Monday, January 14, 2008

The Canada-U.S. FTA: 20 Years After

The Canada-U.S. FTA: 20 Years After
(Stephen Poloz, Export Development Canada)

Twenty years have passed since the signing of the Canada-U.S. Free Trade Agreement, which went into effect 19 years ago. It’s a good time to check the report card, to see how we are doing.

The architects of the deal told us that north-south trade would blossom, and they were right. Our exports of goods and services to the U.S. have more than tripled since 1988, from $117 billion per year to $398 billion, an increase of 240%. Our imports of goods and services from the U.S. have not risen by as much – from $108 billion to $322 billion, and increase of just under 200%.

A good part of Canada’s relative success is due to higher resource prices. Adjusting exports and imports for inflation shows that export and import volumes have both risen by about 150% since 1988. Still, that means that Canadian exporters have earned more through the arrangement.

Superficial analyses might leap on this and claim victory, but this would be wrong. Every transaction that would not have happened without the FTA should be seen as a victory, regardless of direction. When an American and a Canadian agree to a sale, they both get what they want, so they both win.

What makes the analysis of free trade so difficult is that we do not know what the world might have looked like today had there been no FTA. Some analysts look at employment, and they are often disappointed. After all, if everyone should win from free trade, shouldn’t employment go up everywhere? The answer is “no”. Adjusting to free trade means that both countries produce more of what they are good at, and produce less of the other things, which then are obtained through trade, instead. At the production level, then, there are both winners and losers, by definition.

And so it is that the manufacturing sector has seen a decline in employment over the life of the FTA, of about 50,000 jobs, while mining and oil and gas have seen an increase of 50,000 jobs. Within manufacturing, the durables sector is up 80,000, while employment is down 130,000 for non-durables. In the context of a workforce of 17 million, these figures are small, but they belie a big increase in specialisation beneath the surface, which has boosted productivity. Indeed, there has been a 43% increase in manufacturing productivity since 1988, or around 2.4% per year. Not bad, except that U.S. manufacturing has done better, at 68%, or more than 3.8% per year.

It is at the consumer level that everyone wins, because the lower cost of imports boosts total purchasing power, and the extra spending creates jobs across the board, since it is mostly spent domestically. Accordingly, construction sector jobs are up by 360,000 since 1988, and service sector jobs by nearly 4 million. The latter include such occupations as health care (650,000), retail and wholesale trade (630,000), professional and technical (600,000), business support (410,000), hospitality (340,000), the financial sector (270,000) and so on.

The bottom line? It is very difficult to pin down all the effects of the FTA, especially since the effects of increased purchasing power are, well, everywhere. But if one accepts the basic premise that trade in both directions is good, then the FTA has surely made a positive difference.

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