The Changing Structure of the Quebec Economy

Abstract

The decade of the 1980s began with what was at the time the most severe recession in the postwar period. During the decade, the Canadian government favored greater trade liberalization and negotiated the Canada-U.S. Free Trade Agreement (CUSFTA). Further liberalization occurred in the early 1990s in the North American Free Trade Agreement (NAFTA) and during the Uruguay Round of GATT negotiations which culminated in the establishment of the World Trade Organization (WTO) in 1995. The last fifteen years have thus witnessed accelerated integration of the Canadian economy into the regional and global economies. The adjustment has not been painless. This paper considers areas of expansion and contraction within the Quebec economy, particularly in light of recent trade liberalization. The discussion begins with a macroeconomic overview and a look at the expected impact of trade liberalization on the Quebec manufacturing sector. Some general comments on the changing structure of the Quebec economy are followed by a more specific inquiry into changes within the manufacturing sector itself. Trends in Quebec's exports and imports are analyzed. Finally, an examination of commodity trade statistics provides some possible clues about the role of trade liberalization in the changing structure of Quebec manufacturing. Macroeconomic Overview Like the United States, Canada experienced a severe recession at the beginning of the 1980s. Recovery began in 1983 and the remainder of the decade saw average annual growth rates of just over 4 percent. Both countries again experienced cyclical downturns in 1990 and 1991, although output in Canada declined sooner and more drastically than in the United States. Recovery was also slower in Canada throughout 1993. By 1994, Canadian GDP growth exceeded that of the United States. For its part, Quebec's GDP paralleled the growth of Canadian GDP for much of the 1980s, but fell more in 1991 and recovered more slowly. Quebec unemployment rates remained well above Canadian (and Ontario) rates. While the Canadian dollar depreciated about 13 percent against the U.S. dollar from 1980 to 1986, appreciation in the early years of the CUSFTA did not help the international competitiveness of Canadian goods. The Canadian dollar appreciated 14 percent from 1987 to 1991 and then depreciated 20 percent by 1994. This most recent depreciation may help explain the even stronger north-south orientation of Canadian exports in the last two years. Before the 1989 implementation of the CUSFTA, just under 16 percent of Quebec's GDP was exported to non-Canadian markets and 75 percent of those exports, accounting for C$16.5 billion, were destined for the United States. Forty-five percent of Quebec's imports originated in the United States. By 1994, almost one quarter of Quebec's GDP was exported and 82 percent of those exports, or $31.8 billion, were headed for the United States. On the other hand, imports from the United States remained at about the same share of total Quebec imports. Expected Impact of Trade Liberalization A number of studies estimated the likely effects of the CUSFTA, and later NAFTA, on Canadian industrial output and employment. Results differ depending on the type of model used and the underlying assumptions and parameters. (1) Models depicting output and employment changes by industrial sector, as well as changes in economic welfare more generally, are characterized as either computable general equilibrium models or macroeconometric models. Computable general equilibrium models are capable of evaluating static effects of changes in trade policy on factor prices, economic welfare, the intersectoral allocation of resources, and the international allocation of production. (2) The Cox and Harris (1986), Brown and Stern (1989), and Brown, Deardorff, and Stern (1992) studies cited in Table 1 are examples of this type of model. These models incorporate insights from recent advances in the theory of industrial organization into the analysis of international trade. …