STOP IN AN AUTO SHOWROOM, and odds are that the majority of cars on display were produced in either Canada or the United States. Even if they’re foreign brands like Toyotas, Hondas, or Volkswagens, most cars sold in Canada were made here either by the Big Three U.S. auto firms or by subsidiaries of foreign firms. Canadian-made cars are assembled mostly in southern Ontario, within the corridor from Windsor to Oshawa.¹

Although that car you’re looking at may have been made in Canada or the United States, a significant part of what’s inside was probably made elsewhere, very likely in Mexico. Since the 1980s, auto production in North America has increasingly relied on factories in Mexico to produce labour-intensive auto parts, such as seat parts—products that use a relatively high amount of labour in their production.

Changes in economic policy over the years have contributed greatly to the emergence of large-scale Canadian and U.S. imports of auto parts from Mexico. Until the 1980s, Mexico had a system of trade protection—taxes and regulations limiting imports—that both kept out foreign manufactured goods and encouraged Mexican industry to focus on selling to Mexican consumers rather than to a wider market. In 1985, however, the Mexican government began dismantling much of its trade protection, boosting trade with its trading partners. A further boost came in 1993, when Canada, the United States, and Mexico signed the North American Free Trade Agreement (NAFTA), which eliminated most taxes on trade among the three nations and provided guarantees that business investments in Mexico would be protected from arbitrary changes in government policy.

NAFTA was deeply controversial when it went into effect: Mexican workers were paid only a fraction of what their Canadian and American counterparts were paid, and many workers, especially in the United States, expressed concern that jobs would be lost to low-wage competition. Ross Perot, a U.S. presidential candidate in 1992, warned that there would be a “giant sucking sound” as U.S. manufacturing moved south of the border. And although apocalyptic predictions about NAFTA’s impact haven’t come to pass, the agreement remains controversial even now.

Most economists disagreed with those who saw NAFTA as a threat to the Canadian economy. We saw in Chapter 2 how international trade can lead to mutual gains from trade. Economists, for the most part, believed that the same logic applied to NAFTA, that the treaty would make both Canada and Mexico richer. But making a nation as a whole richer isn’t the same thing as improving the welfare of everyone living in a country, and there were and are reasons to believe that NAFTA hurts some Canadian citizens.

Until now, we have analyzed the economy as if it were self-sufficient, as if the economy produces all the goods and services it consumes, and vice versa. This is, of course, true for the world economy as a whole. But it’s not true for any individual country. Assuming self-sufficiency would have been far more accurate 50 years ago, when Canada exported only a small fraction of what it produced and imported only a small fraction of what it consumed. Since then, however, Canadian imports and exports have grown much faster than the Canadian economy as a whole. Nowadays, to have a full picture of how national economies work, we must understand international trade.

This chapter examines the economics of international trade. We start from the model of comparative advantage, which, as we saw in Chapter 2, explains why there are gains from international trade. We will briefly recap that model here, and then extend our study to address deeper questions about international trade, such as why some individuals can be hurt by international trade while the country, as a whole, gains. At the conclusion of the chapter, we’ll examine the effects of policies that countries use to limit imports or promote exports as well as how governments work together to overcome barriers to trade.