University of Toronto Professor Daniel Trefler studied the short-run effect of the Canada–United States Free Trade Agreement on employment in Canada, and the long-run effect on productivity and wages.

There is good news and bad news in regard to the Canada/U.S. Free Trade Agreement. The good news is that the deal, especially controversial in Canada, has raised productivity in Canadian industry since it was implemented on January 1, 1989, benefiting both consumers and stakeholders in efficient plants. The bad news is that there were also substantial short-run adjustment costs for workers who lost their jobs and for stakeholders in plants that were closed because of new import competition or the opportunity to produce more cheaply in the south. “One cannot understand current debates about freer trade without understanding this conflict” between the costs and gains that flow from trade liberalization, notes Daniel Trefler in “The Long and Short of the Canada-U.S. Free Trade Agreement” (NBER Working Paper No. 8293). His paper looks at the impact of the FTA on a large number of performance indicators in the Canadian manufacturing sector from 1989 to 1996. In the one-third of industries that experienced the largest tariff cuts in that period, ranging between 5 and 33 percent and averaging 10 percent, employment shrunk by 15 percent, output fell 11 percent, and the number of plants declined 8 percent. These industries include the makers of garments, footwear, upholstered furniture, coffins and caskets, fur goods, and adhesives. For manufacturing as a whole, the comparable numbers are 5, 3, and 4 percent, respectively, Trefler finds. “These numbers capture the large adjustment costs associated with reallocating resources out of protected, inefficient, low-end manufacturing,” he notes.

Since 1996, manufacturing employment and output have largely rebounded in Canada. This suggests that some of the lost jobs and output were reallocated to high-end manufacturing. On the positive side, the tariff cuts boosted labor productivity (how much output is produced per hour of work) by a compounded annual rate of 2.1 percent for the most affected industries and by 0.6 percent for manufacturing as a whole, Trefler calculates… . Surprisingly, Trefler writes, the tariff cuts raised annual earnings slightly. Production workers’ wages rose by 0.8 percent per year in the most affected industries and by 0.3 percent per year for manufacturing as a whole. The tariff cuts did not effect earnings of higher-paid non-production workers or weekly hours of production workers.

Source: Excerpted from David R. Francis, “Canada Free Trade Agreement,” NBER Digest, September 1, 2001, http://www.nber.org/digest/sep01/w8293.html. This paper by Daniel Trefler was published in the American Economic Review, 2004, 94(4), pp. 870–895.

Questions to Consider

After reading The Long and the Short of the Canada-U.S. Free trade Agreement, consider the question(s) below. Then “submit” your response.

Question

Question

Question