U.S./Canada Free Trade Agreement: Short-Term Costs, Long-Term Benefits
March 1, 2002
The 1989 Canada/U.S. Free Trade Agreement (FTA), which was especially controversial in Canada, has raised industrial productivity there, benefiting both consumers and stakeholders in efficient plants. However, there were also substantial short-run adjustment costs for workers who lost their jobs and for stakeholders in plants closed because of new import competition or opportunities to move production south.
Looking at the impact of the FTA on the Canadian manufacturing sector from 1989 to 1996, economist Daniel Trefler found:
- In the one-third of industries that experienced the largest cuts in tariffs (taxes on imports) -- from 5 percent to 33 percent and averaging 10 percent -- employment shrank 15 percent, output fell 11 percent and the number of plants declined 8 percent.
- For manufacturing as a whole, employment losses amounted to 5 percent.
Since 1996, Canadian manufacturing employment and output have largely rebounded, suggesting that some of the lost jobs and output were reallocated to high-end manufacturing.
- Furthermore, the tariff cuts boosted annual compounded increases in labor productivity (output per hour of work) by 0.6 percent for all of manufacturing -- but by a higher rate of 2.1 percent for the most affected industries.
- Surprisingly, Trefler writes, the tariff cuts raised Canadian production workers' wages -- but not the wages of higher-paid non-production workers or weekly hours of production workers -- by 0.8 percent per year in the most affected industries and by 0.3 percent per year for manufacturing as a whole.
The tariff cuts also explain about a third of the increased share of total Canadian imports from all countries that came from the United States -- which increased from 85 percent to 90 percent.
Source: David R. Francis, "Lessons from the U.S./Canada Free Trade Agreement," NBER Digest, September 2001; based on Daniel Trefler, "The Long and Short of the Canada-US Free Trade Agreement," NBER Working Paper No. 8293, May 2001, National Bureau of Economic Research.
For NBER Digest text
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