necessary, then, to incorporate the volume factor in a trade index which attempts to explain relat ive changes in gains from trade. The Income Terms of Trade combines both the relative export- there is a strong pu l l towards equilibrium in the balance of payments then the Income Terms index which includes a l l exports and imports, not just merchandise transactions, determines the quantity of imports available. This is a direct result of the relationship, In this way, therefore, i t is a measure of the import capacity of a region. The export quantity indexes for Br i t i sh Columbia andEEastern Canada, Figure 10, indicate that the rate of increase has been greater in the former region than in the lat ter . The stagnation in exporting in the late 50's was the result of a change in world business conditions. "The declines primarily reflected the ending of the world-wide investment boom which had followed the period of readjustment at the end of the Korean War and the consequent re- duction in industrial act iv i ty in the United States, Western Europe and elsewhere."1^ Canada Year Book, 1959. Ottawa: Queen's Printer, 1959, p. 965. import price movements with an index of export volumes. 14 Therefore, i f 1 49 FIGURE 10 EXrUKT QUANTITY INDEXES UE BRITISH COLUMBIA AND 16 300 i v i o i r j i u N i loU 0 r\C\ £. DU 240 220 • j w / 180 / / / * 160 ^ - - — « • i r\n 4 ^ ** t mm i 80 4 9 5 0 5 L 5 2 53 54 5. 5 6 57 3 »8 59 60 61 6 I 63 64 65 "C A CrPT7'DAT CANADA E A S 1 E K N 16 See Appendix C for cal culations • 50 Evidently, the decline in export volumes were most noticeable in Bri t i sh Columbia. This is expected as the export base of raw materials is very large in this region and w i l l be sensitive to changes in economic conditions, part icularly in the United States where the recession of 1957- 1959 was most strongly in evidence. On the other hand, exports of Eastern Canada tended to be more stable, reflecting the more res i l iant trading pat- tern of secondary manufacturing areas. The rapid export quantity increase for Bri t i sh Columbia over the 1948-1965 period more than offset the unfavorable movement in the Net Barter Terms of Trade, and gave this region an increasing Income Terms index, Figure 11, in fact, a more rapid increase than that of Eastern Canada. However, i f the Income Terms of Trade is a measure of relative capacity to import, then a disparity arises between this index and the import quantity indexes of Br i t i sh Columbia and Eastern Canada shown in Figure 12. For example, one would expect that the Bri t i sh Columbia import quantity index would rise more rapidly than that of the East. This, however, is not the case, and the reason for i t again involves exchange rates. Flexible exchange rates tend to keep the export and import values balanced. That i s , i f the demand for exports fa l l s off, the exchange rate tends to depreciate to the point where either exports increase again in old or new l ines , or imports decline, to restore general equilibrium auto- matically. As indicated previously, the demand for Canadian products inten- s i f i ed in the early 50's as the war-ravaged countries rapidly expanded. 51 FIGURE 1] L INCOME FASTER! TTTttMC 1 DF R T 5 T T T C W rm TTM"RT A Awn Sf ( •"ANATi/ 1949- •19 65 H948 100) 1 7 > O Ci A 280 / w / ZUU / # • f lou — JLOU • x — _ * lq-u r 120 \ / / 100 / i 10 4 9 5C 5] L 5 1 53 \ 5. 5 56 5 7 58 5< 60 61 ( 53 64 65 <*"! A TVT A T \ A EASTERN CANADA 17 See Appendix C for ca] culations 52 FIGURE 12 T M U n D T n T T A i u T T T V T M T I I ? V T ? C rm B D T T T C U COLUMBIA R = i n n i 1 ' AND FASTRRN CANADA 1 QAQ-1 Qfi S _ ("194 i y 260 // / 22 U / / /> LOU // Bmm 1DU i /,n / / * / s 12U IC 0 4 9 I 0 ! 51 52 J 53 f »4 5 5 56 57 i i8 f )9 60 61 ! 6 3 64 65 i POT TTM"DT A j i JIXL L J_0 tl ASTERN CANADA 18 :al culations See .appena IX ror ( • 53 As a consequence, the demand f o r Canadian currency increased and the Canadian d o l l a r was s e l l i n g at a premium. In terms of the r e l a t i v e economic p o s i t i o n s of B r i t i s h Columbia and Eastern Canada, t h i s premium favored the importing c a p a c i t y of the East. That i s , Eastern Canada obtains a f a r greater p r o p o r t i o n of her import on the world market than does B r i t i s h Columbia and was able to take b e t t e r advantage of the increased buying power. This f a c t o r i s evident when the Income Terms of Trade are r e l a t e d to corresponding import q u a n t i t y indexes. O s t e n s i b l y , the c a p a c i t y to import favors B r i t i s h Columbia on the Income Terms graph. However, a comparison of the import q u a n t i t y indexes r e v e a l s the r e a l Income Terms of Trade. That i s , the i n f e r i o r income-earning p o s i t i o n o f Eastern Canada i s counterbalanced by the s u p e r i o r r e a l buying power of her d o l l a r s to i n f l a t e her importing a b i l i t y r e l a t i v e to that of B r i t i s h Columbia. Consequently, the import q u a n t i t y indexes of the two regions are f a i r l y equal over the decade. The d e c l i n e i n the B r i t i s h Columbia import q u a n t i t y index and the opposing increase i n the Eastern Canada index from 1959-1962 d i r e c t s a t t e n t i o n towards a second problem. When Canada maintains t i g h t c r e d i t , r e l a t i v e to other c o u n t r i e s , i n p a r t i c u l a r the United S t a t e s , import c a p a b i l i t i e s again favor Eastern Canada. For example, through the depressed years, 1959-1962, t i g h t c r e d i t i n Canada r e s u l t e d i n a f a i r l y high c a p i t a l i n f l o w and an exchange r a t e that placed the Canadian d o l l a r at a premium, discouraged exports, and encouraged imports. C r e d i t was easy i n the United States:' and an out- 54 flow of capital was experienced. This condition, however, favored the import capability of Eastern Canada relative to that of Bri t i sh Columbia in the same way as before. That i s , the Eastern Canadian import dollar finds i ts way into world markets to a far greater extent than the Bri t i sh Columbia dollar and is able to reap the benefits of the exchange rate premium. Any increase in Br i t i sh Columbia imports presumeably would be met by an increase in Eastern Canadian exports and, to re-emphasize, no viable exchange rate exists between the regions. 55 CHAPTER V CONCLUSIONS The average annual merchandise trade def ic i t of Eastern Canada with foreign countries was $517,000,000 from 1948-1965. In contrast, the trade surplus of Bri t i sh Columbia was $297,000,000 over the same period. Canadian managerial efficiency lags behind that level required to compete successfully in international markets. It is fa i r to assume that the degree of managerial efficiency in Canadian industries varies inversely with the amount of t a r i f f protection under which the firms operate. In this l ight , the burden of upgrading management in the event of a more l i b e r a l Canadian trade policy w i l l rest on secondary manufacturing industries in the East. However, this factor may well contribute to a delay of such policy changes unt i l such time as Eastern businessmen become more familiar with international marketing. A major drawback to the international competitive position of Canadian industries is the tax system under which they operate. Unlike both the United States and Great Br i ta in , the federal government in Canada 56 obtains the major p o r t i o n of i t s revenue from i n d i r e c t taxes -- v a r i o u s e x c i s e taxes, the 11% manufacturers' s a l e s tax, and t a r i f f s . Although the 11% tax i s refunded on exported products, the i n d i r e c t taxes along w i t h the d i r e c t corporate income taxes at the p r o v i n c i a l and f e d e r a l l e v e l s are absorbed i n t o the cost s t r u c t u r e of Canadian business and thereby hinder competitive i n t e r n a t i o n a l p r i c i n g . T o t a l Costs i n the pulp and paper i n d u s t r y , one of the more important B r i t i s h Columbia i n d u s t r i e s , are r a i s e d by almost 1% by the t a r i f f on machinery and equipment. This a d d i t i o n to t o t a l costs i s the highest of a l l Canadian i n d u s t r i e s and i t s cause may be traced to two f a c t o r s ; (a) The high l e v e l of d e p r e c i a t i o n on machinery and equipment, and (b) The unusually h i g h t a r i f f r a t e s on machinery and equipment used i n t h i s p a r t i c u l a r i n d u s t r y . The consumer p r i c e index i n B r i t i s h Columbia i s 8 - 10 percent higher than i n Ontario. A major cause of t h i s d i s p a r i t y i s the costs i n v o l v e d i n t r a n s p o r t i n g secondaries across Canada. On the other hand, these very c o s t s , coupled w i t h low t a r i f f s on primary imports, have l a r g e l y been r e s p o n s i b l e f o r the e x c l u s i o n of B r i t i s h Columbia exports from the Eastern market. The most advantageous source of B r i t i s h Columbia secondary imports, without t a r i f f p r o t e c t i o n , i s the Western United S t a t e s . This r e g i o n 57 i s much closer than Eastern Canada and would involve less trans- portation costs, faster delivery, less product spoilage, less administration costs, and other benefits to B r i t i s h Columbia consumers. 7. T a r i f f s have raised property values i n Eastern Canada r e l a t i v e to those i n B r i t i s h Columbia by encouraging secondary industry which, for geographical reasons, has flourished i n the St. Lawrence Valley region. As a r e s u l t , p r o v i n c i a l and municipal taxing bodies have bene- f i t e d through the enlargement of the tax base on property and business. 8. Export prices i n B r i t i s h Columbia are not r i s i n g as rapidly as those i n Eastern Canada primarily because of declines i n the prices of wood products and paper. 9. Eastern Canada secondary prices r e s i s t world trends i n recessions. Consequently, the Net Barter Terms of Trade of B r i t i s h Columbia suffer as the sensitive raw material prices f a l l . The r e a l income position of B r i t i s h Columbia deteriorates correspondingly i n these rthese times. 10. When the Canadian d o l l a r appreciated i n the 1950's, Eastern Canada benefited to a greater extent than B r i t i s h Columbia. Most imports of the former region were from foreign countries ( i n p a r t i c u l a r , the United States) and she benefited from the currency premium. B r i t i s h Columbia also benefited, but to a lesser extent than Eastern Canada. Secondary imports from the East remained at the same price levels and 58 of course, no exchange rate existed between the two regions. 11. The Net Barter Terms of Trade of Eastern Canada from 1948-1965 never f e l l below the B r i t i s h Columbia index. In fact, they were usually well above that of the l a t t e r region. 12. By substituting American secondaries for Canadian secondaries i n the import price index of B r i t i s h Columbia from 1948-1965, the terms of trade improved considerably. Most n o t i c i b l e was the decline i n the price index when the Canadian dol l a r was unpegged i n 1950. This, of course, was due to the stronger buying power of B r i t i s h Columbia dollars i n foreign markets. 13. As a measure of import capacity, the Income Terms of Trade suggested that B r i t i s h Columbia should have had a more rapidly increasing import quantity index than Eastern Canada. This, however, was not the case since Eastern Canadian dollars had greater importing potential when the currency appreciated. B I B L I O G R A P H Y 60 BIBLIOGRAPHY A. BOOKS Corden, W. M. Recent Developments in the Theory of International Trade. Princeton University Press, 1965. Dales, J . H. The Protective Tar i f f in Canada's Development. Toronto: University of Toronto Press, 1966. Drummond, Ian M. The Canadian Economy: Organization and Development. Homewood, I l l i n o i s : Richard D. Irwin, Inc. , 1966. Fowke, Vernon C. Canadian Agricultural Policy: The Historical Pattern. Toronto: University of Toronto Press, 1964. The National Policy and the Wheat Economy. Toronto: University of Toronto Press, 1946. Haberler, Gottfried. A Survey of International Trade. Princeton University Press, 1955. Harcourt, G. C , and others. Economic Act iv i ty . Cambridge: Harvard University Press, 1967. Harris , S. E . International and Interregional Economics. New York: McGraw-Hill Book Co. , 1957. Isard, Walter. Methods of Regional Analysis: An Introduction to Regional Science. New York: John Wiley & Sons, 1960. 61 BIBLIOGRAPHY Judge, F. W. Production and Productivity. Queen's University Press, 1963. Kindleberger, C. P. International Economics, revised ed. Homewood, I l l i n o i s : Richard D. Irwin Inc., 1963. Lougheed, W. F. Secondary Manufacturing Indus try i n the Canadian Economy. Toronto: Baxter Publishing Co., 1961. Masters, D. C. The Reciprocity Treaty of 1854. London: Longmans, Green, and Co., 1937. Ohlin, B. Interregional and International Trade, revised ed. Cambridge: Harvard University Press, 1967. P o r r i t t , E. Sixty Years of Protection i n Canada, 1846-1907. London: Macmillan & Co. Ltd., 1908. Shepherd, Geoffrey S. A g r i c u l t u r a l Price Analysis. Iowa State University Press, 1957. Taussig, F. W. International Trade. New York: Macmillan Co., 1937. Vanek, J. International Trade: Theory and Economic Policy. Homewood, I l l i n o i s : Richard D. Irwin Inc., 1962. Viner, J. ..Studies i n the Theory of International Trade. New York: Harper & Bros., 1965. Wonnacott, R. J. and G. P. Wonnacott. Free Trade Between the United States and Canada. Cambridge: Harvard University Press, 1967. 62 BIBLIOGRAPHY Yeager, L. B. and D. G. Tuerck. Trade Policy and the Price System. Scranton, Penn: International Textbook Co., 1966. Young, J. P. The International Economy, fourth ed. New York: Ronald Press Co., 1963. B.; PERIODICALS AND GOVERNMENT PUBLICATIONS Benham, Frederic. "The Terms of Trade," Economica, 7:360-76 (November, 1940). Dorrance, G. S. "The Income Terms of Trade," Review of Economic Studies, 16:50-56 (1949-1950). Economic Council of BriMsh Columbia, Research Dept. The Barter Terms of Trade Between Eastern Canada and B r i t i s h Columbia. V i c t o r i a , B.C. June, 1935. Economic Council of Canada, Fourth Annual Review. Canadian Economy from the 1960's to the 1970's. Ottawa: Queen's Pri n t e r , 1966. Imlah, A. H. "Real Values i n B r i t i s h Foreign Trade, 1798-1853," Journal of Economic History, 8:133-52 (November, 1948). . "The Terms of Trade of the United Kingdom, 1798-1913," Journal of Economic History, 10:170-94 (May, 1950). Kaldor, Nicholas. "A Note on T a r i f f s and the Terms of Trade," Economica, 7/:377-80 '(NovemberV 1940) . 63 BIBLIOGRAPHY Kennedy, C. "Devaluation and the Terms of Trade," Review of Economic Studies, 18:28-31 (1950-1951). Meyer, F. V. "The Terms of Trade of Manufacturing," Economic Journal, 69:507-9 (Sept. 1959). Mundell, R. A. " T a r i f f Preference and the Terms of Trade," Manchester School of Economic and Social Studies, 32:1-10 (January, 1964). P f i s t e r , Richard L. "The Terms of Trade as a.Tool of Regional Analysis," Journal of Regional Science, 3:57-65 (1961). Reuber, G. L. "Western Europe's Demand for Canadian Industrial Materials," Canadian Journal of Economics and P o l i t i c a l Science, 28:16-34 (February, 1962). Robertson, D. H. "The Terms of Trade," International Social Science B u l l e t i n , 3:28-33 (Spring, 1951). Rostow, W. W. "The H i s t o r i c a l Analysis of the Terms of Trade," Economic History Review, 4:53=.76 (1951) . "The Terms of Trade i n Theory and Practice," Economic History Review, 3:1-20 (1950). Staehle, H. "Some Notes on the Terms of Trade," International Social Science B u l l e t i n , 3:33-37 (Spring, 1951). Sumner, W. G. "What i s Free Trade?" Readings i n Economics and P o l i t i c s , 2nd ed. New York: Oxford University Press, 1966. A P P E N D I C E S 65 APPENDIX A CALCULATION OF THE NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA In determining the export price index for B r i t i s h Columbia, the Canadian export price indexes for 8 commodity groups were weighted yearly by the proportion of these classes i n the t o t a l trade of the region to obtain a yearly average export price index. 1 The commodity groups are; (1) A g r i c u l t u r a l and Animal Products, (2) Fibres and Text i l e s , (3) Wood Products and Paper, (4) Iron and Steel and Products, (5) Non-Ferrous Metals and Products, (6) Non-Metallic Minerals and Products, (7) Chemicals and F e r t i l i z e r , (8) 2 Miscellaneous Products. The weights used i n the computation were based upon the yearly composition of B r i t i s h Columbia external trade reported i n Industrial Development, Trade, and Commerce published by the Bureau of Economics and S t a t i s t i c s , V i c t o r i a , B.C. A complete breakdown of each commodity group may be found i n Trade of Canada, Vol 1 : Summary and An a l y t i c a l Tables, published annually by the Dominion Bureau of S t a t i s t i c s , Ottawa, Canada. 66 B r i t i s h Columbia domestic exports are minimal r e l a t i v e to her foreign exports, and since s t a t i s t i c s on int e r p r o v i n c i a l trade are unavail- able, the weights reflected only foreign exports. I t was f e l t that the f i n a l price indexes were not altered i n any appreciable way by this omission. TABLE VI EXPORT PRICE INDEX OF BRITISH COLUMBIA, 1948-1965. (1948 = 100) Year P e 1948 100 1949 102 1950 107 1951 123 1952 124 1953 120 1954 117 1955 121 1956 126 1957 125 1958 122 1959 124 1960 125 1961 123 1962 126 1963 130 1964 132 1965 134 67 However, the export price index for Eastern Canada was more d i f - f i c u l t to estimate since, i n her case, domestic exports are a substantial portion of t o t a l exports. Her foreign export sector was estimated i n a manner sim i l a r to that of B r i t i s h Columbia. The Canadian commodity group price indexes were weighted by an estimate of the proportion of t o t a l Can- adian exports attributable to Eastern Canada i n each c l a s s i f i c a t i o n . In calculating the appropriate weights, i t was f i r s t necessary to estimate the proportions of Canadian industries located i n Ontario and Que- bec. These are displayed i n Table VII for the top 20 industries ranked according to the s e l l i n g value of factory shipments. Subsequently, estimates of the proportions of each commodity group attributable to Eastern Canada were made from the information i n Table VII. These are shown i n Table VIII. The high percentage of misc- ellaneous exports attributable to Eastern Canada arises from the nature of these products, as they are mainly finished goods or a r t i c l e s with a high degree of manufactured content. The percentages given in Table VIII were then applied to the declared values of Canadian foreign exports and, i n this,way, the value of 3 Eastern Canadian foreign exports by commodity groups was estimated. Table IX gives this information. Canadian export values are given i n Trade of Canada, Vol 1: Summary and A n a l y t i c a l Tables, Table 38. This i s an annual publication by the Dominion Bureau of S t a t i s t i c s , Ottawa, Canada. 68 4 TABLE VII PERCENTAGE OF CANADIAN INDUSTRY LOCATED IN EASTERN CANADA, BY SELLING VALUES OF FACTORY SHIPMENTS (1960) Industry Percentage 1 Pulp and Paper 67 2 Smelting and Refining 83 3 Petroleum and Refining 50 4 Slaughtering and Meat Packing 58 5 Motor Vehicles 100 6 Iron and Steel M i l l s 88 7 Sawmills 25 8 Chemicals 80 9 Pasteurizing Plants 65 10 Machinery (Misc.) 92 11 Foods (Misc.) 75 12 Bakeries 67 13 Printing and Publishing 73 14 Metal Stamp and Press 85 15 F r u i t and Vegetable Preparations 81 16r A i r c r a f t and Parts 88 17 Butter and Cheese 80 18 Motor Vehicle Parts 98 19 Feeds 80 20 Clothing 80 Manufacturing Industries of Canada, 1960, Section G: Geographical Distribution. Dominion Bureau of S t a t i s t i c s , Ottawa, Canada. D.B.S. #31-209, pp. 11-16. 69 TABLE VIII PERCENTAGE OF CANADIAN EXPORTS ATTRIBUTABLE TO EASTERN CANADA, BY COMMODITY GROUPS. Commodity Percentage A g r i c u l t u r a l and Animal Products 27 Fibres and Textiles 80 Wood Products and Paper 55 Iron and Steel and Products 84 Non-Ferrous Metals and Products ... 81 Non-Metallic Minerals and Products 67 Chemicals and F e r t i l i z e r 81 Miscellaneous Products 97 Estimated from source ci t e d i n footnote 4, and Trade of Canada, 1958, Vol 1: Summary and An a l y t i c a l Tables, pp. 106-10. 70 TABLE IX 6 VALUE OF EASTERN CANADIAN FOREIGN EXPORTS, 1948-1965, BY COMMODITY GROUPS. ($000,000) Year Agr Text Wood Iron Non-Ferr Non- Met Chem Misc Total 1948 282 36 524 305 320 64 65 94 1690 1949 293 20 481 281 345 50 58 99 1627 1950 268 24 612 229 370 70 82 49 1704 1951 328 30 769 294 461 88 107 80 2157 1952 379 22 752 350 573 96 101 108 2381 1953 362 19 712 317 552 98 112 111 2283 1954 287 16 758 259 574 97 82 93 2166 1955 272 18 836 338 686 141 148 61 2500 1956 331 18 833 391 771 200 148 94 2786 1957 304 22 801 461 795 239 158 94 2874 1958 344 16 778 378 829 168 160 155 2828 1959 328 20 834 482 903 197 163 80 3007 1960 308 33 876 509 983 228 193 81 3211 1961 387 35 901 507 992 289 202 187 3500. 1962 383 38 944 629 1012 368 202 278 3854 1963 4166 1964 5016 1965 5336 6 In 1963, Canada changed export c l a s s i f i c a t i o n and values for the above groupings were not available. However, the totals were estimated by determining the average percentage of Eastern Canadian exports i n the t o t a l Canadian exports over the 1960-1962 period, then applying this percentage to the t o t a l Canadian exports from 1963-1965. 71 Through an identical procedure as that used for Br i t i sh Columbia, the foreign export price index of Eastern Canada was determined. This index is shown below. TABLE X FOREIGN EXPORT PRICE INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) Year P e 1948 100 1949 104 1950 109 1951 126 1952 127 1953 124 1954 122 1955 128 1956 135 1957 132 1958 135 1959 136 1960 136 1961 137 1962 143 1963 144 1964 145 1965 148 72 For the Eastern Canadian domestic price index of exports, the wholesale price index for Canadian secondary manufactures was used, since the greatest proportion of domestic exports are of this type. TABLE XI WHOLESALE PRICE INDEX OF FULLY AND CHIEFLY MANUFACTURED GOODS, CANADA, 1948-1965. (1948 = 100) Year Price Index 1948 100 1949 104 1950 110 1951 126 1952 120 1953 119 1954 117 1955 117 1956 121 1957 124 1958 124 1959 126 1960 126 1961 128 1962 130 1963 132 1964 133 1965 136 Canada Year Book, 1967. Table 2, p. 942. Canada Year Book, 1957-1958. Table 1, p. 1075. The quoted indexes are yearly averages. 73 In order to weight the two Eastern Canadian export price indexes, I t was necessary to determine the proportion of t o t a l regional exports going to each sector. F i r s t , an estimate was made of the proportion of t o t a l Canadian production (less exports) i n each commodity group that was consumed i n Eastern Canada. Using the 1949 Interindustry Flow of Goods and Services published by the Dominion Bureau of S t a t i s t i c s , the regional g population (63% of Canada), and the location of Canadian industries as guidelines, the percentage consumption of each commodity group i n Eastern Canada was estimated. TABLE XII PERCENTAGE OF EASTERN CANADIAN CONSUMPTION OF TOTAL CANADIAN PRODUCTION LESS EXPORTS, BY COMMODITY GROUPS. Commodity Percentage A g r i c u l t u r a l and Animal Products 75 Fibres and Textiles 70 Wood Products and Paper 82 Iron and Steel and Products 80 Non-Ferrous Metals and Products 80 Non-Metallic Minerals and Products 80 Chemicals and F e r t i l i z e r 75 Miscellaneous Products 63 See footnote 4. Total Canadian production s t a t i s t i c s found i n Manufacturing Industries of Canada, 1960, Sections B, C, D, E, and F. Ottawa: Queen's Printer, 1960. 74 These percentages were then applied to total Canadian production in each commodity group to determine the regional consumption in absolute terms. Then the regional yearly totals were subtracted from the Eastern Canadian production (less exports^, foreign), Table IX, to arrive at a yearly domestic export figure for Eastern Canada. TABLE XIII EASTERN CANADIAN DOMESTIC EXPORTS, BY VALUE, 1948-1965. ($000,000,000) Year Value 1948 .7 1949 .9 1950 .9 1951 1.0 1952 1.3 1953 1.3 1954 1.0 1955 1.1 1956 1.3 1957 1.3 1958 1.3 1959 1.5 1960 • 1.6 1961 1.5 1962 1.4 1963 2.0 1964 2.2 1965 2.3 75 From Table XIII and Table IX, the two price indexes for Eastern Canada were weighted and the resulting price index was taken as the total export price index. Table XIV displays this index. TABLE XIV EXPORT PRICE INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) Year P 1948 100 1949 104 1950 109 1951 126 1952 125 1953 122 1954 120 1955 125 1956 131 1957 132 1958 129 1959 132 1960 133 1961 134 1962 140 1963 140 1964 141 1965 144 76 It was then necessary to determine the import price indexes of both regions. In this case, then, i t was British Columbia that had both a domestic and foreign price index, while Eastern Canada was subject to mainly the foreign index. For British Columbia, the domestic import price index was taken to be the same as the Eastern Canadian domestic export index given in Table XT, and the foreign import price index was calculated in the same manner as the British Columbia export price index given in Table VI. The two indexes were then combined in the same way as the export price indexes of Eastern Canada. In this case, however, the value of British Columbia imports from Eastern Canada was taken as 28 percent of domestic exports from the latter region. The export distribution was by population in Canada, and did not take account of interindustry commodity flows. T3ble XV gives the British Columbia import price index. Eastern Canada's import price index was estimated in a manner similar to the estimation of the foreign exports of that region. That i s , the Canadian import price indexes were weighted by the estimated consump- tion of each commodity group in Eastern Canada. Finally, the Net Barter Terms of Trade were found for each region by dividing the export price index by i t s corresponding import price index. Table XVII l i s t s the above trade index for each region. TABLE XV IMPORT PRICE INDEX OF BRITISH COLUMBIA, 1948-1965. (1948 = 100) Year P. 1948 100 1949 103 1950 110 1951 126 1952 116 1953 115 1954 115 1955 116 1956 121 1957 124 1958 123 1959 124 1960 125 1961 126 1962 131 1963 138 1964 139 1965 139 78 TABLE XIV IMPORT PRICE INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) Year P. 1948 100 1949 103 1950 111 1951 128 1952 113 1953 112 1954 111 1955 114 1956 119 1957 122 1958 122 1959 122 1960 124 1961 126 1962 133 1963 137 1964 140 1965 143 TABLE XVII NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA, 194811965. (1948 = 100) Year B.C.' E.C. 1948 100 100 1949 99 101 1950 ' 97 98 1951 98 98 1952 107 111 1953 104 109 1954 102 108 1955 104 110 1956 104 110 1957 101 108 1958 99 106 1959 100 108 1960 100 107 1961 98 106 1962 96 105 1963 94 102 1964 95 101 1965 96 101 80 APPENDIX B CALCULATION OF THE NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA WITH SUBSTI- TUTION OF SECONDARY MANUFACTURES FROM THE UNITED STATES The United States p r i c e index of f i n i s h e d goods i s given i n Table XVIIT.''' However, the index must be adjusted f o r the exchange rate 2 i n order f o r i t to be used as a B r i t i s h Columbia import p r i c e index. This adjustment i s also given i n Table XVIII. The new B r i t i s h Columbia import p r i c e index was then estimated by combining the foreign (other than U.S.) import p r i c e index with the import index i n Table XVIII i n the same manner as i n Appendix A. F i n a l l y , t h i s l a t t e r index was divided into the export p r i c e index to give the comparative Net Barter Terms of Trade of B r i t i s h Columbia shown i n Table XX. 1 See Chapter IV, footnote 9. 2 See Chapter IV, footnote 7. TABLE XVIII UNITED STATES WHOLESALE PRICE INDEX OF FINISHED GOODS AND THE BRITISH COLUMBIA IMPORT PRICE INDEX OF AMERICAN MANUFACTURES, 1948-1965. (1948 = 100) Year U.S. Price Index B.C. Import Price Index 1948 100 100 1949 97 103 1950 98 105 1951 108 114 1952 108 106 1953 106 104 1954 107 104 1955 107 105 1956 110 108 1957 113 108 1958 116 112 1959 116 111 1960 117 113 1961 117 119 1962 118 126 1963 117 126 1964 118 126 1965 121 130 TABLE XIX IMPORT PRICE INDEX OF BRITISH COLUMBIA WITH AMERICAN MANUFACTURES SUBSTITUTING FOR EASTERN CANADIAN GOODS, 1948-1965. (1948 = 100) Year P. l 1948 100 1949 103 1950 108 1951 120 1952 109 1953 107 1954 108 1955 110 1956 114 1957 116 1958 117 1959 117 1960 118 1961 122 1962 129 1963 135 1964 136 1965 136 83 TABLE XX NET BARTER TERMS OF TRADE OF BRITISH COLUMBIA WITH AMERICAN MANUFACTURES SUBSTITUTING FOR EASTERN CAN- ADIAN GOODS, 1948-1965. (1948 = 100) Year Net Barter 1948 100 1949 99 1950 99 1951 102 1952 114 1953 112 1954 108 1955 110 1956 111 1957 108 1958 104 1959 106 1960 106 1961 101 1962 98 1963 96 1964 97 1965 99 84 APPENDIX C CALCULATION OF THE INCOME TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA For this trade indicator, the export quantity indexes are re- quired for each region. These are not the same indexes as value indexes, but are derived from the latter through dividing by corresponding price indexes. With the price indexes for both regions calculated already, i t was only necessary to determine the corresponding value indexes. The Br i t i sh Columbia value index was obtained direct ly from the s tat is t ics 1 used in estimating the export price index weights in Appendix A. Table XXI l i s t s both the export value index and the export quantity index of Br i t i sh Columbia. The export value index for Eastern Canada, on the other hand, was found by f i r s t combining the domestic and foreign values given in Table IX and Table XIII, then converting the annual totals to base 1948. The Income Terms of Trade for each region was then determined by multiplying the export-import price index ratio (Net Barter) by the cor- responding export quantity index. See Appendix A, footnote 1. TABLE XXI EXPORT VALUE INDEX AND QUANTITY INDEX OF BRITISH COLUMBIA, 1948-1965 (1948 = 100) Year V Q0 e ê 1948 100 100 1949 99 97 1950 127 119 1951 158 128 1952 150 121 1953 170 142 1954 187 160 1955 214 177 1956 212 169 1957 199 159 1958 201 165 1959 218 175 1960 247 197 1961 258 209 1962 286 227 1963 322 247 1964 344 262 1965 374 279 TABLE XXII EXPORT VALUE INDEX AND QUANTITY INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) Year V Q e e 1948 100 100 1949 104 100 1950 108 99 1951 133 106 1952 154 123 1953 150 123 1954 133 111 1955 150 120 1956 171 131 1957 175 133 1958 171 133 1959 188 142 1960 200 150 1961 208 155 1962 221 158 19.63 258 184 1964 300 213 1965 317 220 TABLE XXIII INCOME TERMS OF TRADE OF BRITISH COLUMBIA AND EASTERN CANADA, 1948-1965. (1948 = 100) British Eastern Columbia Canada 1948 100 100 1949 96 101 1950 115 97 1951 125 104 1952 129 137 1953 148 134 1954 163 120 1955 184 132 1956 175 144 1957 161 144 1958 163 141 1959 175 153 1960 197 161 1961 205 164 1962 218 166 1963 232 188 1964 248 215 1965 268 222 88 APPENDIX D CALCULATION OF IMPORT QUANTITY INDEXES OF BRITISH COLUMBIA AND EASTERN CANADA For Br i t i sh Columbia, the import quantity index was determined by the same method used in finding the export quantity index. That i s , the import value index was f i r s t constructed, then divided by the approp- riate price index. The values of foreign imports^ were added to 28 per- cent of the annual domestic export values of Eastern Canada given in Table XIII. The 28 percent, as explained ear l ier , was Bri t i sh Columbia's estimated share of domestic imports from Eastern Canada. Imports from other Canadian regions were considered as insignificant in relation to Eastern Canadian imports. Subsequently, the yearly import totals were converted to base 1948 as shown in Table XXIV along with the import quantity index. On the other hand, the import value index of Eastern Canada had to be estimated from Canadian import s tat i s t ics in a similar fashion to the method used in finding the export quantity index of that region. By using the industry location s tat i s t ics given in Table VII, the population See Appendix A, footnote 5. 89 of Quebec and Ontario, and the Interindustry Flow of Goods and Services, 1949, as aides, an approximate figure was obtained for the fraction of Eastern Canadian consumption of total Canadian imports. TABLE XXIV IMPORT VALUE INDEX AND QUANTITY INDEX OF BRITISH COLUMBIA, 1948-1965.(1948 = 100) Year V i Q i 1948 100 100 1949 117 114 1950 126 115 1951 153 121 1952 176 152 1953 180 157 1954 154 134 1955 174 150 1956 222 183 1957 220 177 1958 194 158 1959 227 183 1960 227 182 1961 215 171 1962 221 169 1963 260 188 1964 302 217 1965 332 239 90 TABLE XXV PERCENTAGE OF CANADIAN IMPORTS CONSUMED IN EASTERN CANADA, BY COMMODITY GROUPS Commodity Percentage Agricultural and Animal Products 63 Fibres and Textiles 70 Wood Products and Paper 74 Iron arid Steel and Products 69 Non-Ferrous Metals and Products 71 Non-Metallic Minerals and Products 68 Chemicals and F e r t i l i z e r 65 Miscellaneous Products 63 The above proportions were then applied to the declared values 2 of Canadian imports by commodity groups. 2 See Appendix A, footnote 5. 91 TABLE XXVI VALUE OF EASTERN CANADIAN IMPORTS, 1948-1965, BY COMMODITY GROUPS Year Agr Tex Wood Iron Non- Ferr Non- Met Chem Misc Total 1948 254 246 52 540 111 410 79 92 1784 1949 266 234 61 613 126 361 88 118 1867 1950 329 256 71 674 156 414 105 140 2145 1951 368 339 98 915 211 463 127 237 2758 1952 329 252 95 967 216 434 124 292 2709 1953 331 272 114 1049 267 445 147 320 2945 1954 366 234 117 905 262 404 147 312 2747 1955 378 268 139 1101 292 448 173 329 3128 1956 425 292 162 1531 357 517 191 324 3799 1957 445 287 160 1463 352 524 195 320 3746 1958 451 272 167 1271 314 460 194 326 3455 1959 465 295 194 1438 340 474 218 347 3771 1960 466 302 189 1410 339 449 226 373 3754 1961 496 321 204 1392 373 456 248 462 3951 1962 524 337 209 1509 434 476 264 538 4291 1963 600 340 210 1639 438 505 275 482 4489 1964 640 391 238 2006 468 527 304 560 5134 1965 5922 "In 1965, Canada changed c lass i f icat ion of imports and values for the commodity groups were unavailable. However, the totalsfor that year was estimated by using the average percentage of Eastern Canadian imports in total Canadian imports over the 1962-1964 period. 92 Eastern Canadian imports from other provinces were minimal in relat ion to foreign imports and therefore were not considered in comput- ing the import value index of that region. By converting the above annual totals to base 1948, the value index was found, and from i t , the corres- ponding yearly import quantity index. TABLE XXVII IMPORT VALUE INDEX AND QUANTITY INDEX OF EASTERN CANADA, 1948-1965. (1948 = 100) Year V. Q. x 1948 1949. 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 100 105 120 155 152 165 154 175 213 210 194 211 210 222 241 252 288 322 100 102 109 121 135 148 138 153 179 173 159 173 170 175 181 184 205 233 93 APPENDIX E CALCULATION OF EASTERN CANADIAN FOREIGN TRADE DEFICIT AND BRITISH COLUMBIA FOREIGN TRADE SURPLUS The Eastern Canadian foreign trade def ic i t followed direct ly from the trade totals in Table IX and Table XXVII, while the Bri t i sh Columbia surplus was determined from provincial s ta t i s t i c s . These figures for the merchandise trade balances of the two regions are given on the following two pages. It should be noted that Eastern Canada experienced a foreign trade def ic i t every year from 1948-1965. In contrast, Br i t i sh Columbia shows a foreign trade surplus yearly. TABLE XXVIII FOREIGN TRADE DEFICIT OF EASTERN CANADA, 1948-1965. ($000,000) Year Imports Exports Deficit 1948 1784 1690 94 1949 1867 1627 340 1950 2145 1704 441 1951 2758 2157 601 1952 2709 2381 328 1953 2945 2283 662 1954 2747 2166 581 1955 3128 2500 628 1956 3799 2786 1013 1957 3746 2874 872 1958 3455 2828 627 1959 3771 3007 764 1960 3754 3211 543 1961 3951 3500 451 1962 4291 3854 437 1963 4489 4166 323 1964 5134 5016 118 1965 5922 5336 586 95 1 TABLE XXIX FOREIGN TRADE SURPLUS OF BRITISH COLUMBIA, 1948-1965. ($000,000) Year Exports Imports Surplus 1948 326 192 134 1949 322 209 113 1950 412 246 166 1951 515 319 196 1952 489 329 160 1953 555 346 209 1954 609 324 285 1955 699 373 326 1956 692 511 181 1957 648 504 142 1958 654 402 252 1959 710 470 240 1960 805 440 365 1961 841 422 419 1962 932 477 455 1963 1048 458 590 1964 1122 563 559 1965 1219 662 557 1 Source: Bureau of Economics and Stat i s t ics . Industrial Development, Trade, and Commerce. V ic tor ia , B.C.': Published Annually.

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