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Quebec, October 17, 1995

Notes for an address by the Minister of Finance and Minister responsible for the Federal Office of Regional Development (Quebec), Paul Martin, to the Association des professionnels en développement économique du Québec

Quebec, Quebec
October 17, 1995

Delivered text is official version

Let me first say how pleased I am to be here at the Congrès des professionnels en développement économique du Québec.

As the Minister responsible for the Federal Office of Regional Development, I can assure you that the constant concern of this department's officials is one that ties in exactly with the theme of your meeting, namely the desire and the necessity to maximize the synergy between all stakeholders in the economy.

This is the ultimate guarantee of prosperity for our fellow citizens. I can assure you that this is a goal that the Office has embraced fully.

When I received your invitation some months ago, I agreed to talk about ways to ensure sustained economic development for Quebec.

I have not changed my thrust. But since your invitation, a question crucial to our future economic development has come to the fore -- the choice that we must make in two weeks time:

• To remain part of a large country, Canada; or
• To break our historical ties and create a foreign country.

Quebec's economic development -- a goal which should be the focus for all our thoughts, energy and actions -- rests on this choice more than anything else.

That is why today I want to focus on the core of the separatist agenda: the destruction of the current economic and political union, from which Quebec benefits greatly.

Some of you may not agree with the conclusions I draw. But, just as you do in your daily work, all of you must want to know the facts, the possible consequences of your decisions, of your choices.

You surely would not base the economic development of the cities and regions which you represent solely on emotion. Even less so, when it comes to the future of our country.

That is why, in the present debate on the separation of Quebec, political leaders have a responsibility to put all their cards on the table, and identify clearly the stakes and the costs their options carry.

We all have a moral obligation to tell the truth and to let the people know the consequences of their decision. And that first consequence: the deficit.

It has to be said: it's not good enough for Lucien Bouchard just to be the latest Quebecer to dismiss the studies by Richard Le Hir. He also has the responsibility to provide the people with his own forecast of the financial status of a separate Quebec. So, let's give him a little help with his calculations.

First of all, he must take into account that today, Quebec is one of the provinces with the highest taxes and highest debt in Canada. Then, to this burden, he must add the enormous costs associated with the creation of a new state.

Thirdly, he must take into account the fact that all credible economists agree that the deficit of a separate Quebec would be two to four times higher than it is now.

As the Minister of Finance for Canada, I have no intention of avoiding my own problems, but I do know that in 1996-1997, the federal deficit to GDP ratio will be one of the lowest of all of the G-7 countries. And I also know that for a separate Quebec, this deficit-GDP ratio would be one of the highest among developed countries.

So, the question we need to ask of all separatists is: what is the point of creating a new country if that country's sole purpose will be to pay off its debts?

The second consequence of separation: there will be no further monetary union.

Of all of the pledges given Quebecers by the separatists, one of the most misleading is certainly the assurance that we would have no problem continuing to use the Canadian dollar in a separate Quebec.

When it comes to money -- the money in which you are paid, in which your savings and pension entitlements are measured -- most of us place certainty ahead of anything else. So, it will come as no surprise if I demand to know what assurances the separatists can give regarding the use of the Canadian dollar? The answer? None. But that is the least of their problems.

The reality is that in terms of dollar value, most personal dealings and almost all business transactions do not involve cash, but use cheques or electronic payments, instead.

For these types of payments, the financial institutions which you deal with must have access to the organization which administers the clearing system -- the Canadian Payments Association. And the fact is that this access is not automatic. It requires authorization that can be very difficult to obtain, especially for an institution that is no longer subject to Canadian financial regulation.

As a result, if Quebec wanted to continue to use the Canadian dollar without Canada's agreement, we would quickly find most of our personal and business transactions hitting a major barrier head on: one that would be an inconvenience for individuals and costly for business.

And that's not all. Quebec's financial institutions would no longer have access to the Bank of Canada as the lender of last resort.

The government of a separate Quebec could try to create an institution to fill this role, but it would not last, because the body to which financial institutions turn as a last resort must be the same one that controls the money supply -- the central bank.

Having said this, the ultimate question is not how much Quebec would sacrifice by using the Canadian dollar, but how long this attempt would last? The most obvious problem stems from the fact that monetary policy is a key weapon in a country's economic arsenal. To hand this weapon over to the central bank of another country means not only giving up our best means of keeping inflation at a low level, but it would also alert our exporters that they would be defenceless in the face of fluctuations in a foreign currency that in no way reflected their own economic situation.

Recently, I stated that the attempt to use the Canadian dollar would last six months at most. I must tell you that many think me optimistic. Why? Speaking frankly, because the actions and promises of the separatist leaders are not the sort to inspire confidence.

No tax increases, no program cuts, a lower deficit: this is an impossible equation for Mr. Parizeau.

To be fair, even if Mr. Parizeau begins acting more responsibly, the use of the Canadian dollar still would not be viable over the long term.

After the break up of Czechoslovakia, the Czech-Slovak monetary union lasted all of 39 days. The Czech and Slovak governments did not want the monetary union to collapse. But the people of the new republics, and of other countries, did not have confidence that the union would survive. They started taking steps to protect themselves against the possibility of the union's collapse and of devaluation of the anticipated Slovak currency.

The lesson from all of this is that neither Jacques Parizeau, nor any government, can guarantee confidence in a new monetary system. The decision would be made by hundreds of thousands of Quebecers, private businesses and lenders, both here and abroad.

In the case of the Slovak Republic, the cumulative effect of individual actions based on a lack of confidence proved impossible for the authorities to counter: a separate Slovak currency had to be created and its value quickly fell. The same thing could happen in a separate Quebec.

In short, separation would threaten the continued use of the Canadian dollar by Quebecers and could even lead, in the not too distant future, to the introduction of a Quebec dollar.

This would perhaps fulfill the dream of Lucien Bouchard, who two days ago stated, and I quote: "We will be the master of our money; we will manage our money."

This outlook is also in keeping with what Jacques Parizeau said in an interview given to the magazine L'Actualité in 1991, and I quote:

"Creating a Quebec currency is not very complicated ... But to ensure in advance that people have confidence in that currency, that is a whole different matter. What is the best way to gain their confidence? Tell them that we will keep the Canadian dollar, even if the Canadians do not want us to."

In other words, a yes vote is a vote to replace the certainty of Canada's currency with the "unknown" of a Quebec dollar.

The third consequence of separation: the destruction of the economic union between Canada and Quebec.

This could not have been made any clearer than it was last week by the premiers of our closest neighbours, New Brunswick and Ontario.

Should separation occur, they would have to act in the short and long term interests of their own producers and manufacturers, and those interests would not be served by an economic union. Let's not forget that exports from Quebec to the rest of Canada represent twenty-one per cent of its GDP while exports from Canada to Quebec represent only six per cent of its GDP.

The reaction of the separatists was typical of their reasoning. They declared that there would always be trade between Quebec and Canada.

Of course, there would be trade. Canada trades with hundreds of countries around the world. But let's understand that trade is not the same as an economic union.

The provincial premiers are correct. An economic union between Canada and a separate Quebec is an impossibility. Why? For many reasons.

Just to give one example: consider that, for Canada, the negotiation of such a union would open a real Pandora's box. The mere fact of beginning negotiations with a separate Quebec would immediately endanger Canada's trade relations with our main trading partner, the United States, because the Americans would insist on being at the table, on becoming fully involved in any negotiations.

And they would be at that table to challenge the absolutely essential protections and provisions that Canada fought so hard to win and have included in NAFTA for its own protection. Faced with such a significant threat, Canada would have no choice but to place two options in the balance:

• On one hand, the $165 billion in annual exports made by the rest of Canada to the United States;
• On the other hand, the $33 billion in Canadian trade with Quebec.

Given these figures and the crucial safeguards that Canada would not want to lose, it would never agree to expose itself to American demands for concessions. That is why there would never be a new economic union. Separation is separation. It means a complete break.

Having said this, the total impossibility of an economic union with Canada would make membership in NAFTA even more vital for a separate Quebec's economic development. And here again, the separatists must tell the truth, the whole truth, and lay out the facts as they really are.

Until very recently, the separatists have always claimed that a separate Quebec's entry into NAFTA would be automatic, based on the law of the succession of states. We know now that that claim is total rubbish.

Bernard Landry recently had to admit the obvious: a separate Quebec would have to negotiate its membership in NAFTA, and to all objective analysts that means starting from ground zero. Jacques Parizeau would like to see this as a matter of a few months. But the reality is something totally different.

First of all, Quebec could not seek entry to NAFTA until, for one thing, it had officially separated, and then after it had become a member of the World Trade Organization. Fulfilling these two conditions could take a minimum of two to three years, not counting the time required -- several more years -- to pass the obstacle course of the American Congress.

It should also be understood that each of the signatories to NAFTA has the right of veto over the membership of any new country. This means that Quebec would have to have the agreement of Canada and Mexico.

And what about the United States -- not only its Administration, but its Congress, which represents all of the industries that compete directly with Quebec exporters? Do you think it would say yes to a separate Quebec without tough negotiations against practices which it has already denounced and which greatly benefit Quebec?

This would mean a frontal attack on, among others:

• Our agricultural policy, including milk production; and
• The protection of our cultural industries, from film to television to radio to magazines.

It would mean putting on the table:

• The preferential access to the American market currently enjoyed by our clothing industry;
• The govermnent's preferential procurement policy, including the billions of dollars spent by Hydro-Quebec;
• And our regional development policies, which are currently permissible.

This scenario has already been confirmed by two American trade experts: Bill Merkin, in public comments, and Charles Roh, in a very weighty study on this subject released yesterday.

Obviously, the price of accession to NAFTA could be very high, perhaps too high. It would not be handed to Quebec on a silver platter. But again, that is not the least of the problem. Let me explain.

The core of NAFTA is its dispute settlement mechanism.

It is this mechanism that gives Canadians a recourse when the Americans want to resort to unfair trade practices.

It is what protects us from harassment by our American competitors seeking to impede our access to their markets. Without this mechanism, Canada would never have signed the pact.

It is this mechanism that successfully protected the pork industry in Quebec.

And it is this mechanism that may be called upon again to protect the Quebec softwood lumber industry, which was targeted by the United States Trade Representative, Mickey Kantor, as recently as last week.

It is this important protection mechanism that a separate Quebec will lose, even if it should eventually rejoin NAFTA.

And I am not the one who is saying this.

I have here a letter dated August 9, 1995, sent to Mickey Kantor by Senator Robert Dole, a candidate in the presidential election, and by other members of the U.S. Senate Committee on Finance. This committee, it should be remembered, will play a pivotal role in any process for the admission of a new country to NAFTA. In this letter, these senators make it very clear that they would oppose the extension of this dispute settlement mechanism to any new member of NAFTA.

It is worth citing freely some of the contents of this letter:

"We believe that ... (the) dispute settlement mechanism should not be extended in future trade agreements to any other country, including the present NAFTA accession negotiations with Chile."

To reinforce their position, the letter concludes by reiterating: "The United States should not agree to extend this fundamentally flawed system to any other country." End of quote. And "any other country" would mean a separate Quebec.

What does this mean? It means that a separate Quebec would lose one of the most effective protection mechanisms it presently has. It would no longer have a mechanism enabling it to fight anti-dumping and countervailing duties imposed by the Americans.

It means that without such a mechanism, a Quebec investor or any other investor interested in exporting to the member countries of NAFTA would have no choice but to locate outside Quebec if they wanted to take advantage of this protection, which is essential to entering the North American market.

You are economic developers. You know what the word "competition" means. Tell me: how will you be able to succeed in your efforts? How will you be able to attract investment to your regions? How will you create new jobs in your regions after losing this vitally important tool, a tool which your competitors in other provinces will not have lost?

Let's be clear: the loss of this mechanism would mean that Canada, the United States and Mexico would be privileged partners in NAFTA, while a separate Quebec could only hope to become a junior partner. Three partners would benefit from it, while Quebec would suffer!

It would mean that only Quebec would have to use the old system of seeking recourse through the American courts, a system which caused so many problems in the past. Not Mexico. Not Canada. And that means that those countries would always have an advantage over Quebec every time it comes to entering the U.S. market.

Even worse, it could mean that this old system would be the one that governed trade relations not only between a separate Quebec and the United States and Mexico, but also relations between Quebec and Canada, our main customer.

In other words, because of their established rights under NAFTA, Americans and Mexicans would have better access to the Canadian market than a separate Quebec.

Let's look at things from a practical standpoint. Right now, a company in Québec, Chicoutimi or Val d'Or has free access to a market of 300 million people throughout Canada and the whole of North America.

After separation, the only certain market remaining barrier-free to this employer would be Quebec -- seven million people. It would no longer share the protection and advantages presently available to it through NAFTA and would no longer benefit from open borders with Canada. The consequence in this context? Separation would mean the economic isolation of Quebec.

What would this jeopardize? Ninety per cent of our exports; close to one million Quebec jobs.

The facts of separation are quite straight forward. There will be no formal monetary union between a separate Quebec and Canada. Quebec's use of the Canadian dollar will be at risk. This could well lead to the creation of a Quebec dollar.

There will be no economic union.

The cost of re-opening Canada's other trading agreements, especially with the United States, our largest market, to accommodate the interests of Quebec, a much smaller market, would be simply too high.

Quebec may eventually become a member of NAFTA -- that remains to be seen -- but only if the United States, Canada and Mexico each approve.

It is also clear, based on hard evidence, that American approval will come only at the expense of most of the current safeguards underlying Quebec's economy.

Furthermore, as the current debate in the United States Congress unfolds over Chile, it is clear the NAFTA that would be open to Quebec would be of considerably less benefit than the current agreement between Canada, the United States and Mexico.

No one should underestimate the cost of this in terms of jobs, or in terms of the effort Quebec will have to undertake to regain fiscal health.

In conclusion, I would like to go back to the theme with which I began my comments: political responsibility. The separatists are not just failing the tests of figures and logic. They are failing the test of transparency.

I do not believe it is transparent to hide the real costs of separation, to hide the studies, to hide the figures on the debt, on the deficit, on interest rates, on taxes, to hide the negative effects that regional development programs in Quebec will suffer.

I do not believe it is transparent to pretend that accession to NAFTA will be automatic and cost-free.

I do not believe it is transparent to speak of a new partnership when the only certain consequence of their option is to destroy the partnership that already exists.

I do not believe it is transparent to try to make Quebecers believe that the separatists can gain partnership through the front door when they are trying, in reality, to win separation by the back door. Let there be no doubt: independence carries very harsh consequences. As much for Canada as for Quebec. And that's not all there is to this question.

The real issue is that the separatists refuse to even consider that possibility. Today, I would like to pose a crucial question: why are the separatist leaders afraid to discuss the fundamental issue of the costs of separation? Ultimately, their silence is a perfect illustration of the weakness of their cause.

When it comes to the bottom line, who can deny that the economic costs would be significant and long-lasting? Who can deny that the risks are real and the benefits illusionary?

My friends, who better than you should know that, on the eve of the 21st century, Quebec, like all of the provinces, must prepare itself to meet constantly changing forces and realities. We are living in a world where the levers of traditional nationalism no longer work. Economic reality is global, and it is making the theories of yester-year obsolete. This new reality demands a new type of leadership, "a new vision."

As Quebecers, we must set our sights on the future, on the real needs of the next generation. As Quebecers, we must never stop being open to the world, to the future and to other people. We must practice an open nationalism, a nationalism without walls.

If Canada is considered to be one of the best places to live, it is not because of our prairies or the majesty of our mountains. It is because of the vitality, the potential, the synergy and the achievements of our people.

Canada's future with Quebec will be a reflection of our hopes, our efforts, our extraordinary abilities, of our purpose. And ultimately it will reflect the certainty that together, and only together, can we face the threshold of the third millennium with strength, unity and confidence.

Thank you.