By Alan M. Field
Twenty years after the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico was ultimately enacted in 1994, the trade agreement’s legacy remains shrouded in controversy, and ignorance about its numerous complexities and multiple impacts. In each of the three member states, there is a widespread conviction that the treaty has ‘helped ‘the other guy’ but that ‘it has hurt us.’ Thus, many Canadians seem to believe that the United States and, especially, Mexico have benefitted greatly – in the form of higher rates of job growth, foreign investment and GDP expansion – while Canada has become less competitive in each of these indicators. Likewise, a great many Americans believe that NAFTA has hurt their country’s competitiveness versus Mexico, which has reaped huge economic benefits.
But Gary Hufbauer, Senior Fellow at the Peterson Institute for International Economics in Washington, D.C., argues that those critics are mistaken. Although opponents and proponents of NAFTA and other free-trade agreements often focus on the issue of jobs – proponents arguing that free-trade pacts inevitably create jobs, and opponents arguing that such pacts destroy jobs – Hufbauer said that free-trade agreements (including NAFTA) generally “do not have large net employment effects” on the populations of the countries that belong to those pacts. Their “impact on net jobs is generally small,” whether in Canada, the U.S. or other countries that join such pacts. He calculates that fewer than five percent of “dislocated” U.S. workers have lost their jobs as a result of rising U.S. imports from Mexico. Rather, “Demand for both domestic labor and foreign goods are dominated by local economic conditions, not by trade policy,” Hufbauer said. On the contrary, “Historically, rising trade deficits are associated with falling unemployment” rates, rather than with weakening economic growth.
Rather than damage Canada’s economy, Hufbauer’s research shows that every one billion dollar increase in trade between the NAFTA member states annually generates GDP gains of $200 million for both Canada and the same amount for the U.S. For Mexico, the same volume of increased trade generates GDP gains of $500 million. For a U.S. household of three persons, that amounts to an annual payoff of $1,200. And for each net manufacturing job lost in those two countries, “the national payoff from membership in NAFTA is about $450,000 annually for an indefinite period.” Hufbauer added that the main benefits of NAFTA “flow both from larger exports and larger imports of goods and services” between the three NAFTA members, which were the direct result of the elimination of tariff barriers in the pact.
Hufbauer added that “productivity in Canadian firms that are exposed to NAFTA competition has increased sharply.” Those Canadian firms “are more adept and they expand, but those firms that are not so productive, go out of business.” Other benefits of NAFTA for Canada including lower prices for a wide range of consumer items that are imported from Mexico or the U.S.; the availability of a greater range of imported (often, low-priced) goods and services; and the transition from a job market dependent on traditional manufacturing of goods (such as auto assembly) into an economy that is increasingly dependent on high value-added services, much like the transformation of the American economy.
Daniel Schwanen, Vice-President of Research at C.D. Howe Institute in Toronto, said, “Internationally mobile services, such as scientific research, engineering or consulting, are a rapidly increasing source of high-paying jobs for Canadians. Exports of these services from Canada have also considerably outshone goods exports since the beginning of the century. While goods-production and transportation industries use relatively larger amounts of physical capital, most tradable service industries hold relatively large amount of intellectual property and employ workers with higher formal educational achievement. Although tradable services are less tangible than manufacturing, they are becoming equally important to Canada’s future competitiveness.”
Between 2001 and 2012, Canadian employment in manufacturing dropped by 491,734 to a total of 1,483,720 workers in 2012. But Canadian employment in tradable services rose by 273,641 over that period to 1,667,929 jobs; thus, surpassing manufacturing jobs. Public services also increased by 428,700 jobs over the period. Nevertheless, critics in all three countries argue that the benefits of the pact have been enjoyed mostly by the wealthiest segment of the population. Hufbauer notes that while trade, relative to GDP, has grown in the three countries, “median income has not grown very much.” Is the growing inequality of the three societies a result of NAFTA? “Some people say that this is cause and effect,” said Hufbauer, “but it is not so simple.” While free trade has had some effect, he attributes to job losses and growing economic inequality in the three societies, in good measure, to the impact of new technologies, which eliminate many low-wage jobs, such as bank tellers or store clerks. Canada’s economic integration into NAFTA has also suffered from the fallout from the 9-11 disaster of 2011, which led to the “thickening of the border.” This has cut down the number of day trips by Americans to Canada, and made Canada a more expensive and/or inconvenient location for manufacturing parts. And Canada “did not get out of NAFTA” all of what it deserved. “Canada did not get much sympathetic attention when issues such as the Keystone pipeline came up.”
Hufbauer said, “I admit that there are people and companies who suffer” from the impact of NAFTA, including some workers who lost jobs and some companies in Canada and the U.S. that have gone out of business because they are no longer competitive with imports from Mexico. “But there are also these [above] gains for the economies” of Canada and the U.S.
Despite all the complaints about NAFTA, it has also had a positive political payoff, argued Hufbauer. NAFTA has created “a new foundation” for relations between its three member states, and for Mexico’s “transition from a one-party system of state capitalism to a multiparty, market-oriented system.” For Canada, the U.S. and Mexico, “trade policy can complement a growth strategy, but internal factors will dominate the result.
What kind of impact will the Trans-Pacific Partnership have on Canada’s economy and trade?
In each of the three NAFTA states, attitudes about the upcoming 12-nation Trans-Pacific Partnership closely track views about NAFTA, and for good reason. NAFTA is the core of TPP, points out Jeffrey Schott, Senior Fellow at the Peterson Institute for International Economics. Sixty-eight percent of the TPP countries’ combined output and almost 60 per cent of its population are from the NAFTA members. Although details of the TPP text have yet to be published, it’s clear that TPP would become “a stepping stone to broader Asia-Pacific and multilateral trade accords.” Like other pro-free trade economists, Schott believes that “the TPP would generate significant income and trade gains for each country” that would belong to it – including all three members of NAFTA.
According to a recent study by economists Peter Petri, Michael Plummer and Fan Zhai, the three NAFTA countries would reap combined income gains of $95.3 billion as a result of the TPP by 2025. Most of those gains — $76.6 billion – would be enjoyed by the United States, while $8.7 billion would be enjoyed by Canada, and $9.9 billion by Mexico. So while Canada would surely reap benefits from its participation in the TPP, those benefits would be somewhat lower than those in Mexico, in dollar terms. According to the same study, by 2025 Canada would gain $13.8 billion in exports from the TPP, while Mexico would gain $19.1 billion in additional exports. If the TPP group of nations were expanded from a club of 12 countries to 16 nations (in a scenario that would add Indonesia, South Korea, the Philippines and Thailand) both Canada and Mexico would enjoy even greater benefits.
If this analysis turns out to be right, it shows that Canada would not “lose” from its membership in the TPP, but reap benefits. Most of the benefits from a TPP, notes the study, would come “from trade and investment creation, not from diversion from other countries.” The biggest gains would come for the smaller economies, such as Vietnam, and for Asian countries that who gain further access for their manufactured goods and services as a result of the TPP. So long as Canada benefits, does it matter if Mexico benefits even more than Canada? In terms of Canada’s population – only 35.5 million, versus 119.7 million in Mexico – Canada’s per capita gains would actually be larger than those enjoyed by Mexico. For his part, Schott argues that “TPP should strengthen [overall] North American competitiveness and significantly boost output and exports of each country,” including Canada. However, there are bound to be further political frictions from those groups who perceive themselves as the relative losers from such a trade agreement.