Summary
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:
  1. Adopt an inclusive, transparent, and trilateral approach.
  2. Facilitate the cross-border mobility of business people to support trade in services.
  3. Maintain and enhance market access for traded goods.
  4. Encourage innovation and digital trade while protecting intellectual property and culture.
  5. 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.”).