INST Committee Report
If you have any questions or comments regarding the accessibility of this publication, please contact us at accessible@parl.gc.ca.
INTRODUCTION
In the aftermath of the terrorist attacks of September 11, 2001, on the United States, indirect economic shocks to many business networks, airline companies and airport infrastructure, travel agencies and tourist centres have rippled from so-called "Ground Zero" in the heart of New York City’s financial district to the rest of the continental United States. These shocks have also migrated northward and across the border to Canada, eastward and across the Atlantic Ocean to Europe, and have now made it to the farthest reaches of the Asia-Pacific region. Although each ripple has dissipated as it extends further across the globe from its origin, it will be the policy response to security concerns of each nation, and their international institutions, that will ultimately determine the perennial economic impacts of international terrorism in the years to come. Moreover, the economic consequences of these policy responses will likely be shared more equally across the world than the economic impacts directly associated with the carnage of September 11 that disproportionately fell upon the United States. This fact will be particularly true of Canada, which, with the U.S., partakes in the largest and most commercially successful cross-border trade in the world. Indeed, Canada-U.S. border issues need immediate attention and satisfactory resolution. This report is intended to assist the federal government in devising a coherent long-term plan for arresting the adverse economic shocks set in motion by these desperate acts of violence and for responding effectively to the new security threat. More specifically, the Committee offers counsel to governments, regulators and their agencies on how to effectively respond to the post-September 11 security-conscious environment in a way that minimizes any further adverse impacts on the Canadian economy, in general, and on Canadian industry, in particular. |
Since September 11, which was a tragic day for humanity, the U.S. has been almost totally focused on security, while in Canada our preoccupation has been very much on trade as well. Theirs, because security is threatened; we, because of our dependence on them in trade, our trade is threatened. [Bill Rowat, Railway Association of Canada, 47:9:25] |
In Chapter 1, the Committee examines estimates of the direct and indirect economic impacts on Canada of the September 11 terrorist attacks, as presented to the Committee by selected experts and to the public through the media by economists and economic forecasting institutions. These estimates or impact assessments are preliminary at best, but nevertheless it is clear from the data that the destruction of the twin towers of the World Trade Center was significant in terms of New York City’s capital stock, both physical and human, but was a very small percentage of the capital stock of the U.S. as a whole. At the country level, the greatest economic impact was felt, not on the supply-side of the economy, but on the demand-side, as consumer and investor confidence, both in the U.S. and Canada, plummeted, thereby exacerbating an already faltering North American economy. The economic downturn that began before September 11 thus became more pronounced and will be more protracted than had been originally forecast.
In Chapter 2, the Committee lays out the current predicament of the Canada-U.S. border. With the relative shift in traffic of commercial cargo, and business and leisure travellers from the east-west axis to the north-south axis of the continent in the wake of the Canada-U.S. Free Trade Agreement (FTA), insufficient capital investment in border infrastructure and customs processing equipment has been identified as the primary source of traffic delays at Canada’s more important border crossings. This situation predates the September 11 terrorist attacks. Although such delays were grudgingly tolerated before September 11, they have since soared to intolerable levels at a number of border crossings with the new more intensive inspections undertaken by Canadian and American officials. Despite much lower leisure traveller traffic levels and the presence of the U.S. National Guard at the border, the adoption of more security-conscious customs and immigration procedures are producing bottlenecks in commercial traffic. "Just-in-time" manufacturing and delivery systems are being devastated, and the compensating — but very costly — inventory build-ups are eating away at the razor-thin profit margins of integrated North American companies, such as those of the automobile sector. The Committee recommends a new approach and several targeted strategies for providing national security, which will relieve pressure at the border. Congestion will also be reduced with robust investment initiatives in state-of-the-art customs processing equipment, highway access to the border, and border infrastructure. This chapter also addresses the impact of the events of September 11 on the safety and security of Canada’s food supply.
Chapter 3 addresses the immediate response of the Government of Canada and its agencies to the events of September 11. These reactions include the stepped-up anti-terrorist intelligence-gathering efforts of the Canada Security Intelligence Service (CSIS); the introduction of Bill C-36, An Act to amend the Criminal Code, the Official Secrets Act, the Canada Evidence Act, the Proceeds of Crime (Money Laundering) Act and other Acts, and to enact measures respecting the registration of charities in order to combat terrorism; procedural changes at the border instituted by the Canada Customs and Revenue Agency (CCRA); a government offer of a $160 million compensation package to the Canadian airline industry; the Bank of Canada’s interest rate reduction on overnight chartered bank deposits at the central bank, given the pivotal role it plays in influencing short-term interest rates on chartered bank loans to Canadians and Canadian businesses and thereby stimulating aggregate demand; and, finally, the Minister of Finance’s decision to table the federal budget in December 2001 rather than the customary February period to immediately shore up and restore consumer and investor confidence in Canada.
In the aftermath of the September 11 terrorist attacks and what appears to be a weak North American economy, new budget priorities are the order of the day. In Chapter 4, the Committee provides the government with advice on what should be its priority spending and taxation initiatives, favouring increased national security spending and the adoption of a new "innovation agenda" while remaining committed to the five-year planned tax cuts set out in the budget of 2000. The Committee’s approach, which embodies conservative economic assumptions and a built-in contingency fund, is compatible with the prevailing fiscal balance and debt management course, as well as economic stabilization through lower interest rates under an easing of monetary policy.
The shift in the federal government’s short-term priorities following the events of September 11 may have an impact on spending in other government programs. In Chapter 5, the Committee addresses the potential impact of the events of September 11 on the federal government’s ambitious "innovation agenda," a long-term program designed to help Canada become one of the most innovative economies in the world. The Committee has been heavily involved in providing advice to the government on how the transition to an innovation and knowledge-based economy can best be achieved. In this chapter, the Committee encourages the government to preserve the long-term objectives of its innovation agenda, but to closely examine the priorities and timing of delivery of individual components given the new fiscal reality.
Finally, the Committee reassesses the immediate economic responses to the terrorist shock, puts into context Canada’s present situation, and concludes by giving direction to the government for arresting the terrorist threat without shackling Canadian industry.