Canada-US Free Trade Agreement Research Articles

Distributional Impacts of the Canada-US Free Trade Agreement

We examine the effects of the 1988 Canada-US Free Trade Agreement (FTA) on employment and earnings inequality among low-, medium-, and high-income Canadian workers initially employed in manufacturing. Although the FTA tariff cuts drove large changes in trade flows, we find generally small effects on employment and cumulative earnings during 1989-2004. Workers faced negative effects of import competition and positive effects of access to the US export market, but these effects were largely offset by transitions into other industries and sectors. The effect on earnings inequality was small, with point estimates implying a slight reduction in earnings inequality.

Gains from trade liberalization with flexible extensive margin adjustment

We propose a sufficient statistic to measure the ex-post welfare gains from trade in CES models featuring any productivity distribution and any pattern of selection into production and exporting. This statistic is based on a single data moment, the change in the market share of continuing domestic producers, and a single structural parameter, the elasticity of substitution between products. We apply our statistic to measure Canada's gains from the Canada-US Free Trade Agreement using data on observed firm selection. We find that welfare gains can substantially deviate from welfare estimates implied by formulas that assume a constant extensive margin trade elasticity.

Binational Panel Review of Trade Remedies Determinations: Prospects for Exporting the USMCA’s Unique Procedure

The United States-Mexico-Canada Agreement (USMCA) contains a distinctive procedure under which anti-dumping and countervailing duty determinations by national agencies can be reviewed by an ad hoc binational panel established under the treaty as an alternative to domestic court review. Binational panel review was first adopted in the Canada-US Free Trade Agreement (Canada-US FTA) to respond to Canada’s concern that the administration of the US anti-dumping and countervailing duty laws by the US agencies was biased in favour of the US domestic industries and the review of agency determinations by the US courts was inadequate to address that bias. Continuing Canadian concerns, shared by Mexico, resulted in binational panel review being included in the USMCA, even though the US had sought to eliminate it. Compared to US judicial review, binational panels under the Canada-US FTA and its successor, the North American Free Trade Agreement (NAFTA), have resulted in more frequent remands of the US agency determinations often leading to lower (or even zero) duties in anti-dumping and countervailing duty cases. As well, the prospect of rigorous panel review has discouraged the filing of anti-dumping and countervailing duty cases, the commencement of anti-dumping and countervailing duty investigations, and the imposition of duties in relation to imports from Canada and Mexico. Adopting binational panel review in other treaty contexts would be most attractive where significant concerns about domestic agencies comparable to Canada’s are present and national anti-dumping and countervailing duty regimes in participating countries have similar structures and procedures for judicial review. anti-dumping, countervailing duty, trade remedies, free trade, North America, dispute settlement

Reflections on the Struggle Against the Canada-US Free Trade Agreement (TFA), 30 Years Later

The implementation of the Canada-US Free Trade Agreement (CUSFTA) in January 1989 marked a decisive moment in the rise of neoliberalism as a political project in Canada. While the left, and socialist political economists in particular, played a central role in galvanizing the agreement and contributed in no small part to the demise of the Conservative government in 1993, the free trade agenda continued to move forward through the 1990s. This Special Issue revisits the history of struggles against free trade in Canada with two aims in mind: first to remember the coalitions through which opposition was organized, the mobilization of socialist critiques by activists and intellectuals, and the key events leading up to the adoption of the agreement. Second, drawing from this history to make sense of how things have changed over the past 30 years, as right-wing nationalists have increasingly taken the lead in opposing free trade, while neoliberals have sought to rebrand their project as ‘progressive’. How can those on the left effectively confront the project of free trade today while at the same time challenging both far-right nationalism and neoliberal globalization?

Accounting for the new gains from trade liberalization

We challenge the conventional wisdom on the variety and productivity gains from trade liberalization which are commonly referred to as “new” gains from trade. In particular, we show that the import variety gains measured in studies such as Broda and Weinstein (2006) are counteracted by exactly analogous domestic variety losses. Similarly, we show that the domestic productivity gains measured in studies such as Trefler (2004) are counteracted by exactly analogous import productivity losses. We then account for all these gains and losses in an application to the Canada-US Free Trade Agreement and show that Canada actually experienced net “new” losses from trade.

Tariffs and the Composition of Employment: Evidence from the Canada–US Free Trade Agreement

I analyze the effect of the Canada–US Free Trade Agreement (CUSFTA) on the composition of employment at the local labour market level in Canada. I construct local labour-market-level changes in tariffs for both exports and imports, exploiting regional differences in pre-CUSFTA industrial composition to obtain variation in the degree to which CUSFTA affected localities across Canada. I find that Census Divisions (CDs) that experienced larger Canadian tariff cuts against US imports experienced higher rates of self-employment. CDs with larger American tariff cuts against Canadian goods correspondingly experienced lower rates of self-employment. These self-employment effects are dampened in CDs with higher initial shares of educated people, immigrants, and female workers. I do not find any evidence that part-time employment is affected by CUSFTA tariff cuts. The findings in this article provide evidence that increasing trade openness between two developed countries can affect the prevalence of self-employment.

Advancing labour mobility in trade agreements

PurposeLabour mobility is increasingly recognized as an important component of a globalized international trading system. This paper aims to examine the role of temporary entry commitments in international trade agreements toward facilitating global labour mobility.Design/methodology/approachThis paper traces three decades of temporary entry provisions in international trade agreements signed by the USA and Canada, beginning with their bilateral Canada–US Free Trade Agreement and culminating in the Trans-Pacific Partnership (TPP).FindingsThe paper finds that while many countries have continued to liberalize their temporary entry commitments in various trade agreements, the USA has reversed course in the previous decade, hampering international progress. Meanwhile, Canada has pursued ever greater labour mobility provisions with most of its trading partners.Practical implicationsThe unique roles played by the USA, Canada and other trading partners in advancing a coherent international labour mobility agenda are considered. To continue to advance labour mobility in trade agreements moving forward, policy alternatives to the “all” or “nothing” approaches pursued by Canada and the USA are suggested.Originality/valueTo the author’s knowledge, this paper is the first to formally evaluate labour mobility in the TPP and the only paper to outline the evolution of temporary entry in the US vs Canadian trade agreements over three decades.

Competition and Pay Inequality Within and Between Firms

How does market competition affect pay inequality between and within firms? Using division managers as a pool of similar workers and the Canada-US Free Trade Agreement, we find that greater competition increases overall pay inequality between, but not within, firms. This null effect within firms is not driven by lack of statistical power. Instead, we find that it predominates within subsamples of firms with higher predicted levels of social comparison. Further, increased competition leads to greater pay-performance sensitivity among the higher-paid managers within firms, while it leads to greater overpayment among the others. These last results are consistent with firm principals increasing incentive strength of their best managers, and overpaying the rest. Altogether, this study suggests that, while competition leads to greater pay inequality overall, principals aim to maintain equality within firms, and do so through the differential provision of incentives among employees.

Phase Out Tariffs, Phase in Trade?

What causes U.S. trade with Mexico and Canada to continue growing faster, for up to a decade, relative to countries with which the U.S. does not have a free trade agreement? Baier and Bergstrand (2007) suggest that tariff phase-out and delayed pass-through of tariffs into import prices could cause such prolonged differential import growth. We examine how tariff cuts negotiated under the Canada-US Free Trade Agreement and the North American Free Trade Agreement (NAFTA) affected U.S. import growth in 1989{2016 using detailed product-level data on tariff phase-out in the original treaties. We find essentially no evidence for the tariff phase-out or delayed pass through explanations. Rather, we find evidence for an important role played by NAFTA tariff cuts reducing the impacts of frictions at various extensive margins.

Tariffs and the Composition of Employment: Evidence from the Canada-U.S. Free Trade Agreement

I analyze the effect of the Canada-U.S. Free Trade Agreement (CUSFTA) on the composition of employment at the local labour market level in Canada. I construct local labour market-level changes in tariffs for both exports and imports, exploiting regional differences in pre-CUSFTA industrial composition to obtain variation in the degree to which CUSFTA affected localities across Canada. I find that Census Divisions which experienced larger Canadian tariff cuts against U.S. imports experienced higher rates of self-employment. Census Divisions with larger American tariff cuts against Canadian goods correspondingly experienced lower rates of self-employment. These self-employment effects are dampened in Census Divisions with higher initial shares of educated people, immigrants, and female workers. I do not find any evidence that part-time employment was affected by CUSFTA tariff cuts. The findings in this paper provide evidence that increasing trade openness between two developed countries can affect the prevalence of self-employment.

NAFTA Dispute Settlement Mechanisms and the Constitution

The United States, Canada, and Mexico are renegotiating the North American Free Trade Agreement (NAFTA). If the three countries do reach a new agreement, constitutional issues raised by any dispute settlement mechanisms (DSMs) deserve careful consideration. Congress’ hearings prior to approving NAFTA failed to consider serious constitutional questions, particularly about the DSMs and more generally about U.S. sovereignty. As between Canada and the U.S., the real stumbling block in the NAFTA renegotiations is not a substantive one. It concerns process and enforcement. When disagreements occur about how one country interprets or enforces the provisions of the agreement, NAFTA contains three provisions for resolving those disputes. NAFTA’s Chapters 11,19, and 20 include three distinct DSMs. The United States Trade Representative has favored changes for all three. It remains to be seen whether, in whole or in part, the NAFTA DSMs will be retained as-is, altered, or abolished. This paper contends that the constitutionality of NAFTA’s Chapter 19 binational panel system for settling antidumping and countervailing (AD/CVD) disputes should be more apparent by now than possibly it was when it was first adopted as part of the Canada-U.S. Free Trade Agreement (CUSFTA). NAFTA is not a treaty, but an executive-congressional agreement, which complicates the constitutional analysis. The paper, however, does not directly consider the constitutionality of using an executive-congressional-agreement rather than a treaty. Part I of this paper provides the background for the dispute over NAFTA’s dispute settlement processes. Next, Part II addresses the Constitutionality of Chapters 11 and 19. Finally, in Part III, the paper discusses whether NAFTA promotes the Rule of Law or only the Rule of Rules.

Free Trade Agreements and Volatility of Stock Returns and Exchange Rates: Evidence from NAFTA

This paper uses GARCH models and daily data to investigate the effect of the Canada – U.S. Free Trade Agreement (CUSFTA) and NAFTA on the volatility of, and the relationship between stock market returns and changes in bilateral exchange rates of the member countries. Empirical results indicate that the CUSFTA had a stabilizing effect on the Canadian and U.S. equity markets while increasing the volatility of the CAD/USD exchange rate. NAFTA further reduced the two stock markets’ volatility, however unlike CUSFTA, NAFTA also reduced the volatility of the CAD/USD exchange rate. Additional results indicate that during NAFTA, the Mexican stock market is more volatile than the other stock and bilateral exchange markets. Moreover, the exchange rate of the Mexican peso against both the U.S. and Canadian dollars has been more volatile than the Canadian dollar/US dollar exchange rate. Evidence also suggests that all three stock markets are positively correlated with each other with the U.S. market being much less correlated with the Canadian and Mexican stock markets than the latter two markets are correlated with each other. Evidence found in this paper suggests a negative relationship between the stock and bilateral currency markets that is statistically significant except for the U.S. equity market when paired with an exchange rate that involves the Mexican peso.

Accounting for the New Gains from Trade Liberalization

We measure the new gains from trade reaped by Canada as a result of the Canada-US Free Trade Agreement (CUSFTA). We think of the new gains from trade of a country as all welfare effects pertaining to changes in the set of firms serving that country as emphasized in the so-called new trade literature. To this end, we first develop an exact decomposition of the gains from trade which separates traditional and new gains. We then apply this decomposition using Canadian and US micro data and find that the new welfare effects of CUSFTA on Canada were negative.

Multiproduct firms and product scope adjustment in trade

A recent theoretical literature has emphasized the importance of multiproduct firms in trade. However, models within this literature have reached contradictory conclusions regarding the product-level response of firms to changes in trade costs. This paper attempts to resolve these contradictions by employing Bayesian techniques to estimate the product portfolio response throughout the distribution of US firms following the Canada–US Free Trade Agreement of 1989. I find evidence of a differential response among firms that are heterogeneous in terms of their involvement in foreign markets. Firms with less than 10–20% of total sales accounted for by foreign markets reduced product diversification as trade costs fell, while more foreign-oriented firms increased diversification.

Multiproduct Firms and Product Scope Adjustment in Trade

A recent theoretical literature has emphasized the importance of multiproduct firms in trade. However, models within this literature have reached contradictory conclusions regarding the product-level response of firms to changes in trade costs. This paper attempts to resolve these contradictions by employing Bayesian techniques to estimate the product portfolio response throughout the distribution of U.S. firms following the Canada-US Free Trade Agreement of 1989. I find evidence of a differential response among firms that are heterogeneous in terms of their involvement in foreign markets. Firms with less than 10-20 percent of total sales accounted for by foreign markets reduced product diversification as trade costs fell, while more foreign-oriented firms increased diversification.

Accounting for the New Gains from Trade Liberalization

We measure the new gains from trade reaped by Canada as a result of the Canada-US Free Trade Agreement (CUSFTA). We think of the new gains from trade of a country as all welfare effects pertaining to changes in the set of firms serving that country as emphasized in the so-called new trade literature. To this end, we first develop an exact decomposition of the gains from trade which separates traditional and new gains. We then apply this decomposition using Canadian and US micro data and find that the new welfare effects of CUSFTA on Canada were negative.

Regional Trade Agreements and Cross‐border Lobbying: Empirical Evidence from the Canada–US Free Trade Agreement Negotiations

AbstractThis paper documents participation of special interest groups in negotiations of the Canada–US Free Trade Agreement. Using data on the tariff reduction schedules mandated by the agreement, it shows that industries represented by strong lobby groups were faced with more favorable tariff reduction paths in both countries: phase‐out periods were longer at home and shorter in the partner country. This result provides evidence on the involvement of industry lobbying in negotiation of regional trade agreements and suggests that countries negotiating trade agreements are responsive to the interests of lobbying groups from across the border. Both results provide important implications for the political economy theory of trade agreements.

The effect of the Canada‐US Free Trade Agreement on Canadian multilateral trade liberalization

AbstractIn this paper show that the Canada‐US Free Trade Agreement (CUSFTA) tariff preferences have triggered a decline in Canadian external tariffs, explaining a two percentage point reduction in the average tariff between 1989 and 1998. Next, we found that industries that generate the least export rent to the US firms experienced deeper tariff cuts in Canada; this result provides evidence of cooperation in trade policies between the US and Canada. Finally, we estimate the effect of the CUSFTA on the intensity of industrial lobbying for trade policy in Canada and find no relationship between preferential trade liberalization and lobbying activity.

Tariffs, Trade and Productivity: A Quantitative Evaluation of Heterogeneous Firm Models

We examine the quantitative predictions of heterogeneous firm in the context of the Canada–US Free Trade Agreement (CUSFTA) of 1989. We compute predicted increases in trade flows and measured productivity and compare them to the post‐CUSFTA increases observed in the data. Most models predict increases in measured productivity that are too low by an order of magnitude relative to predicted increases in trade flows. A multi‐product firm extension that allows for within‐firm productivity increases has the potential to reconcile model predictions with the data.

The Permeable Border: Examining Responses to North American Integration in Video Art

In this essay, I suggest that artistic production provides valuable insights into the nature of the Canada-US border during the late-twentieth century when significant changes were occurring to dominant understandings of Canada in relation to North America. Focusing on the medium of video art, I trace the sustained engagement of Canadian contemporary artists to respond to and comment on the move towards continental integration through free trade. I contextualize my discussion in relation to trade developments that opened Canada’s border with the US, such as the 1989 implementation of the Canada-US Free Trade Agreement. This agreement, along with the later North American Free Trade Agreement, led to increasing continental integration at the end of the twentieth century, as well as hope for hemispheric integration with the subsequent negotiations towards the Free Trade Area of the Americas. With attention to works by Lisa Steele and Kim Tomczak, Eva Manly, and Clive Robertson, I foreground cultural contributions to redefining the Canada-US borderlands. Here, I chart the artists’ intention to echo narratives of the border’s porousness and address the power dynamics between the Canadian state and its trade partners. Examining themes of cultural imperialism, colonialism, and national identity, I point to the importance of cultural production in assessing the borderlands and, more broadly, histories of free trade in North America.