The Effects of the North American Free Trade Agreement on the Canada-United States Trade Relationship

Abstract

Much of the popular discussion of the effects of the proposed North American Free Trade Agreement (NAFTA) on Canada as well as a number of more academic general assessments have concentrated on the effects of adding Mexico to the previously established Canada-United States Free Trade Area (e.g., Harris and Cox, 1992; Watson, 1992; 1993; Wonnacott, 1993). These studies generally conclude that the economic effects of such an expansion of the currently existing free trade area would be small and only marginally beneficial to Canada. However, this outcome is presented as preferable to the possible alternative of a bilateral agreement between the United States and Mexico, from which Canada is excluded. Such a bilateral agreement would allow Mexico to compete more effectively with Canada in the US market and cause some trade substitution away from Canadian and toward Mexican commodities. It would also make the United States the hub and Canada and Mexico the spokes of a so-called 'hub-and-spokes' system in which only a company located in the US would have relatively unfettered access to the entire North American market. This scenario could encourage investment in the United States at the expense of both Canada and Mexico (Gestrin and Rugman, 1993; Lipsey et al., 1993; Rugman and Gestrin, 1993; Waverman, 1993; Wonnacott, 1993). If the United States continued in this direction and negotiated liberalizing trade agreements with other Latin American countries, the situation would be even worse (Wonnacott, 1993). Canada can do nothing about the increased competition from Mexico in US markets resulting from a US-Mexico accord. However, it can avoid granting the United States the exclusive privilege of access to all of North America, and perhaps ultimately the Americas, by obtaining such access itself through joining the NAFTA. This story represents a simple and persuasive argument in favour of Canadian participation in the NAFTA. However, as most of the authors telling it recognize, it is not the whole story. The NAFTA is much more than the expansion of the Canada-US Free Trade Area to include Mexico. The negotiation of the NAFTA has involved a recasting of the Canada-US Free Trade Agreement (FTA) in a number of important