Summary
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Freer trade in North America led to significant benefits for
Canada—increased trade, significant manufacturing output and
productivity gains, and a greater variety of products available to
Canadians.
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The impacts of NAFTA were positive for the United States, as increased
trade across the region led to twice as many jobs being created than
were lost in import-competing segments. Moreover, U.S. exports to
Canada and Mexico support nearly 3 million jobs in the United States.
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Most of the gains in merchandise trade that freer North American trade
made possible have already materialized. However, there are still
significant improvements that can be made—especially in the areas of
cross-border mobility, government procurement, and labour and
environmental standards.
Canada’s economy over the past century can be divided into two distinct
periods—before free trade, and after free trade. The Canada–U.S. Free
Trade Agreement (CUSFTA) was followed by the signature of the North
American Free Trade Agreement (NAFTA), and both were key milestones
along this transition. NAFTA was controversial when it was negotiated
and ratified in the early 1990s, and it has remained contentious ever
since it came into force in 1994. However, until now, its continued
existence had never been in question.
Since Donald Trump’s inauguration in January 2017, his administration
has made frequent informal indications that it intends to renegotiate
the agreement. The administration has not yet given the U.S. Congress
the formal notification needed to launch the process, and notice to
Congress is only one of many steps that will need to occur before formal
negotiations with Canada and Mexico can begin.
Trade talks are inevitably both extensive and difficult before
agreements are reached. Nonetheless, the importance of NAFTA to Canada’s
economy means that governments, business leaders, and stakeholders (such
as labour unions and civil society interests) need to develop a strategy
to address the concerns of our NAFTA partners while also protecting
Canadian interests.
To support Canada in this effort, this Conference Board of Canada report
offers key recommendations for the upcoming NAFTA renegotiation. It is
part of the Conference Board’s international trade research, conducted
under the banner of the Global Commerce Centre. Before delving into our
recommendations, let’s look at the impacts of freer North American trade
on the Canadian and U.S. economies.
CUSFTA and NAFTA: The Impacts on Canada and the United
States
In theory, freer international trade should support economic growth, by
allowing countries, industries, firms, and individuals to leverage their
comparative advantages and specialize in what they do best. Through
trade, a country’s available resources—whether natural resources,
human capital, or technology—can be used more effectively. However, in
the short term, there are adjustment costs associated with freer trade.
The resulting changing market dynamics lead to disruptions for domestic
industries, firms, and workers. Still, the long-term gain should
outweigh the short-term pain.
Looking back at nearly three decades of freer trade in Canada, starting
with the signing of the Canada–U.S. Free Trade Agreement in 1987, what
does the evidence tell us about the impact of freer North American
trade?
Over the past 20 years, an extensive body of research has looked at the
impact of North American trade agreements on the Canadian
economy.11A review of the evidence on the economic impact of
CUSFTA and NAFTA on the Canadian economy can be found in Harris, ”The
Economic Impact of the Canada–U.S. FTA and NAFTA Agreements for
Canada” and in Global Affairs Canada, ”International Trade and Its
Benefits to Canada.” Available research focused extensively on the
decade that followed the signing of CUSFTA in 1987. CUSFTA is an ideal
trade policy to study, since it led to the elimination of most tariffs
between Canada and the United States, our largest trading partner. In
fact, by the time NAFTA came into force in 1994, most tariffs between
Canada and the U.S. had already been removed and the economy had already
adjusted to freer North American trade. With the U.S. still accounting
for over 98 per cent of Canada’s merchandise trade in North America,
looking at the benefits and costs of CUSFTA gives us a good sense of the
impact freer North American trade had on the Canadian economy.
Research has shown that CUSFTA contributed to an increase in bilateral
trade.22Harris, ”The Economic Impact of the Canada–U.S. FTA and
NAFTA Agreements.” See the “Trade Creation and Trade Diversion”
section. led to significant output and productivity gains in the
manufacturing sector,33The productivity gains from CUSFTA are
reviewed in Foreign Affairs and International Trade Canada,
”International Trade and Its Benefits to Canada.” and was associated
with a large increase in the variety of products available to
Canadians.44Chen, ”The Variety Effects of Trade Liberalization.”
However, the agreement also led to adjustment costs. Manufacturing
employment declined by 5 per cent, with a 12 per cent loss in those
industries that faced the greatest competition from imports.55Trefler,
”The Long and Short of the Canada–U.S. Free Trade Agreement.” What
is more, the job losses associated with the tariff reductions under
CUSFTA affected less-skilled workers the most.66Beaulieu, ”The
Canada–U.S. Free Trade Agreement and Labour Market Adjustment in
Canada.” Still, overall, freer North American trade, thanks to CUSFTA
and then NAFTA, has had a net positive impact on Canadian
employment.77Harris, ”The Economic Impact of the Canada–U.S.
FTA and NAFTA Agreements.” See the “Jobs, Wages, and Employment”
section. Increased trade led to job gains in other sectors of the
economy, which more than offset the losses in manufacturing.
For NAFTA, which brought Mexico into the free trade area, the evidence
is positive for all three participating countries.88For an
extensive review of the evidence on the impacts of NAFTA on the U.S.,
Canada, and Mexico, see Hufbauer and Schott, NAFTA Revisited ;
Harris, ”The Economic Impact of the Canada-U.S. FTA and NAFTA
Agreements”; Burfisher, Robinson, and Thierfelder, ”The Impact of
NAFTA on the United States.” In an extensive review of the impacts of
NAFTA, the Washington-based Peterson Institute for International
Economics concluded that:
NAFTA was designed to promote economic growth by spurring competition in
domestic markets and promoting investment from both domestic and foreign
sources. It has worked. North American firms are now more efficient and
productive. They have restructured to take advantage of economies of
scale in production and intra-industry specialization.99Hufbauer
and Schott, NAFTA Revisited, 61.
On the impacts of NAFTA on U.S. employment in particular, the authors
noted that “trade pacts are far from the most prominent cause of job
churn—and have only a third-order impact on the absolute level of
employment.”1010Ibid., 39. As such, NAFTA had only a limited
impact on overall employment trends in the United States between 1994
and 2003. During that period, an estimated 525,000 jobs were disrupted
in import-competing industries, while an estimated 1 million jobs were
created as a result of increased North American trade.1111The
expansion of North American trade contributed to the creation of an
estimated 100,000 additional U.S. jobs each year in the decade after
NAFTA came into force, representing a total of 1 million jobs. Also,
as of 2014, the United States’ exports to Canada and Mexico supported an
estimated 2.8 million U.S. jobs.1212Schaefer and Rasmussen,
Jobs Supported by Export Destination 2014 .
Therefore, the economic evidence on the impact of CUSFTA and NAFTA on
Canada and the U.S. generally supports the economic theory that freer
trade brings major benefits.
Recommendations for NAFTA 2.0
The 1990s were a crucial period for the liberalization of merchandise
trade in North America. And, the resulting trade gains were concentrated
during that period. Between 1990 and 2000, Canada’s North American trade
(exports and imports) nearly tripled in nominal terms, compared with a
twofold increase for our trade with non-NAFTA countries. Then, in the
2000s, Canadian trade with non-NAFTA partners picked up, significantly
outpacing growth with our NAFTA trading partners. These trade gains with
non-NAFTA partners were largely made on the back of China joining the
World Trade Organization in 2001.
Most of the gains in merchandise trade made possible by CUSFTA and NAFTA
have thus already materialized. So, what should Canada seek to improve
in a NAFTA 2.0? The Conference Board of Canada’s proposed actions for
the upcoming NAFTA renegotiation can be grouped into five broad
recommendations:
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Adopt an inclusive, transparent, and trilateral approach.
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Facilitate the cross-border mobility of business people to support
trade in services.
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Maintain and enhance market access for traded goods.
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Encourage innovation and digital trade while protecting intellectual
property and culture.
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Modernize NAFTA to new business realities and standards.
Obviously, there are risks to the upcoming renegotiation. The greatest
threat would be a tearing up of the treaty, which could see tariffs
re-established, although this appears a very remote risk. And there is
also talk in the U.S. of imposing a border adjustment tax, although it
seems highly unlikely to be adopted. A border adjustment tax would pose
a significant threat to North American merchandise trade and would have
considerable implications for North American supply chains and the
competitiveness of Canadian exporters vis-à-vis U.S. firms. (See “U.S.
Border Adjustment Tax: A Threat to Exports.”).