NAFTA has helped Canada

[Toro]

This is from a paper by Professor Daniel Tefler at the Rotman School of Management published in the American Economic Review in 2004.

Some highlights

In 1988, the average Canadian tariff rate against the United States was 8.1 percent. The corresponding effective tariff rate was 16 percent. Perhaps most importantly, tariffs in excess of 10 percent sheltered one in four Canadian industries. Given that these industries were almost all characterized by low wages, low capital-labour ratios, and low profit margins, the 1988 tariff wall was indeed high.

... Employment losses of 5 percent translate into 100,000 lost jobs and strike me as large, not least because only a relatively small number of industries experienced deep tariff concessions.  Indeed, most of these lost jobs were concentrated in the most-impacted, import-competing industries. For this group, with its 12 percent job losses, one in eight jobs disappeared. This number points to the very large transition costs of moving out of low-end, heavily protected industries. It reflects the most obvious of the costs associated with trade liberalization.

It is difficult to be sure whether these transition costs were short-run in nature. However, two facts drawn from the most recent seasonally adjusted data suggest that they probably were short run costs. First, the FTA had no long-run effect on the Canadian employment rate which was 62 percent both in April 1988 and April 2002. Second, Canadian manufacturing employment has been more robust than in most OECD countries. For example, between April 1988 and April 2002, manufacturing employment rose by 9.1 percent in Canada, but fell by 12.9 percent in the United States and by 9.7 percent in Japan. This suggests, albeit not conclusively, that the transition costs were short run in the sense that within 10 years the lost employment was made up for by employment gains in other parts of manufacturing.

... the Canadian tariff concessions raised labour productivity by 15 percent in the most-impacted, import-competing group of industries.  This translates into an enormous compound annual growth rate of 1.9 percent.  The fact that the effect is smaller and statistically insignificant at the plant level suggests that much of the productivity gain is coming from market share shifts favouring high productivity plants. Such share shifting would come about from the growth of high-productivity plants and the demise and/or exit of low-productivity plants.

... The plant-level numbers indicate that the FTA raised labour productivity in manufacturing by 7.4 percent or by an annual compound growth rate of 0.93 percent.  The industry-level numbers are about the same. These numbers, along with the 14-15 percent effects for the most-impacted importers and exporters, are enormous. The idea that an international trade policy could raise labour productivity so dramatically is to my mind remarkable.

... The Canadian tariff concessions raised Canadian imports from the United States by 54 percent. ... The Canadian tariff concessions lowered Canadian imports from the rest of the world by 40 percent.

...There is modest evidence ... that the FTA reduced import prices by 7 percent for the most-impacted import-competing products.

... Most commentators expected Canadian wages to fall in response to competition from lessunionized, less-educated workers in the southern United States. ...For all workers, the tariff concessions raised annual earnings. For example, the total FTA impact is a rise of 3 percent at both the industry level and the plant level. ... At the plant level, earnings rose for both production and non-production workers. At the industry level, earnings gains were concentrated among production workers. ... a 3 percent rise in earnings spread over 8 years will buy you more than a cup of coffee, but not at Starbucks. The important finding is not that earnings went up, but that earnings did not go down in response to competitive pressures from the U.S. South.

... unionization does not offer an explanation of modestly rising earnings.

... There is a presumption in the popular press that anything to do with globalization will worsen income inequality. It is thus reassuring that there is absolutely no evidence that the FTA worsened income inequality.

... Several strong conclusions emerged from the analysis. First, the FTA was associated with substantial employment losses: 12 percent for the most-impacted, import competing group of industries and 5 percent for manufacturing as a whole. These effects appear in both the industry- and plant-level analyses. Second, the FTA led to large labour productivity gains. For the most-impacted, export-oriented group of industries, labour productivity rose by 14 percent at the plant level. For the most-impacted, import-competing group of industries, labour productivity rose by 15 percent with at least half of this coming from the exit and/or contraction of low-productivity plants. For manufacturing as a whole, labour productivity rose by about 6 percent which is remarkable given that much of manufacturing was duty free before implementation of the FTA. Third, the FTA created more trade than it diverted and possibly lowered import prices. Thus, the FTA likely raised aggregate welfare.

Link

[Guest eureka]

I don't know waht you think of the paper, Toro. I suspect from the bacground in economics you have demonstrated, that you, like me, think it is a load of crap.

More than 90% of goods moved between Canada and the US without tariff prior to "Free Trade. The effects shown could not have been a consequence of the agreement. There was also a recession between the dates used that had enormous effects that do not seem to have entered the calculations.

First, the FTA had no long-run effect on the Canadian employment rate which was 62 percent both in April 1988 and April 2002. Second, Canadian manufacturing employment has been more robust than in most OECD countries

Does nothing else enter the employment participation than a tiny shift in trade. Not much move in trade happened in those four years.

[mcqueen625]

It makes me suspicious whenever a business or economics so-called expert says that any free trade deal has helped Canada. Look around at the many manufaturing jobs that disappeared from Canada immediately upon signing of the FTA. Companies like Carter Pen Company who almost immediately closed their manufacturing plants in Ontario and Quebec, and moved those operations south of the border. Carter Pen did own trade names like Gillette, Wilkenson Sword, PaperMate, Marks-a-Lot, Carter's Inks, and many other trademark standards. Oh yes, they immediately denied that the closures had anything to do with the FTA but any thinking person knows that those two things were directly linked. Many other companies moved their operations as well, and hundreds of thousands lost good paying jobs. I remember at the time reading articles stating that in order for us to become competive and survive we needed to take on a more service sector type role. Many of those jobs have since been replaced by those service sector jobs, but at much lower rates of pay than these worker's previously made.

Along came NAFTA and even more jobs left Canada, but they also packed up and left the U.S. as well creating a the situation we now have where people are now working for pre-80's wage levels when taxes and inflation are taken into consideration. In other words Canadian's are far worse off financially today, than they were even ten year's ago. Those much touted service sector jobs as well as manufacturing jobs are now disappearing to third world countries like India, China, Bangladesh, Sri Lanka, etc. etc. etc., and the only one's praising the trade agreements are corporations and their puppet governments who signed those deals. If you want to know how great those deals are for ordinary Canadian's ask one of those workers who are now working retail, because their well paying manufacturing jobs have left the country.

Let's get real, Free Trade was a concept designed by ecomomist's and business majors as a way to save corporations money and allowed them to maximize their profits, for the owners, executives and shareholders. These people could care less that for many Canadian's and American's a monthly norm is now a trip to the local food bank, and in some cases a daily trip to the local soup kitchen because wages have become so low and the cost of living so high that there is not enough disposable income left with which to purchase food & in the case of senior's both food and medications.

Do these corporate owner's care about what they have done to ordinary Canadian's? Of course they don't care because they have succeeded in having their government puppets, lower their tax burdens to a level that they are no longer paying a fair share of the costs associated with running the country. Owner's such as Paul Martin's family, and Mulroney before him think only of tehmselves, and let's not forget the Irving's who have moved their assets offshore so the tax man cannot get to them. Even our PM's family business has flagged their ships in a foreign country to avoid Canadian taxes. Our tax regulations are designed to favour the rich, while the poor starve, and pay for what the corporation refuse to pay, thanks to the Mulroney's and the Mattin of this world.

Has Free Trade been good for Canada? Not in this lifetime, and it's just a matter of time before these corporation welfare bums run out of people to sell their products to. People who make low wages or have no jobs do not tend to buy manufactured products, and right now it has reached a point where many Canadian's are simply living from pay-cheque to pay-cheque, and in between using credit cards and lines of credit to keep the wolf (bill colloectors) from the door. When the credit cards are maxed and the lines of credit are not there this whole house of cards is going to come crashing down, corporations and government's are going to go bankrupt, and for what? Greed!!!

[Toro]

I don't know waht you think of the paper, Toro. I suspect from the bacground in economics you have demonstrated, that you, like me, think it is a load of crap.

No, I think its pretty much spot on.

[err]

It's rather amazing that this "indepth analysis" could somehow not even mention the decline in the Canadian dollar at or about the time of the NAFTA agreement. The fall in the dollar made "buying Canadian" and having components manufactured in Canada extremely attractive to American industry.

Now that our dollar has risen significantly with respect to the US dollar, Canadian made goods will be less attractive to the USA. I think we can expect a shift in the balance of trade due to the recent rise in our dollar. Had our dollar maintained its pre-NAFTA value, I think we would have already seen the effects of NAFTA that we can expect to start seening any day now...

[August1991]

It's rather amazing that this "indepth analysis" could somehow not even mention the decline in the Canadian dollar at or about the time of the NAFTA agreement.  The fall in the dollar made "buying Canadian" and having components manufactured in Canada extremely attractive to American industry.

<{POST_SNAPBACK}>

More than 90% of goods moved between Canada and the US without tariff prior to "Free Trade. The effects shown could not have been a consequence of the agreement. There was also a recession between the dates used that had enormous effects that do not seem to have entered the calculations.

On the contrary, if you read the paper, the author explicity takes these points into account:

A key issue for examining the FTA is the treatment of the early 1990s recession.

p. 10, and elsewhere. This is a very complete and detailed study.

There was a good summary of this article in the NYT.

Toro got the quote I recall from the paper:

There is a presumption in the popular press that anything to do with globalization will worsen income inequality. It is thus reassuring that there is absolutely no evidence that the FTA worsened income inequality.

[Guest eureka]

If he did explicitly take them into account, August, then the absurdity of his calculations is heightened. A relatively small shift in trading patterns coud not produce the effects he claims. Under free trade, Canada lost jobs and under NAFTA, both Canada and the US lost jobs.

Those figures have been cited by many critics.

[Toro]

If he did explicitly take them into account, August, then the absurdity of his calculations is heightened. A relatively small shift in trading patterns coud not produce the effects he claims.

Why not? He doesn't write that NAFTA has been the be all and the end all. What he's writing is that NAFTA has not been damaging in the manner critics said it would in aggregate and that the productivity gains have been much greater than expected. Seems very reasonable to me.

Under free trade, Canada lost jobs and under NAFTA, both Canada and the US lost jobs.

Is this true or is this merely dogma, eureka?

From the paper

First, the FTA had no long-run effect on the Canadian employment rate which was 62 percent both in April 1988 and April 2002. Second, Canadian manufacturing employment has been more robust than in most OECD countries. For example, between April 1988 and April 2002, manufacturing employment rose by 9.1 percent in Canada,

It certainly isn't true in the US.

Number of people working in the US

1988 - 108 million

2004 - 131 million

ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb1.txt

Labour participation rate

1988 - 65.9%

2004 - 66.0%

ftp://ftp.bls.gov/pub/suppl/empsit.cpseea1.txt

Those figures have been cited by many critics.

So where are they? What rigourously academic studies do the critics have to back them up? Post them because I would be interested to see the work.

[politika]

This is from a paper by Professor Daniel Tefler at the Rotman School of Management published in the American Economic Review in 2004.

Some highlights

In 1988, the average Canadian tariff rate against the United States was 8.1 percent. The corresponding effective tariff rate was 16 percent. Perhaps most importantly, tariffs in excess of 10 percent sheltered one in four Canadian industries. Given that these industries were almost all characterized by low wages, low capital-labour ratios, and low profit margins, the 1988 tariff wall was indeed high.

... Employment losses of 5 percent translate into 100,000 lost jobs and strike me as large, not least because only a relatively small number of industries experienced deep tariff concessions.  Indeed, most of these lost jobs were concentrated in the most-impacted, import-competing industries. For this group, with its 12 percent job losses, one in eight jobs disappeared. This number points to the very large transition costs of moving out of low-end, heavily protected industries. It reflects the most obvious of the costs associated with trade liberalization.

It is difficult to be sure whether these transition costs were short-run in nature. However, two facts drawn from the most recent seasonally adjusted data suggest that they probably were short run costs. First, the FTA had no long-run effect on the Canadian employment rate which was 62 percent both in April 1988 and April 2002. Second, Canadian manufacturing employment has been more robust than in most OECD countries. For example, between April 1988 and April 2002, manufacturing employment rose by 9.1 percent in Canada, but fell by 12.9 percent in the United States and by 9.7 percent in Japan. This suggests, albeit not conclusively, that the transition costs were short run in the sense that within 10 years the lost employment was made up for by employment gains in other parts of manufacturing.

... the Canadian tariff concessions raised labour productivity by 15 percent in the most-impacted, import-competing group of industries.  This translates into an enormous compound annual growth rate of 1.9 percent.  The fact that the effect is smaller and statistically insignificant at the plant level suggests that much of the productivity gain is coming from market share shifts favouring high productivity plants. Such share shifting would come about from the growth of high-productivity plants and the demise and/or exit of low-productivity plants.

... The plant-level numbers indicate that the FTA raised labour productivity in manufacturing by 7.4 percent or by an annual compound growth rate of 0.93 percent.  The industry-level numbers are about the same. These numbers, along with the 14-15 percent effects for the most-impacted importers and exporters, are enormous. The idea that an international trade policy could raise labour productivity so dramatically is to my mind remarkable.

... The Canadian tariff concessions raised Canadian imports from the United States by 54 percent. ... The Canadian tariff concessions lowered Canadian imports from the rest of the world by 40 percent.

...There is modest evidence ... that the FTA reduced import prices by 7 percent for the most-impacted import-competing products.

... Most commentators expected Canadian wages to fall in response to competition from lessunionized, less-educated workers in the southern United States. ...For all workers, the tariff concessions raised annual earnings. For example, the total FTA impact is a rise of 3 percent at both the industry level and the plant level. ... At the plant level, earnings rose for both production and non-production workers. At the industry level, earnings gains were concentrated among production workers. ... a 3 percent rise in earnings spread over 8 years will buy you more than a cup of coffee, but not at Starbucks. The important finding is not that earnings went up, but that earnings did not go down in response to competitive pressures from the U.S. South.

... unionization does not offer an explanation of modestly rising earnings.

... There is a presumption in the popular press that anything to do with globalization will worsen income inequality. It is thus reassuring that there is absolutely no evidence that the FTA worsened income inequality.

... Several strong conclusions emerged from the analysis. First, the FTA was associated with substantial employment losses: 12 percent for the most-impacted, import competing group of industries and 5 percent for manufacturing as a whole. These effects appear in both the industry- and plant-level analyses. Second, the FTA led to large labour productivity gains. For the most-impacted, export-oriented group of industries, labour productivity rose by 14 percent at the plant level. For the most-impacted, import-competing group of industries, labour productivity rose by 15 percent with at least half of this coming from the exit and/or contraction of low-productivity plants. For manufacturing as a whole, labour productivity rose by about 6 percent which is remarkable given that much of manufacturing was duty free before implementation of the FTA. Third, the FTA created more trade than it diverted and possibly lowered import prices. Thus, the FTA likely raised aggregate welfare.

Link

<{POST_SNAPBACK}>

Sorry to burst your bubble their torro but if you read REAL facts about free trade it's really only free for the americans.

[Guest eureka]

Why would employment in manufacturing not have risen 9.1% in 14 years given the growth in population was greater than that?

Since, during that time, the growth in service jobs; part time employment etc. was higher, then there would be an actual decline in manufacturing participation. Thre should have been an actual increase in participation rates in employment generally given the social changes that were occurring. However, this study shows that there was not. Why? Could it be because so many were dropping out due to the hopelessness of the employment situation.

I haven't looked up the job losses related to free trade recently, but, a few years ago when these things were being analysed by just about everybody, it seemed to be fairly widely agree that the USA lost more than 2 million jobs following free trade: Canada's loss was well over 200,ooo. I don't recall the exact figures that were often quoted.

[Toro]

I haven't looked up the job losses related to free trade recently, but, a few years ago when these things were being analysed by just about everybody, it seemed to be fairly widely agree that the USA lost more than 2 million jobs following free trade: Canada's loss was well over 200,ooo. I don't recall the exact figures that were often quoted.

<{POST_SNAPBACK}>

But who generated those figures? What were their sources? What were their methodologies? I would like to see them if anyone has them.

Like the professor said, low tech, low margin, low paying industries took a big hit. But you cannot look at that in isolation. They were replaced by jobs elsewhere. That's what is supposed to happen. Decreasing tariffs is supposed to make your economy more efficient, and NAFTA did. That's the biggest conclusion in the paper.

[Guest eureka]

I agree that one cannot look at that (or anything to do with this subject in isolation. I suggest, though, that is what the professor is doing - or selectively leaving out parts that do not fit his wishes.

Were those jobs replaced? If so, by what. The increase in contract work and part time work is well noted. I would say that the 9.1% increase in manufacturing jobs is a telling indictment of free trade. The population grew by more than that: the participation rate in the workforce did not grow significantly: the number of low paying jobs rose dramatically.

By how much were tariffs reduced? Not very much, I would say. When less than 10% of our trade with the US was affected by the reductions, reductions that were not terribly significant since the tariffs on that portion were already low, the overall impact had to be neglible.

Free Trade was not about trade barriers at all. It was about the freedom of corporate interests to move freely and to interfere with the Canadian economy.

[Toro]

I agree that one cannot look at that (or anything to do with this subject in isolation. I suggest, though, that is what the professor is doing - or selectively leaving out parts that do not fit his wishes.

I assume you mean the currency. I'll ask him and see what he says.

Were those jobs replaced? If so, by what. The increase in contract work and part time work is well noted. I would say that the 9.1% increase in manufacturing jobs is a telling indictment of free trade.

Its not a telling indictment of anything. First, compared to the US and Japan, Canada did well. Second, there is nothing magical about manufacturing jobs. The number of manufacturing jobs is not indicative of economic strength, just as the number of agricultural jobs was not indicative of economic health in 1900.

The population grew by more than that: the participation rate in the workforce did not grow significantly: the number of low paying jobs rose dramatically.

Again, that's not correct. In his study, he concludes that wages rose 3% because of NAFTA. Now that's no great shakes either, but as he concluded, people think/thought wages would fall because of the deal and that hasn't happened.

By how much were tariffs reduced? Not very much, I would say. When less than 10% of our trade with the US was affected by the reductions, reductions that were not terribly significant since the tariffs on that portion were already low, the overall impact had to be neglible.

But they were high in low-margin, low-efficient, low-value added industries. Those were the industries that felt the greatest effects under the agreement, as one would expect. However, the biggest conclusion in that paper was productivity at the plants that remained soared much higher than he expected. That's good news because productivity is highly correlated to economic growth and wage growth.