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The National Policy was a Canadian economic program introduced by John A. Macdonald's Conservative Party in 1876 and put into action in 1879. It called for high tariffs on imported manufactured items to protect the manufacturing industry. Macdonald campaigned on the policy in the 1878 election, and defeated the Liberal Party, which supported free trade.
The term National Policy originally referred to a proposed raise in tariffs by the Macdonald-led Conservatives ("Tories") during the 1878 election campaign. Over time the term became associated with the entire Tory platform for developing the economy, especially increased immigration to Western Canada, and the development of the Canadian Pacific Railway's transcontinental line. 
Macdonald hoped that by creating a strong manufacturing base in Canada, the nation would become more secure and less reliant on the United States. He was also closely linked to the Montreal and Toronto business interests that would benefit from such a policy, and they played an important role in keeping the Tories in office until 1896
Despite a brief experiment with free trade in the Canadian–American Reciprocity Treaty before Confederation, the Americans were intent on pursuing a strongly protectionist policy, with tariffs higher than Canada imposed under the National Policy.
With such high American tariffs, Canadian firms could not compete in the United States, but American firms could enter Canada. Canadian producers were particularly hurt by US producers dumping surplus goods in Canada, so as not to lower prices in the United States. Tariffs were put on goods coming into Canada. These tariffs would make American goods more expensive.
The policy was introduced in the budget on March 14, 1879, and it created high tariffs on the import of most manufacturing goods. At the same time, the tariffs on raw materials were lowered also to help manufacturers. The tariff was not as high as that in the United States, however. The Canadian government was dependent upon revenue from customs - an income tax had not yet been introduced, largely because it was feared that would hurt immigration at a time when Canada was having trouble attracting immigrants. Too high a tariff would have cut off almost all imports, thus depriving the government of revenue.
The policy quickly became one of the most central aspects of Canadian politics, and it played an important role in keeping the Tories in power until 1896, when Wilfrid Laurier and the Liberals campaigned on a promise to keep the National Policy in place. While many Liberals still supported free trade, the National Policy was too popular in Ontario and Quebec to end. When the Liberals campaigned on free trade in the 1911 election, they lost the election.
While the policy was popular in central Canada, it was extremely unpopular in western Canada. This opposition to the National Policy played an important role in the rise of the Progressive Party of Canada in the 1920s. Its platform was entitled the "New National Policy", and it advocated free trade.
The National Policy was slowly dismantled under the many years of Liberal rule under William Lyon Mackenzie King and Louis St. Laurent. At the same time, the United States was lowering its tariffs. Economic integration surged during World War II, and in 1965 the automobile industry in the two nations became fully integrated. Complete free trade was not achieved until 1988 with the Canada–United States Free Trade Agreement brought in by Brian Mulroney's Progressive Conservative government.
The assessment of the National Policy is mixed. In general, economists argue that it increased prices and lowered Canada's efficiency and ability to compete in the world. By not becoming merged into the larger, more efficient American economy, Canada built too many monopolistic firms, and too many small inefficient factories with high prices for consumers. The overall impact was not large because the policy applied only to the manufacturing sector, which played a relatively small role, compared to agriculture, fishing, transportation, mining, lumbering and services, which were not affected by the National Policy. Historians tend to see the policy in a more positive light, viewing it as a necessary expense to create a unified nation independent of the United States.
In the years right after the policy was introduced, Canada experienced the same type of economic boom that many other nations experienced, as well as the construction of a manufacturing base and the development of the nation, which is generally what the Tories and economic nationalists use to justify the policy. However, Canada also suffered a net population outflow, as more people emigrated out of Canada (usually for the United States), than arrived as immigrants.
Eden and Molot (1993) argue that there have been three national policies in Canada: the "National Policy" of defensive expansionism, 1867–1940; compensatory liberalism, 1941–81; and market liberalism, starting in 1982. The defensive expansion phase relied on the tariff, railway construction, and land settlement to build the country. The second national policy combined a commitment to the GATT system, Keynesian macroeconomic policies, and the construction of a domestic social welfare net. Current national policy relies on Canada-US free trade and NAFTA free trade, market-based policies, and fiscal restraint. They argue for a fourth policy called "strategic integration." It would consist of free trade, both external and internal; the building of a national telecommunications infrastructure based on the development and diffusion of information technologies; and human capital development.