Canada-US Free Trade Agreement Research Articles

Trade and Global Income Inequality with Frictional Labor Markets: A Lesson from the Canada–US Free Trade Agreement

This paper develops a two-country trade model with frictional labor market structures to investigate the link between increased openness to trade and cross-country income inequality. Calibrated to US–Canadian data, the model simulation results show that the Canada–US Free Trade Agreement benefited Canada, the country with relatively higher capital intensity, more due to its capacity to flexibly expand in response to an increase in product demand. The results from counterfactual experiments indicate that increased capital intensity in the US is expected to increase gains from trade in both countries while making the distribution of gains less unequal.

Were the original Canada–US Free Trade Agreement (CUSFTA) and the North American Free Trade Agreement (NAFTA) significant policy turning points? Understanding the evolution of macroeconomic policy from the pre- to the post-NAFTA era in North America

This article reviewsthe Keynesian/heterodox critique of free trade and the principle of comparative advantage, and offers some prima facie empirical evidence for North America that contradicts the basic predictions of the traditional free trade model. The evidence supports, instead, the view that trade liberalization actually promoted a perverse neo-mercantilist export-led growth (ELG) strategy that generates deflationary pressures not so much because NAFTA promoted greater international competition, but primarily because ELG relied on the macroeconomic role of the state in its implementing of restrictive fiscal and monetary policies to keep a lid on wage growth. The article argues that there is need for an alternative NAFTA that should promote the free circulation of goods, and that an institutional structure should be put in place that firmly ties each national government to an explicit full-employment commitment.

The Macroeconomic Effects of the Canada–US Free Trade Agreement on Canada: A Counterfactual Analysis

AbstractWe evaluate the macroeconomic effects of the Canada–US Free Trade Agreement (FTA) on Canada's economy using a counterfactual analysis. We exploit the dependence of GDP growth (labour productivity and unemployment, respectively) among different economic entities and construct the counterfactuals using data from countries other than Canada. We find that in the adjustment period from 1989:Q1 to 1992:Q1, Canada's economy bore the short‐run adjustment costs of the FTA with a decline of the annual real GDP by 2.56 per cent and a decline of the labour productivity by 0.62 per cent. After the adjustment period, the FTA had a positive and permanent effect of 1.86 per cent on Canada's annual real GDP growth and raised the labour productivity from 1992 to 1994 by 2.39 per cent on average. Moreover, the FTA increased Canada's annual unemployment rate by 1.81 per cent in the period 1989–94.

North America’s Energy Revolution

Mexico has a huge potential for becoming, once again, a major energ player in the years to come. Energy cooperation in North America became a reality during the negotiations of the Canada-US Free Trade Agreement (CUSFTA) in 1989. It became even stronger during Mexico's negotiations to build on CUSFTA and create the North American Free Trade Agreement (NAFTA) in 1994. Based on CUSFTA, Canada guaranteed energy supplies to the US; through NAFTA, Mexico began liberalization of cross-border energy...

A note on Canadian migration to the United States during the 1980s and 1990s

Considerable media attention had been directed towards the flow of highly talented Canadians to the United States in the 1990s. There are firm theoretical reasons, however, to believe that qualitative differences in migration began as early as the 1980s, owing to the widening distribution of earnings and the related increased returns to education in the United States relative to Canada, both of which could result in qualitative improvements in the migration flow. US immigration policy remained essentially unchanged during the 1980s, but changed markedly in the 1990s owing to the implementation of the Canada–US Free Trade Agreement (CUFTA) and its successor, the North American Free Trade Agreement (NAFTA). We use a flexible empirical approach to document these changes in immigrant quality using 1980, 1990 and 2000 US census data. Our results suggest that improvements in Canadian immigrant quality occurred during the 1990s, but these also happened earlier, casting doubt on the hypothesis of improving Canadian immigrant quality in the 1990s. Quantile regressions also show that improvement in the entry quality of immigrants was not limited to the upper tail of the earnings distribution.

Canadian and US Financial Sector Stability Differences over Long History: Is There a Unifying Explanation?

Canada and the United States are highly similar economies, as would be expected given the many common historical influences on economic policy and regulation, the shared geography and the high degree of economic interaction, amplified powerfully in recent decades by the 1989 Canada-US Free Trade Agreement. However, in the financial sector, and particularly in banking, the experience of the crisis-prone United States contrasts starkly with Canada’s stability. For each major US crisis – the Great Depression, the S&L crisis and the sub-prime mortgage debacle as well as others – different sets of micro reasons have been put forward to explain Canada’s comparative stability in the face of broadly similar shocks. This paper examines whether there is a unifying explanation for these contrasting outcomes. It identifies the tipping points early in Canada’s history that led Canada to manage banking sector problems in a cooperative arrangement between the banks and the Canadian authorities directly addressing the externalities generated by bank failures while controlling the resultant moral hazard through social networks rather than market disciplines. Importantly, the system ensured enough competition to be efficient.

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

We examine the quantitative predictions of heterogeneous firm models a la Melitz (2003) in the context of the Canada - US Free Trade Agreement (CUSFTA) of 1989. We compute predicted increases in trade flows and measured productivity across a range of standard models and compare them to the post-CUSFTA increases observed in the data. Our results point to a fundamental problem which most models we analyse face: predicted increases in measured productivity are too low by an order of magnitude relative to predicted increases in trade flows. Thus, most models are inherently incapable of simultaneously matching trade and productivity reactions to freer trade, raising doubts about the accuracy of the quantitative predictions of a large number of work-horse models in the literature. Using a multi-product firm extension of our baseline model as an example, we show that allowing for within-firm productivity increases has the potential to reconcile model predictions with the data.

A New Border?

Canada and the United States form a highly integrated economic region; indeed, since the signing of the North American Free Trade Agreement (NAFTA) in 1993, economic integration of the two countries has progressed faster than economic growth. In the 1990s scholars suggested that the primary characteristic of the Canada- US border and surrounding regions was an environment facilitating the seamless flow of goods and capital. But since 9/11, borders have hardened, and some argue that securitization has impeded trade and is now affecting all policy arenas concerned with borderlands. This article is a review of those arguments.In this article I show that since 9/11, Canada and the US have worked out a border policy that is generally harder but softer for pre-cleared goods and people. First, I give an overview of the state of cross-border relations and policies before 9/11. I then review the current status of free trade and economic integration in the context of arguments that post-9/11 policies hardened the border to suggest that Canada and the US have safeguarded and deepened their friendship since 9/11 and to make some inferences about the future of Canada-US border relations.A SEAMLESS BORDER BEFORE 9/11?Academics argued in the 1990s that the Canada-US border was increasingly transparent to trade. At the time scholars noted that for the past 25 years, the internationalization of the economy had increased the influence of market forces, and that states had increasingly been risking free trade.1The signing of NAFTA represented a turning point in North American trade relations; concurrently, states were losing the capacity to regulate effectively within national boundaries.2 Regional studies attributed this shift to economic reorganization.3 This literature assumed that the world transformation resulted from economic restructuring which, in turn, the North American free trade regime enhanced. Some argued that NAFTA leads to the development of a borderless world, as regions will be delineated only by the sharing of information and goods, rather than international borders. Kenichi Ohmae, for instance, when looking at similar policy mechanisms in Asia, suggested that the political influences of the regions in question did not match the economic influence of regional trade flows.4NAFTA AND ECONOMIC INTEGRATIONThe Canadian and US economies have become highly integrated. Since the 1990s, two-way trade between Canada and the US has more than doubled. This trade increase from US$45.6 billion in 1977 to US$818 billion (imports and exports) in 2010 - an increase of 1,800 percent - was largely the result of the signing of the Canada-US free trade agreement (FTA) in 1988 and NAFTA in 1993.5 Originally, a few Canadian manufacturing sectors, particularly primary goods and automobiles, formed a unique economic ensemble with the US. In the 1990s 81 percent of all Canadian exports were end products and semi-manufactured goods, with an additional US$42 billion worth of services.6 In 2009, total merchandise trade with Canada was down to US$429.7 billion (a 28 percent decrease from 2008), consisting of US$224.9 billion (a 33 percent decrease from 2008) in imports and US$204.7 billion (a 21.5 percent decrease from 2008) in exports. In 2009, slightly less than US$1.2 billion in goods crossed the border each day. Trade with Canada represented 16.4 percent of total US trade, with Canada purchasing 19.4 percent of US exports and supplying 14.4 percent of total US imports. Also in 2009, the US supplied 51.1 percent of Canada's imports of goods and purchased 75 percent of Canada's merchandise exports.7Trade between the US and Canada expanded rapidly following the signing of the FTA in 1988. The goal of NAFTA, which came into force on 1 January 1994, was to expand trade and investment among Canada, Mexico, and the US. NAFTA did not modify the implementation of the 1988 FTA. It organized the phasing out of tariffand non-tariff barriers on originating goods. …

The Scope and Limits of a Public–Private Hybrid: Dispute Settlement under NAFTA Chapter 19

Globalisation is often depicted as having led to an increase in private authority at the expense of that of the state. It is important to correctly specify the scope that private authority has achieved and the capacity of states to push back and limit that authority. This article grounds these theoretical issues in a discussion of the hybrid, public–private dispute settlement mechanism set up in the original Canada–US Free Trade Agreement (CUSTFA), and later extended into Chapter 19 of the North American Free Trade Agreement (NAFTA). It finds that privatising the enforcement process did make a difference. Trade experts on panels saw things differently to judges and in ways that were more sympathetic to exporters. This favoured Canadian and Mexican interests. However, the arrangement lacked deep roots. It was a late-stage compromise in trade negotiations. This rendered it vulnerable to a US counterattack once panels began to rule in favour of Canadian and Mexican challenges to US trade determinations. The transfer of quasi-judicial authority to a public–private hybrid proved contingent, partly on the hegemonic state's ongoing level of comfort with the arrangement, as well as on a lack of business consensus within the United States.

Wine industry developments in the Pacific Northwest: a comparative analysis of British Columbia, Washington State, and Oregon

The grape and wine industries in the Pacific Northwest have evolved in quite different ways. The expansion of the wine industry in British Columbia has been driven by increased competition resulting from the enactment of the Canada–US Free Trade Agreement in the late 1980s. In contrast, the grape and wine industries of Washington State and Oregon have expanded in response to global market trends in consumers changing life styles and wine preferences. In this paper, we explore the changing production and export trends of the Pacific Northwest wine industries over the last decade and analyze how these trends have been influenced by government regulations, business organizations, and export promotion programs.

The Conspiracy that Never was

Few events have imparted more obvious lesson to future generations than loyalty of 1891. For century it served as cautionary tale of what became of politicians foolhardy enough to pursue free trade with United States. Wilfrid Laurier's Liberals campaigned on bold new platform of unrestricted reciprocity, while Sir John A. Macdonald's Conservatives stood their national policy which, since 1879, had protected domestic industry applying high tariffs against foreign imports. Macdonald successfully framed campaign as struggle for survival of Canada, accusing Liberals of veiled treason and wrapping himself patriotically in Union Jack. A British subject I was bom, Sir John A. declared. A British subject I will die.1 It was last refuge of scoundrel, but it worked. The British connection triumphed, Tories won election, and when Macdonald passed away three months later, legend was born that he had literally died saving country from annexation to United States.It seemed clear enough at time that Canadians would never vote for free trade, and lesson learned in 1891 was reinforced election of 1911, when Liberals - this time governing party - again proposed unrestricted reciprocity, and again went down to defeat. Not for three quarters of century would issue be raised again in federal election, even as Canada and United States steadily grew closer economically. When old battle was finally fought again in election of 1988, Brian Mulrone/s Progressive Conservatives earned mandate to implement historic Canada-US free trade agreement. Today, issue has been definitively settled, and gone is time when a British subject I will die was meaningful rallying cry for Canadians. This being case, does election of 1891 have any lessons of history left to teach us?The answer is yes, but not for reasons one might expect. First, close inspection of campaign reveals that Canadians ofthat era were not quite so pro-British and anti- American as its outcome suggests. Almost half of voters backed free trade, and many were motivated continentalist brand of nationalism that maintained that Canadians could compete successfully against Americans under free trade without compromising their economic or political independence. Second, for all apocalyptic talk of Canada being sold out to United States - recurring theme in Canadian- American relations to be sure - preponderance of historical evidence suggests that despite some indiscretions and foolishness on part ofa few of Liberals, intentions of party were no less patriotic than those of Conservatives. Finally, contrary to impression created Macdonald, there never was sinister American conspiracy to acquire Canada, by force, fraud, or both in late 19th century.2 In fact US diplomacy was quite proper in its handling of Canadian question in 1891, showing patience and restraint even in face of ugly anti-American rhetoric from Macdonald government.THE CONFIDENT CONTINENTALISTSTo understand true extent of anti-American sentiment in Canada during election of 1891, it is first necessary to get past iconic Tory propaganda that produced most enduring images from campaign. There is the old flag, old policy, older leader poster, an unabashed appeal to British-Canadian sentiment, which depicts flag-waving Sir John A. perched on shoulders of his supporters. There is cartoon that shows Laurier and Sir Richard Cartwright (Laurier's English-Canadian lieutenant) begging on their knees for free trade from their American masters, and another that imagines Cartwright as slave trader, selling bound Miss Canada to devilish Uncle Sam.3 Macdonald's accusation that dark American conspiracy to annex Canada was afoot and his great ringing phrases - veiled treason and a British subject I will die - are better remembered than anything that Liberals uttered during campaign. …

Trade policymaking in the real world: Elites' conflicting worldviews and North American integration

ABSTRACT Research on trade policymaking often fails to recognize important disagreements between economists, on the one hand, and economic and political elites, on the other. As a consequence, many studies overstate the prevalence of economists' neoclassical trade theory among businesspeople and politicians, and its intellectual influence on the practice of trade negotiations and policymaking. While economists, politicians, and businesspeople often do support the same (neoliberal) agreements and policies, the worldviews motivating and embodied in their endorsements are consistently different. Economists' formalized neoclassical theory fully endorses international market liberalism, primarily on the basis of expected benefits for consumers, and substantially de-emphasizes conflicts of interest across nations. Businesspeople's and politicians' more informal and practical support for ‘free trade’ agreements primarily values them for their benefits to producers, and frequently evokes visions of win–lose competition among nations. Empirically, I defend these arguments using qualitative data from a comparative-historical study of the formation of the 1989 Canada–US Free Trade Agreement and the 1994 North American Free Trade Agreement.

CUSFTA effects: A joint consideration of trade and multinational activities

This paper estimates the effects of the Canada–US Free Trade Agreement (CUSFTA) on trade, sales of foreign affiliates of multinational enterprises, and total bilateral commerce (aggregate of both trade ands sales of foreign affiliates) in the manufacturing sector. The empirical investigation is carried out over a panel dataset covering the US bilateral transactions with the Organization for Economic Cooperation and Development (OECD) countries for the period 1983–1998. The empirical specification is guided by a gravity-based model that accounts for trade and the operation of foreign affiliates as alternative modes of accessing foreign markets. The results show that the CUSFTA induced an increase in inward and outward trade between the US and Canada, but also led to a significant reduction in sales of their foreign affiliates in the corresponding CUSFTA partner country. This outcome implies that the trade-generating effect of the CUSFTA is overstated.

Review: The World in Canada

THE WORLD IN CANADA Diaspora, Demography, and Domestic Politics David Carment and David Bercuson, editors Montreal & Kingston: McGill-Queen's University Press, 2008. 256pp, $29.95 paper (ISBN 978-0-7735-3297-7)As the co-editors, David Carment and David Bercuson, suggest in their introduction, the purpose of this book is to survey the recent changes in Canada's ethnic mosaic and assess the impacts of those changes on foreign policy (4). In the chapters that follow, the focus appears to be on recent immigrant communities and the Quebecois, while older minority communities such as First Nations and Ukrainians are missed out. They admit to an assumption of linkage politics, the notion that a porous domestic-international divide ensures that foreign policy elites must to some extent adapt their goals to reflect their constituents' opinions (5). Long-term demographic change within at the very least constrains future foreign policy goals.The first chapter immediately confounds the reader. Taking the Canada as small-power thesis to an extreme, Adam Chapnick argues that the question of the prime minister's on Canadian foreign policymaking is largely irrelevant because the office's occupants have rarely had a measureable impact on international affairs (16). He supports this extreme position with dubious claims, for instance by arguing that the Canada-US free trade agreement lacks significance for anyone in the long run. Regardless of the veracity of his revisionist thesis, the reader must ask how this piece is relevant to the rest of the collection. Indeed the basic claim that Canadian policy is insignificant threatens to undercut the whole purpose of the book.A better introduction to the collection is the second chapter, Elizabeth Riddell-Dixon's overview of immigration to and its on Canadian foreign After a brief description of the major immigration trends, she surveys the foreign policy interests of recent immigrant communities, including attitudes towards a more liberal immigration and refugee policy and ties to home countries. She also assesses their potential for influence through the electoral process and NGOs.In the first half of chapter 3, Andrew Harrington, Stewart Prest, and Per Unheim present interesting case studies of the criminal connections between Jamaica and Haiti and their respective diasporas in Toronto and Montreal. They argue that criminal deportation and illegal immigration have fostered a transnational conduit between and the Caribbean for drugs and criminal gangs. This study is the most information-intensive in the collection (as its large number of footnotes attests) and may provide readers with data they would not otherwise encounter. The authors then shift focus to show how this transnational conduit might be used to alleviate the chronic poverty and instability in the diasporas' home countries. But this approach then begs for a similar analysis of the conduit's on the Canadian state.J.L. Granatstein wants to discuss this in chapter 4, Multiculturalism and Canadian foreign policy. He poses a series of provocative questions: does a policy of multiculturalism lead inevitably to foreign policy pacifism and neutralism? What happens when dual loyalties conflict? What duties do immigrants have to their new state? How active can they remain in the politics of their state of birth (up to and including terrorism)? These are important questions and could be debated on their own moral grounds. But Granatstein reverts to the old dichotomy between national interests and values and argues that only the former should determine foreign The frailness of this bifurcation is evident in the fifth national interest he enumerates - work with like-minded states for the protection and enhancement of democracy and freedom - which is clearly value -laden (80). (Granatstein' s five national interests are very similar to my own scheme except that mine keeps the ideological one - the projection of a national identity - generic and requires no dichotomy between values and interests. …

The contradictions of regionalism in North America

AbstractStudents of regionalism almost reflexively include North America in their lists of regions in contemporary global politics. Inevitably students of regionalism point to the integrative agreements between the countries of North America: the two free trade agreements that transformed the continental economy beginning in the late 1980s – the Canada–US Free Trade Agreement that came into force on 1 January 1989, and the North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada, that came into force on 1 January 1994 – and the Secutity and Prosperity Partnership of North America (SPP), launched in March 2005. These agreements, it is implied, are just like the integrative agreements that forge the bonds of regionalism elsewhere in the world. We argue that this is a profound misreading, not only of the two free trade agreements of the late 1980s and early 1990s and the SPP mechanism of 2005, but also of the political and economic implications of those agreements. While these integrative agreements have created considerable regionalisation in North America, there has been little of the regionalism evident in other parts of the world. We examine the contradictions of North America integration in order to explain why North Americans have been so open to regionalisation but so resistant to regionalism.

Review: Uneasy Neighbo(U)RS

UNEASY NEIGHBO(U)RS Canada, the USA and the Dynamics of State, Industry and Culture David T. Jones and David Kilgour Mississauga: John Wiley & Sons Canada, 2007. 352pp. $33.99 cloth (ISBN 978-0470153062)If Canada and the United States best friends, like it or not, the Socred leader Robert Thompson once famously put it 40 or so years ago, then according to David T. Jones and David Kilgour our two countries today are certainly in a 'not' portion of the cycle the relationship moves further into the 21st century (2). Jones is a former US diplomat who served in Ottawa and who in recent years, especially through a spate of thoughtful journal articles, has established himself a well-known Canada hand. Kilgour is a former politician who served for many years a member of parliament for Alberta under both the Progressive Conservative and Liberal colours, and an independent. They have together written a broad work that addresses the state and prospects of the Canada-US relationship, compares the two countries, and describes many aspects of each country in considerable detail.These two former practitioners of the diplomatic and political arts not especially interested in getting anywhere deep into the kind of theoretical approaches that many scholars of Canada-US relations tend to love. The Canada-US relationship, they say, can simply be thought of as akin to an accordion being played: regularly moving and squeezing closer and then changing harmony by pilling back. It is also analogous to the psychologist's approach /avoidance concept in which, two bodies move closer, the forces to be overcome increase and push them back apart (2). To be sure, the success ofthe Canada-US free trade agreement, followed by the North American free trade agreement, has drawn the two countries together over the past decade or so. Yet this has been offset by disagreements over foreign policy, including the land mines treaty, the International Criminal Court, the Kyoto accord on global warming and, of course, the liberation of Iraq from Saddam Hussein. There has also been by a growing awareness of some social differences between Americans and Canadians. The result is an overall crankiness that spills over into the economic sector, especially on the Canadian side, where such disputes softwood lumber and Canadian beef exports to the US made into bigger deals than they really are. Therefore, Jones and Kilgour not expecting much change in the Canada-US relationship in the immediate future, especially not towards any steps that would deepen the trading relationship, such a common currency or a customs union. Where the Canada-US relationship is going right now, they conclude, is nowhere (305).The authors make it clear that they similarly uninterested in obsessing over any overarching theories, ranging from Michael Adams's notion of fire and ice to Seymour Martin Lipset's conceptions of individualism and collectivism, that explain differences between the essential natures of two countries. …

The geographical effects of the NAFTA on Canadian provinces

This paper investigates the effects of the North American Free Trade Agreement (NAFTA) on the Canadian provinces. A large body of research has emerged testing the effects of the Canada–US Free Trade Agreement and the NAFTA, but the majority of that research has analyzed the effect of free trade at the national scale despite the fact that different provinces have different industrial compositions and levels of integration with the US. It is found that there is a geographical component to the effect of the NAFTA, and this geographical component varies from province to province.

The Asian Economic Revolution and Canadian Trade Policy

This chapter discusses the broad orientation of Canada’s trade policy relative to two major historical phases of development based on a secure national market behind the National Policy from 1879 until the 1930s, and progressive integration with the US through Bilateral Agreements (1930s), the Auto Pact (1965), the Canada-US Free Trade Agreement (1987), and the North American Free Trade Agreement (NAFTA) (1994). Currently, Canada exports approximately 85% to the US, but imports from China account for 8% and are growing at over 20% a year. Sharply unbalanced (surplus) trade with the US is counterbalanced by unbalanced deficit trade with China. A scenario of elevated growth in Asia (principally China, India, and the Association of Southeast Asian Nations or ASEAN) poses challenges of relative disintegration from North America and growing global integration centred on Asia. Seemingly, a series of implications follow, including positioning Canada within the emerging network of regional agreements in Asia, more resource-based and Western Canada focused trade and infrastructure development, and responding to capital market integration with Asia. Broader Issues are raised including the potential adjustments facing Centre Canada as Asian imports of manufactures displace both imported manufactures for the US and domestic production.

Can Someone Please Settle This Dispute? Canadian Softwood Lumber and the Dispute Settlement Mechanisms of the NAFTA and the WTO

The long-running Canada-US softwood lumber dispute provides a useful backdrop for comparison of the dispute settlement mechanisms of the Canada-US Free Trade Agreement, the North American Free Trade Agreement, and the dispute settlement mechanisms of the World Trade Organisation because it is the only dispute to have been litigated in all three venues. By looking at a dispute in which the central arguments of the litigants have remained consistent while the venues for litigation have changed, this article aims to evaluate the utility of these mechanisms for resolving some of the world trading system's most difficult disputes and highlights several weaknesses within each that both hamper their effectiveness and suggest avenues for future change.

Trade liberalization, profitability, and financial leverage

We investigate the effects of trade liberalization on profitability and financial leverage using Canadian data arising from implementation of the Canada–US Free Trade Agreement. We find that falling domestic tariffs are associated with declining profits, especially for import-competing firms, while falling foreign tariffs are associated with increasing profits, especially for export-oriented firms. Also, import tariff reductions tend to increase leverage while export tariff reductions tend to decrease leverage.