CANADA Key Economic Indicators (Millions of Canadian Dollars (Cdols) Unless Otherwise Stated) Money, savings, time deposits (M2)228,742 38,997 252,872 N/A 279,087 Canada is the world's seventh-largest market economy. Production and services are predominantly privately owned and operated. However, the federal and provincial governments are significantly involved in the economy. They provide a broad regulatory framework and engage in considerable redistribution of wealth from high income individuals and regions to less advantaged persons and provinces. Also important are government-owned Crown Corporations such as the Canadian Broadcasting Corporation, the Canadian National Railway Co., and Petro-Canada. Canada is a major producer of natural resources and related products. Forestry, mining, and the energy sector are leading exports. The economy is also fully industrialized and produces highly sophisticated consumer goods and capital equipment. Canada is the most important trading partner of the United States, with merchandise exports of 94.7 billion U.S. dollars (USdols) to the U.S. and merchandise imports from the U.S. valued at USdols 79.6 billion in 1990. Vehicles and parts accounted for approximately 30 percent of U.S. merchandise exports to Canada in 1990. The stock of total foreign direct investment in 1990 was Cdols 127 billion, of which U.S. foreign direct investment amounted to Cdols 79 billion. In 1988, roughly 45 percent of the assets of Canadian manufacturing companies were foreign-owned. Of this total, about 80 percent belonged to the United States. Federal government economic policies since late 1984 have emphasized reduction of public sector interference in the economy and promotion of private sector initiative and competition. The Canadian government dismantled the highly interventionist National Energy Program and converted the restrictive Foreign Investment Review Agency into Investment Canada, which was given a mandate to encourage foreign investment. Both federal and provincial governments undertook privatization of selected Crown Corporations. The deficit and related expansion of government debt are the most pressing problems facing fiscal policymakers. The federal government made some progress in slowing the growth of public debt after 1984, reducing the annual federal deficit from Cdols 38.3 billion in fiscal year 1985 (FY-85) to Cdols 28.1 billion in FY-88. However, it rose to Cdols 28.9 billion in FY-90 and Cdols 30.6 billion in FY-91. Government options to reduce the deficit are constrained by the high level of non-discretionary spending in the federal budget. Statutory social transfers to individuals and to provincial and local governments account for 40 percent of the FY-91 federal CANADA budget, while public debt service payments account for an additional 28 percent of projected spending. Even reduction of subsidies for regional development and other remaining discretionary programs such as defense and foreign aid would require the government to make difficult political decisions. The Bank of Canada is a publicly-owned, quasi-independent central bank. It is supervised by a board of directors appointed by the government and representing the private sector across the country. The board appoints and the government approves the governor of the bank, who is responsible for monetary policy. The Bank rate or interest charge on central bank advances is set 25 basis points above the average yield on 90-day Treasury bills at the weekly auction conducted by the Bank of Canada. The authorities may participate in the auction to influence its outcome. Other tools used to control the money supply include management of the government's cash deposits with the chartered banks, purchase and resale agreements with money market participants, and open market and foreign exchange operations. Canada and the U.S. entered into a free trade agreement effective January 1, 1989 and are now negotiating the North American Free Trade Agreement (NAFTA) with Mexico. Canada is the U.S.' largest trading partner. 2. Exchange Rate Policies The Canadian dollar is a fully convertible currency, and exchange rates are determined by supply and demand conditions in the exchange market. There are no exchange control requirements imposed on export receipts, capital receipts, or payments by residents or non-residents. The Bank of Canada operates in the exchange market on an almost daily basis for purposes of maintaining orderly trading conditions and smoothing rate movements. Between December 31, 1987 and December 31, 1990, the Canadian dollar appreciated 12.0 percent against the U.S. dollar and by nearly 13 percent on a trade weighted basis against the Group of Ten currencies. During the same time period, Canada's official foreign exchange reserves increased from USdols 8.2 billion to USdols 18.6 billion. 3. Structural Policies Prices for most goods and services, including land, buildings, capital equipment, and consumer goods are established by the market without government involvement. Energy prices were decontrolled in 1985 with the dismantling of the National Energy Program. There are some important exceptions, such as prices for health services, which are regulated by the government. The government completed privatization of the national airline, Air Canada, in 1989, and the privatization of the national oil company, Petro-Canada, is proceeding in stages. The principal sources of federal tax revenues are corporate and personal income taxes, the goods and services tax, unemployment insurance contributions, customs duties, and CANADA energy taxes. In 1987-88, the government reduced direct taxes on the energy sector and in 1988 further reform lowered corporate and personal income tax rates and eliminated or reduced exemptions and credits. This brought Canadian personal and corporate income tax rates more into line with comparable U.S. rates and reduced many of the distortions in the former income tax system. At the beginning of 1991 the government implemented a reform of the federal sales tax system, replacing the manufacturer's sales tax and telecommunications tax with a multi-stage seven per cent value-added tax on consumption. Known as the Goods and Services Tax (GST), this tax applies to most goods and services, including imports, sold in Canada. Federal government regulatory regimes affect foreign investment (see section 5 below) and also U.S. firms in the financial services sector. Although foreign banks are subject to federal restraints on their operations and growth, U.S. banks have been exempted from most of these restrictions under the U.S.-Canada Free Trade Agreement (FTA). Provincial and federal reforms in 1987-88 enabled foreign securities firms to open offices in Canada and authorized banks to establish securities subsidiaries. In 1989 foreign firms were permitted to become primary distributors of Canadian government securities. The Mulroney government has introduced further financial sector reforms, largely to eliminate many of the remaining barriers between banks, trust companies and insurance companies. Transportation Policies: The pro-competitive National Transportation Act and its companion legislation, the Motor Vehicle Transport Act, entered into force in 1988. While underscoring the continuing need to maintain high safety standards, this legislation introduced a greater degree of deregulation in the Canadian transportation industry. Among the provisions of the new Canadian transport laws are the following: -the main regulatory body, the Canadian Transport -regulation of domestic airline passenger fares and air cargo tariffs was largely eliminated; -market entry for domestic airline operations was eased; -a uniform, nation-wide entry test for extraprovincial trucking operators was established, thereby reducing barriers against U.S. trucking operators; -collective rate-making among railways has been abolished and shippers have been allowed for the first time to negotiate confidential contracts with carriers. Transportation is not included in the FTA. In October 1990 the U.S. and Canada announced a joint initiative to negotiate a new "open skies" agreement covering transborder air services. Telecommunications Policy: Canada has a complex mixture CANADA of federal and provincial legislation, policies and regulations regarding telecommunications. The carriers include private, governmental and mixed corporations and organizations. They are regulated either by a federal agency, the Canadian Radio-television and Telecommunications Commission (CRTC), a provincial public utility board, or a provincial or municipal government. The allocation and use of the radio spectrum is regulated by the Department of Communications. An August 1989 decision by Canada's Supreme Court in the case of the Alberta Government Telephone Company has provided the basis for expanding federal jurisdiction over all carriers constituting Telecom Canada, the national monopoly for long distance services. The present government has expressed its intent to introduce a policy favoring more competition in telecommunications. A new Telecommunications Act, yet to be introduced, would define basic and enhanced services. While basic services would remain closely regulated and subject to limitations on foreign ownership, enhanced services would be opened to free competition, and to unlimited foreign investment. 4. Debt Management Policies Canada's net international investment position rose from Cdols 115 billion (26 percent of GDP) in 1984 to Cdols 217 billion (33 percent of GDP) in 1990, a relatively high figure for an industrial country. 5. Significant Barriers to U.S. Exports Provincial legislation and Liquor Board policies regulate Canadian importation and retail distribution of alcoholic beverages. The Free Trade Agreement addresses a number of these policies with respect to wine and spirits (listing, distribution, and pricing) and provides dispute settlement procedures. The U.S. is concerned that all provinces are not adhering to the FTA and has made specific requests for information and justifications from the Government of Canada. With respect to beer, since the FTA has entered into force, several provinces have introduced discriminatory measures in apparent conflict with the agreement. Canada has not brought its import regime into compliance with GATT rules. The United States took the matter to a GATT panel which found Canada's provincial practices to be GATT-inconsistent for the second time in four years. In December 1991, the United States Trade Representative (USTR) determined under Section 301 of the 1988 Omnibus Trade and Competitiveness Act that rights of the United States under the GATT are being denied as a result of Canadian provincial liquor board practices concerning beer, and that action shall be taken in the form of substantially increased duties on beer and malt beverages from Canada no later than April 10, 1992. The USTR will continue to consult with the Government of Canada in an effort to obtain commitments for the elimination |