Trade deal is a mixed bag

How much difference has the North American Free Trade Agreement made to jobs and prosperity 20 years after its implementation in 1994? Proponents are busy trying to show that it — along with the earlier Canada-U.S. free trade agreement — was transformative, delivering huge benefits and a major restructuring of the Canadian economy ready for the competitive global marketplace of the 21st century.

How much difference has the North American Free Trade Agreement made to jobs and prosperity 20 years after its implementation in 1994?

Proponents are busy trying to show that it — along with the earlier Canada-U.S. free trade agreement — was transformative, delivering huge benefits and a major restructuring of the Canadian economy ready for the competitive global marketplace of the 21st century.

Critics, meantime, are pointing to plant shutdowns, growing dependence on exports of raw materials, our widened productivity gap and the increased power of corporations to set the public agenda.

But in a report on the first 20 years of NAFTA, the Congressional Research Service in Washington finds that the overall economic impact is impossible to measure.

Trade and investment have also been affected by many other factors, such as economic growth, inflation, fluctuations in exchange rates, the 9/11 terrorist attacks and the emergence of new competitors, notably China and India.

“The agreement may have accelerated the trade liberalization that was already taking place, but many of these changes may have taken place with or without an agreement,” the report concluded.

There is much truth to this, especially in the case of Canada and the U.S. Successive rounds of multilateral tariff cuts had already established near free-trade between Canada and the U.S. by 1988. So most of the growth in Canada-U.S. trade would have taken place without NAFTA.

Likewise, a recent NAFTA analysis by Stratfor, a U.S. provider of “global intelligence,” found that “the general consensus has been that the trade deal was a mixed bag, a generally positive yet disappointing economic experiment,” adding, “that consensus may not be wrong.”

To be sure, there were some major costs to workers and communities as branch plants in Canada were closed. Canadian factories manufacturing products such as household appliances (from refrigerators to washing machines), automotive tires, electrical machinery and a range of other products were closed. In 1984, before the NAFTA, Canada supplied 20.6 per cent of U.S. imports; in 2011, it supplied 14.5 per cent.

One of the biggest impacts of NAFTA has been the decline in Canada’s automotive industry and the rise of Mexico.

In 1993, U.S. imports of Canadian vehicles and auto parts totalled US$37 billion, compared to US$11.1 billion from Mexico.

In 2011, U.S. imports of Canadian vehicles and auto parts totalled US$55 billion but US$64.4 billion from Mexico. While Canada is striving to retain a smaller automotive industry, Mexico is attracting billions of dollars in new investment.

In a report a year ago, the Conference Board of Canada noted that Canada-U.S. trade had stalled, stating that “the value of Canada’s bilateral trade with the U.S. is essentially the same today as it was in 2001.” The value of Canadian exports to all trading partners in 2011 was only 11 per cent higher than in 2001, and the increase was entirely from higher prices for raw materials, including oil.

In 2005, oil and gas displaced automotive products as Canada’s largest export to the U.S.

The big challenge that NAFTA were supposed to address but didn’t — how to upgrade Canadian innovation and productivity to ensure a future of good jobs and prosperity — remains a huge task. Canada still lacks a competitive and well-diversified economy for the 21st century, and Mexico has become a more formidable competitor than had been anticipated.

Meanwhile, the future of NAFTA itself is unclear. The proposed Trans-Pacific Partnership could lead to important changes in trade rules and market access for NAFTA members.

At the same time, the proliferation of preferential trade deals by each of the three NAFTA members with other countries has diluted the value of preferences originally negotiated in NAFTA.

However, as Stratfor contends, the major strength of North America is not NAFTA — “what lies ahead for the three countries will not be so much the result of NAFTA as NAFTA will be the result of the key geopolitical imperatives binding the three together.”

North America, it contends, is a stable and dynamic geopolitical grouping looking east and west through the world’s two major oceans, with abundant natural resources and arable lands, much capacity for innovation and possessing the economic and military power to support a promising shared future at a time when much of the world faces growing difficulties.

Building on these strengths will be the key to future prosperity, which is why Canada needs a renewed strategy for innovation and growth.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.

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