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TRAIN IN NEPAL
industry of Central Canada. The Canadian Pacific Railway was built to link the outlying regions of Canada with Ontario and Quebec, and immigration to settle the West was encouraged. Elements of protectionism continued for the next century until the Progressive Conservative government led by Brian Mulroney negotiated a free trade agreement with the United States in 1987 (later expanded into the North American Free Trade Agreement in 1994 to include Mexico). With free trade, tariffs were reduced or eliminated on many products. Further, Canada has supported tariff reductions through the World Trade Organization multilateral negotiations.
Global economic integration also began to take hold during this period. Cross-country capital flows rose substantially. For example, cross-border foreign direct investment among OECD countries increased from about $600 billion annually in 1990 to over $2 trillion annually by the end of the decade.3
With a sharp increase in capital mobility, Canadian governments began to experience pressure to improve their business tax regimes. This pressure led to reductions in corporate income and capital taxes after 2000, a trend that will be discussed in more detail in chapter 7.
Global economic integration has changed not only corporate taxation but also other aspects of the tax system, especially sales taxation. As noted later, the federal manufacturers’ sales tax, a single-stage archaic tax supposedly imposed at the wholesale level, was criticized for putting manufacturing companies at a competitive disadvantage since the tax increased the costs of manufactured goods produced in Canada relative to those in other countries. First the federal government and then six provinces adopted a value-added tax that removed these distortions, and greatly aided the competitiveness of Canadian producers. (However, and as noted later, British Columbia has voted in a referendum to revert to its previous provincial sales tax.
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