Archived — Perspectives on North America Free Trade Series

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No. 6: The Long and Short of the Canada-U.S. Free Trade Agreement

by Daniel Trefler, University of Toronto and Canadian Institute for Advanced Research, December 1999

Executive Summary

This paper assesses the impact of the Canada–U.S. Free Trade Agreement (FTA) on Canadian manufacturing during the 1989–1996 period. The estimated effects of the tariff concessions are calculated for manufacturing as a whole as well as for the most impacted industries (those industries faced with the largest tariff cuts).

  1. For the most impacted industries, the tariff cuts reduced employment by 18 percent, output by 12 percent, and the number of establishments by 12 percent. For manufacturing as a whole, the numbers are 4 percent, 2 percent, and 4 percent, respectively. These numbers capture the large adjustment costs associated with reallocating resources out of protected, inefficient, low-end manufacturing. The fact that manufacturing employment and output have largely rebounded since 1996 suggests that some and perhaps most of the reallocation has been to high-end manufacturing.
  2. The tariff cuts raised labour productivity at a compounded rate of 3.2 percent per year for the most impacted industries and at 0.6 percent per year for manufacturing as a whole. Dramatically higher productivity in low-end manufactures and resource re-allocation to high-end manufactures are the key gains from the FTA.
  3. Surprisingly, the tariff cuts slightly increased annual earnings, primarily by raising production worker wages by 0.8 percent per year for the most impacted industries and by 0.2 percent per year for manufacturing as a whole. It thus minimally mitigated rising earnings inequality. The tariff cuts did not affect earnings of non-production workers or weekly hours of production workers.
  4. For the most impacted industries, the tariff cuts explain almost all of the increased trade with the United States and the increased U.S. share of Canadian trade. However, most of Canada's increased trade was in industries that had no tariffs in 1988.

The effects of the FTA tariff concessions are smaller than one would imagine from the heat generated by the debate. The controversy stems from the conflict between those who bore the short run adjustment costs (displaced workers and stakeholders of closed establishments) and those who are garnering the long run efficiency gains (stakeholders of efficient establishments).

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