Trade Talk: The Gateway to Economic Growth

From the effects on employment to the industries that have benefited the most to the downsides of the agreement, three experts discuss the impact NAFTA has had on the three nations

The North American Free Trade Agreement (NAFTA) between Canada, the United States and Mexico came into effect on January 1, 1994. The agreement aimed to eliminate barriers to trade and investment among the three nations. It was preceded by the Canada-U.S. Free Trade Agreement signed on January 2, 1988, and both agreements elicited long and divisive debates in Canada. We’ve asked three experts to reflect on NAFTA’s impacts. 

David Watt
Chief Economist,
HSBC Bank Canada 
Marcus Ewert-Johns
Vice President,
British Columbia, Canadian Manufacturers & Exporters
Stephen Blank 
Collaboratory on Energy, Research and Policy,
University of Ottawa


Which industries have benefited the most from NAFTA over the past five years?

Stephen Blank: Primarily manufacturing, but also some agricultural products. Industries that have been able to benefit from the creation of continental-wide supply chains. For example, the Canadian automobile industry, until prior to the Canadian dollar beginning to fall, became far more efficient as it was more integrated into the American and continental industry. You can look at almost any industry like that where the Canadians have been able to benefit from extending supply chains to areas that maximize efficiency and productivity. If you can get larger economies of scale then you’re almost always likely to do better.

Marcus Ewert-Johns: You see integration of the auto industries in Ontario and Detroit-Windsor. You see general manufacturing in Niagara-Buffalo, and aerospace in the Greater Vancouver-Seattle corridors. Factories are able to produce components and move them easily across the border to be integrated into larger components and final assembly. This happens between all three countries. With a continental approach there is little need to offshore to Asia.

What effect has NAFTA had on employment of Canadians both at home and internationally?

David Watt: It’s about positive and negative effects. By lowering trade barriers, it has certainly helped support trade in general. Spillover effects of the increasing trade have been positive, but in the context of competition it’s also opened up pressures on the labour market. I would highlight the Canadian auto sector. Recently we’ve had some good news, but most of the news in the last few years has been about plant closures. And with regard to investment, we’ve certainly seen a shift in auto investment where Canada has lost a step relative to the U.S. and Mexico. So, you’ve got this one aspect where lowering trade barriers certainly does expose the economy to foreign competition which could strengthen the economy overall and strengthen employment in sectors where we can compete, but it also creates uncertainty in sectors that have been somewhat less successful in stepping up to the challenge.

Stephen Blank: When I started working in Canada in the 1987s, General Electric (GE) Canada was one of the largest employers in the country. It was protected by relatively high tariffs, and General Electric made almost every product in very small runs in Canada, by Canadians for Canadians. So it didn’t capture economies of scale. During the continental integration of GE and others, the initial impact was to disemploy a substantial number of workers in the early ’90s. But by and large, those were quickly redeployed in other industries, which became much more efficient. So GE has many fewer employees today, but they are more efficient, they are better paid and they do large runs of a smaller number of product with company-wide or even global mandates.

How has the falling Canadian dollar impacted trade between Canada and the other two countries?

Watt: In particular industries where Canada and Mexico are both exporting into the U.S., we’ve tended to see over the past several years a competition for market share in the U.S. We tend to fight for market share in other industries as well, so we certainly pay attention to the Canadian dollar-Mexican peso exchange rate in that, are we going to be able to make incremental gains versus Mexico?

Ewert-Johns: The lower dollar has been good for trade, especially if a Canadian product is a good substitute for a product from an international supplier. For example, it is now cheaper for Mexico to buy a part or machine from Canada than from the U.S. simply because of the better exchange rate. The same applies if an American business chooses to buy from Canada instead of Europe.
Looking back on the past 20 years since NAFTA came into effect, what have been the biggest positives and negatives for Canada?

Watt: One of the positives is the idea that we have this multilateral trade agreement that brought an emerging economy into the trade agreement that we already had with the U.S., and we’ve been able to compete with an emerging economy when trade barriers went down. That’s a very important history to have because as we enter into Trans-Pacific partnerships, to an extent we’ve already gone through part of that adjustment. Hopefully now we will be able to do it from a position of knowledge and confidence, and being able to compete.
Blank: I’m like a lot of traditionalists. I think the biggest positives are the opening of deep integration in North America. Now, I don’t use the word trade. Trade suggests to most people the exchange of raw materials or finished products. We don’t sell stuff to each other as much as we make it together. So we are not trading partners, we are production partners. You can’t buy a Made in the U.S. or Made in Canada automobile or computer or even a cookie. You can’t buy something that’s made in Canada without components made in the U.S. That isn’t trade: that is the fact of deeper structural integration in our economies.

I would say the biggest negative for Canada has been the continued reluctance by Canadian leaders to capitalize on that development. Ottawa has been reluctant since the signing of NAFTA to leverage that situation and really create policies that would push to strengthen that structural integration. Ottawa keeps talking that we’re trading partners, it doesn’t want to acknowledge that we’re production partners. If we are deeply interdependent, then we’re not sovereign. And no one wants to say that. But the reality is that we are deeply interdependent.

What are some opportunities NAFTA presents that businesses in B.C. can do a better job of capitalizing on?

Ewert-Johns: Canada is well positioned to be a central platform. We have geographic position. Not only are we next to the U.S. and Mexico, we are equidistant from Europe, Asia and South America. We have transportation infrastructure to support those trade flows. We have free trade agreements with many major economies. We have the cultural community and talent pool that allows Canada, especially British Columbia, to be a central hub for businesses that want to establish here and gain access to Europe, U.S., Mexico and dozens of other markets duty free.
Is there any concern over the new B.C. liquor laws violating trade obligations with the U.S.?

Ewert-Johns: Yes, trade agreements are supposed to promote equal access and treatment. Recent commentary on B.C.’s new liquor laws (pricing and shelf placement) could be perceived as discriminatory which would then result in a non-tariff trade barrier complaint.
Has NAFTA actually weakened a particular country’s economy?

Blank: Again, think about NAFTA not just as free trade, but what I call North American production. It has weakened the less efficient parts of every economy and resulted in regional changes. We can see that most in Mexico where the lack of flexibility in the economy has meant that the economy north of Mexico City has become much more integrated into the North American economy, where south of Mexico City has suffered due to the lack of education, transportation and cultural institutions that would make the transition to modernity easier. So sure the less efficient parts of our economies have suffered, but in a sense that’s what growth is all about.
Is there a need to re-evaluate NAFTA and to make some amendments to the agreement to reflect the reality of today’s trade between the three countries?
Watt: Certainly it never hurts to re-examine trade agreements that have been around a long time. Right now we’re looking at a European trade agreement and you’ve got intellectual property rights, issues related to the Internet and a number of those issues which would not necessarily have been captured in the NAFTA negotiations. In the CETA agreement, (Comprehensive Economic and Trade Agreement between Canada and the European Union) one of the signature aspects was how to treat foreign direct investment in a domestic economy so we could encourage more foreign direct investment. So, certainly I think there are avenues where there’s been progress relative to where we would have been when NAFTA was originally negotiated that could use some sprucing up.
Ewert-Johns: Yes, NAFTA is 20 years old. In the intervening period, Canada has signed many new trade agreements and each one has advanced text to be more suited to the economy of today. NAFTA needs to be revisited in order to address long-standing issues in government procurement, regulatory harmonization and improved labour mobility. These are all areas that the new Canada-Europe agreement addresses. Furthermore, NAFTA needs to be adjusted to include the services trade.