L’Encyclopédie de l’histoire du Québec / The Quebec History Encyclopedia
History of Tariffs in Canada
[This article was written in 1948 by K. W. TAYLOR. For the full citation, see the end of the document.]
Up to 1846 there were two tariffs applicable to imports into Canada, an imperial tariff on foreign goods only, and a colonial tariff fixed by the colonial legislature, levied on all imports, and limited to a maximum of 5 per cent. In the earlier years of the nineteenth century no duties were levied on the land frontiers of Canada, and even when such duties were legally imposed there was little attempt to enforce or collect them. Much of the supplies for the western pioneers in Ohio , Indiana, and Michigan came through Montreal, and considerable quantities of American produce were exported via the St. Lawrence, and accepted in Great Britain as Canadian in origin. During the 1820's and 1830's the definition of "Canadian" produce was more strictly drawn, but American raw materials processed in Canada were still admitted into England as Canadian goods. When in 1846 the repeal of the Corn Laws swept away the preferences on which so much of the St. Lawrence trade had come to be based, desolation stalked in Montreal .
The repeal of the Corn Laws almost necessarily involved the granting of full autonomy to Canada in tariff matters, and in 1847 a Canadian tariff, with a prevailing rate of 10 per cent., took the place of the old imperial and colonial tariffs. A second inevitable result of 1846 was the negotiation of a commercial treaty with the United States. Negotiations began in 1848, and following a difficult and complicated course were successfully .concluded in 1854. The Reciprocity Treaty of 1854 in effect traded navigation and fishing privileges for free entry of all natural products of the farm, forest, mine, and sea. The treaty remained in force for twelve years, but was abrogated in 1866 at the instance of the United States. The Canadian prosperity which coincided with the period of reciprocity was due in no small measure to the free access to the American market. Especially during the Civil War did Canadian producers profit by the high prices and insatiable demand of the United States . And, in its turn, the denunciation of the treaty was an important influence underlying Confederation.
In the meantime, a protectionist movement had begun to develop in Canada. In response to the growing agitation of the small manufacturers, the Cayley tariff of 1858 and the Galt tariff of 1859 raised the duties on manufactured goods from an average of about 10 per cent. to one rather over 20 per cent. While the government defended the increases as necessary revenue measures, it is clear that it was accepting in principle a policy of moderate protection. The Cayley and Galt tariffs aroused a storm of protest in England, but the despatches, speeches, and memoranda in this connection belong to constitutional rather than economic history. They also occasioned a good deal of resentment in the United States , where they were regarded as a breach of the spirit of the Reciprocity Treaty, and this resentment was added in 1865 to the other interests demanding the abrogation of the Treaty.
In 1867 the normal rate of the Canadian tariff was reduced from 20 per cent. to 15 per cent. This reduction was a compromise between the moderately protectionist policy of the Canadas and the more or less free-trade policy of the Maritimes, but it was also a reply to the abrogation of Reciprocity. With the United States market largely closed, it was necessary "to make Canada a cheap country to live in and to produce in".
During the first ten years of Confederation, the tariff was not a divisive factor in politics. It was regarded primarily as an instrument of revenue, conferring, it is true, "incidental protection". The economic depression that began in 1873 created budgetary difficulties, and in 1874 the general rate was increased to 17½ per cent. In 1876 a further increase to 20 per cent. was proposed, but was rejected by the government. As the depression deepened, Canada became a slaughter market for the surplus stocks of British and American manufacturers. Attempts at relief through a new reciprocity treaty failed. After some hesitation the Conservative party, then in opposition, adopted its " National Policy ", a policy of high protection and concentration on the home market. In the general election of 1878 the Conservatives were victorious, and the new government at once put its policy into practice.
The budget of 1879 and its successors amply fulfilled the pre-election promises of the National Policy . Duties on manufactured goods were raised from 17½ per cent. to 30, 35, and in some cases 45 per cent., and the free list was considerably reduced. Cottons, woolens, furniture, and iron manufactures were especially favoured. In 1883 the production of pig-iron and steel was further encouraged by the introduction of a system of bounties.
The prosperity of 1879-1883, which came to Canada as it did to the rest of the world, gave a somewhat fictitious prestige to the National Policy. Undoubtedly the history of modern manufacturing in Canada dates from 1879, but after 1883 the era of the National Policy was largely one of difficulty and depression. Industry became stagnant, and emigration assumed alarming proportions. The Canadian political Scriptures, it was said, "began with Exodus and ended in Lamentations."
By 1890 the seven lean years had begun to produce a reaction. The reviving political power of the Democrats in the United States offered some hope of freer trade relations with that country. The publicity given to the growth of monopolies and trusts in Canada was turned into an effective argument against high tariffs. The government met this shift in opinion by lowering a few duties here and there, especially on articles used chiefly in the farming industry. The election of 1896 was fought on a complexity of issues, but of these the tariff was one of the most important. The Liberals roundly attacked the whole National Policy, and, against a rather disorganized Conservative party, won handsomely.
In spite of the Liberal professions when in opposition, the first Liberal budget of 1897 made no radical changes in the tariff. Indian corn, binder twine, barbed wire, pig-iron, and sugar were added to the free list; there was some simplification of rates and classifications; and the duties on a few items were raised.
The most significant item in the Budget of 1897 was the introduction of the principle of the British preference. It took the form of a rebate of 1/8th of the general rate on imports from countries granting at least as favourable rates to Canada . It was intended and expected that this rebate would apply only to the United Kingdom and certain of its colonies, but it was found to be legally impossible so to confine it, because the British treaties with Belgium (1862) and the German Zollverein (1865) specifically bound the colonies. In practice, therefore, the lower rates had to be extended to all countries within the world-wide network of the British most-favoured-nation treaties. The United States was the only important country that failed to qualify. At the Colonial Conference of 1897, Great Britain was persuaded to denounce the Belgian and German treaties, and in 1898 Canada was free to grant special preferences to British and Empire goods. This she at once did, at the same time increasing the rebate to ¼, a rebate further increased to 1/3 in 1900. In 1904 the flat rate preference was abandoned in favour of a two-column tariff, the British preferential column being in most cases substantially lower than the general column.
The inauguration of Imperial Preference may be attributed to several factors. It was supported by Liberal free-traders as an ingenious flank attack on the policy of protection. In part it reflected Canadian resentment to the McKinley and Dingley tariffs of 1890 and 1897; and it was in part a product of imperial emotion associated with the Diamond Jubilee. Opinion in Canada divided only on the question of whether the concessions should be conditional or unconditional. In practice they were accorded unconditionally to Great Britain and conditionally to other parts of the Empire. By 1904 preferential treatment had been extended to India , South Africa, British West Indies, and New Zealand ; and by 1913 to practically the whole of the dependent Empire. In 1923 the Irish Free State was included, and in 1928 Newfoundland. Trade relations with Australia have never been governed by the preferential tariff, but since 1925 they have been the subject of a special trade agreement.
The development of imperial preference aroused some misgivings in foreign countries, but Germany was the only country to take retaliatory action by withdrawing from Canada its conventional tariff and imposing its maximum rates. Canada replied in 1903 with a surtax of 33 1/3 per cent. against German goods. Not until 1910 was a settlement reached, when Germany accorded her minimum rates to the principal Canadian exports, and Canada withdrew the special surtax.
In 1904 the anti-dumping clause was introduced into the Canadian tariff. This clause provides that when the export price to Canada is lower than the domestic price in the exporting country an extra duty equal to the difference in these prices is levied. This anti-dumping clause was a Canadian invention, and has been widely copied by other countries.
In 1907 there was a complete revision of the tariff, and the well-known "three-column tariff" was introduced; that is, for each item three rates of duty are provided, the British preferential rate, the intermediate rate, and the general rate. The intermediate rate is the bargaining rate, and the general rate applies to all countries with which Canada has no most-favoured-nation agreement. Broadly speaking, the 1907 revision left the preferential and general rates unchanged, but introduced the new intermediate rates, slightly lower than the general rates.
Between 1907 and 1911 Canada built up a network of most-favoured-nation agreements with a large number of foreign countries. It has already been noted that Canada received autonomy in tariff-making in 1846, but freedom to negotiate commercial treaties came much later. In 1877 Great Britain adopted the practice of inserting a clause in all new commercial treaties making the adherence of the self-governing colonies optional. But treaties affecting Canada were still negotiated through the Foreign Office, though the practice slowly developed of including a Canadian as an associate in the diplomatic pourparlers. In 1883 Sir Charles Tupper was appointed joint-plenipotentiary with the British ambassador in Paris for the purpose of negotiating a commercial agreement. Not until 1907 did Canadian plenipotentiaries conduct the whole of the negotiations, and even then the British ambassador put his signature to the final document. Only in 1923 did the Canadian government secure recognition of the right to sign exclusively on behalf of the Crown.
Commercial agreements were signed with France in 1907, and with Italy, Germany, Belgium, and Netherlands during the next few years. In addition, by adherence to British treaties, Canada entered into most-favoured-nation relations with most of the other European countries, with several South American countries, and with Japan.
The pre-war history of the Canadian tariff naturally concludes with the struggle over reciprocity. In 1909 the Payne-Aldrich tariff had for the first time given the United States a twocolumn tariff, the punitively higher rates to be used against countries which discriminated against the United States. The United States raised no official objection to the preferential tariffs, but did demand, in return for its "minimum" tariff, the concession of not only the whole intermediate column, but also certain special rates conceded to France in the 1907 agreement. A very generous compromise was reached in March, 1910, by which Canada made a few very minor concessions, and in return received the whole minimum schedule.
The negotiations leading up to this settlement had, however, given rise to discussions of a much broader nature. Both governments were facing regional political revolts on the tariff question, and a sympathetic understanding of each other's difficulties led them to accept the broad objective of reciprocally lower tariffs. A draft agreement, to be given effect by concurrent legislation, was completed in January, 1911. This agreement placed most natural products on a reciprocal free list, and provided for substantial reductions on a long list of manufactured products. The agreement passed Congress, though not without difficulty, but in the Canadian parliament the Conservative opposition vigorously and successfully insisted on an appeal to the people. In the election that followed the Liberals received only 88 seats to the Conservatives' 133. The Liberals carried the Maritimes and the West; Quebec divided largely on the nationalist and naval questions; Ontario went almost solidly to the Conservatives. In the popular vote the Conservative majority was about 40,000 in a poll of 1,300,000. Both parties, however, accepted the 1911 verdict as a definitive rejection of special tariff relations with the United States , and regarded the issue as closed.
This period was marked by frequent changes in tariff detail, but no significant change in policy or in trend. During World War I, a horizontal increase in all tariffs was made by imposing a special surtax on all imports, 5 per cent. on the British preference, and 7 ½ per cent. on the intermediate and general rates. In 1919 the tariff question was forced into political discussion once more, but the division of opinion remained strongly regional, and both national parties, in the attempt to remain national, had to compromise. Though the government changed in 1921, and for the first time a large farmers' party arrived at Ottawa , no real change in tariff policy can be observed. Duties on agricultural machinery and on automobiles were reduced in 1924 and 1926, but the rates on many iron and steel items were increased. The most numerous changes came in the Dunning budget of 1930. The number of items on the British free list was greatly increased, largely by the addition to it of items under which little was imported or in which Canadian production hardly existed. The 1930 budget completely re-wrote large sections of the tariff, but the work was really one of long overdue reclassification, and the net effect on the margin of protection was negligible. The Dunning budget did, however, introduce a new tariff device, the seasonal tariff in a wide range of fresh fruits and vegetables.
The years 1923-1928 saw renewed activity in the negotiation of trade agreements, the more important being with France, Italy, Australia, Netherlands, and the British West Indies. By exchange of notes or order-in-council, most-favoured-nation treatment was still further extended. After a short lapse this movement was renewed after 1933, and by 1937 Canada had commercial agreements either of a special nature or of the general most-favoured-nation type with all the important countries of the world except China.
An Advisory Board on Tariff and Taxation was created in 1926. For some time there had been discussion of "taking the tariff out of politics," or of applying scientific methods, or at least "open diplomacy", to tariff changes. The Board of 1926 was empowered to study and report on any question referred to it by the minister of finance.
During the four years of its life it received nearly 200 references. Its most important achievement was the complete revision and reclassification of the iron-and-steel schedules. The Board was dissolved after the general election of 1930, but a new Board was constituted in 1933. The new Board not only reports on any matter referred to it by the minister of finance; it also deals with matters arising out of Articles 10 to 15 of the United Kingdom-Canada Trade Agreement (1932) and it hears and decides appeals from the rulings of the Department of National Revenue with respect to appraisals, valuations, and the classification of imports.
Immediately after the general election of 1930 a special session of parliament was called to deal with unemployment, and as part of the relief programme a drastic upward revision of the tariff was undertaken. Duties were increased all along the line; and in many cases, especially in textiles, heavy specific duties were superimposed upon the increased ad valorem rates. Canada stepped directly into the ranks of the definitely high tariff countries. At the same time, the Customs Act was amended, giving the government broad powers to impose arbitrary valuations and drastic anti-dumping duties by ministerial decree, and to impose what were in effect almost prohibitive duties on imports from countries with depreciated currencies. The special powers thus conferred were freely used between 1930 and 1933. Partly as a result of the Ottawa Conference and partly as a result of the passing of the acute stage of the depression, these powers were more moderately exercised after 1934.
In 1931 the new powers were used to prohibit the importation of coal, lumber, asbestos, and certain other products from Russia. In retaliation the Soviet government practically ceased making purchases in Canada. Normal trade relations, however, were resumed in 1936.
A short tariff war with Japan occurred in 1935. Japan took the view that the Canadian "administrative protection" constituted in fact discrimination against Japanese trade. Negotiation failing to resolve the issue, Japan imposed a surtax of 50 per cent. on the more important exports from Canada, and Canada replied with a surtax of 33 1/3 per cent. on all Japanese goods. Five months later an amicable settlement was effected.
In 1932 the Imperial Economic Conference was held at Ottawa. For thirty years the principle of imperial preference had been spreading in the British Dominions, but so long as Great Britain remained a free-trade country it was impossible for it to reciprocate. During and immediately after the war Great Britain imposed protective customs duties on a few commodities - the McKenna and Key Industries duties - and in these she conceded a 33 1/3 per cent. rebate on imports from Empire countries. During the winter of 1931-2, however, Great Britain definitely abandoned her free-trade policy, and imposed, first, a general tariff of 10 per rent. (subject to some important exemptions), and later a more complicated tariff with rates as high as 25 and 35 per cent. In all cases imports from Empire countries were admitted free of duty pending the results of the Ottawa Conference. At this Conference a comprehensive series of bilateral agreements were negotiated. Canada signed agreements with the United Kingdom, South Africa, the Irish Free State, and Southern Rhodesia. Agreements were already in effect with Australia and New Zealand. India and Newfoundland remained the only parts of the Empire with which Canada had no special agreement.
The agreement with the Irish Free State accorded Canada most-favoured-nation treatment, and in return Canada gave the same rates of duty accorded to the United Kingdom. The agreements with South Africa and Southern Rhodesia exchanged preferences on specified lists of goods, chiefly Indian corn, fruits, nuts, and sugar, on the one hand, and wheat, apples, lumber, paper, hosiery, rubber goods, electrical appliances, and various kinds of machinery, on the other.
The Canada-United Kingdom Agreement was more comprehensive. Great Britain undertook to continue the preferences already existing under the Import Duties Act, and in addition created new preferences chiefly in wheat, dairy products, meat, fruits, and tobacco. Great Britain further undertook to secure for Canada extensive preferences in the non-self-governing Empire. In return Canada increased the margin of preference on 223 items, 133 by lowering the preferential rate, and 90 by raising the intermediate and general rates. The principal groups benefited were textiles, iron and steel, and chemicals. Canada also increased the margins of preference on various commodities largely produced in the dependent Umpire.
In addition to the tariff schedules, Canada agreed to a number of broad principles governing the administration of her tariff. Chief of these were undertakings to accord protection only to industries with reasonably sound prospects of success; to limit the height of the tariff by considering the differences in the costs of efficient production in the two countries; to provide machinery for impartial settlement of disputes over tariff administration; and to abolish as soon as possible the exchange dumping duties.
The Agreement ran for five years, and was replaced by a new Agreement in 1937. The new Agreement involved no significant changes, but accorded slightly lower rates of duty on a long list of commodities, the most important being in the textile group.
In November, 1935, Canada signed a trade agreement with the United States which for the first time in seventy years placed Canadian-American trade on a negotiated foundation. The agreement exchanged unconditional most-favoured-nation treatment (the United States excepting Cuba, and Canada excepting the British preferential rates). The United States further reduced by 20 to 50 per cent. the duties on 63 items including lumber, cattle, fish, cheese, cream, apples, and certain chemicals. The United States undertook to keep twenty-one items on the free list, including newsprint, shingles, wood-pulp, and agricultural implements. For five items the tariff concessions were applicable only to reasonably generous quotas, all imports above the quota being subject to the old rates of duty. Canada in return extended the entire intermediate tariff to the United States, a reduction of 2 ½ to 5 per cent. on the great majority of the items in the tariff. On fruits, vegetables, magazines, farm implements, and a wide range of industrial machinery, new rates were established considerably below the old intermediate rates. Canada also agreed to amend the Customs Act to eliminate much of the arbitrary control of customs valuations, and agreed specifically to reduce by at least 20 per cent. the special seasonal duties on fresh fruits and vegetables.
The net effect of the agreement was to put the general level of duties in both countries back to about the level prevailing in 1929, that is, before the introduction of the Hawley-Smoot and Bennett tariffs of 1930.
Beginning in 1867 with a low tariff, Canada became in 1879 a country of moderately high tariffs. Since 1879 the general level has been fairly constant, with perhaps a slight downward trend. The only important break in this policy was in 1930-35, when Canada was definitely in the high tariff class. Since about 1904, Canada has become steadily more conscious of the growing importance of trade with countries other than Great Britain and the United States, and this has been reflected in the growth and development of a network of commercial treaties. Since 1890 there has been no politically significant group in Canada committed to a free-trade policy. Low tariff sentiment is strong on the Prairies and in the Maritimes; high tariff sentiment dominates the industrialized central provinces; and the national policy has remained a somewhat uneasy compromise between the two.
See E. Porritt, Sixty years of protection in Canada (London, 1908); O. D. Skelton, "General economic history, 1867-1912", in A. Shortt and A. G. Doughty (eds.), Canada and its provinces, vol. ix (Toronto, 1914); W. A. Mackintosh, "Canadian tariff policy", in Canadian papers, Banff Conference, I. P. R. (Toronto, 1933); K. W. Taylor, "Tariff administration and non-tariff methods of trade control", in Proceedings of the Conference on Canadian-American affairs, Canton, New York, 1935 (New York, 1936); and H. Feis, "A year of the Canadian Trade Agreement" (Foreign Affairs, 1937). See also Canada Year Book and contemporary government documents on Reciprocity, the Imperial Economic Conference, etc. Full details of all rates of duty, as well as the text of all trade agreements in force, are to be found in The customs tariff of Canada (Office consolidation)
Source : K. W. TAYLOR, "Tariffs", in W. Stewart WALLACE, ed., The Encyclopedia of Canada , Vol. VI, Toronto, University Associates of Canada, 1948, 398p., pp. 102-108.
© 2004 Claude Bélanger, Marianopolis College