Free trade benefits Canada and the United States

The Free-Trade Agreement (FTA) and its extension to Mexico is associated with higher worker productivity, lower import prices and a slight reduction in manufacturing employment says economist Daniel Trefler.

Does free trade help developed countries? Some question whether the gains from trade that have been realised in poor and developing nations are also applicable to countries such as the United States and Canada.

In his new study, Trefler finds that the tariff concessions achieved under FTA provided significant economic benefits on both sides of the border with minimal costs:

Labour productivity, defined as the value added in production activities per hour worked by production workers, rose by a remarkable 6 percent across both nations.

The FTA lowered Canadian import prices in industries most affected by the trade agreement by 7 percent.

The FTA reduced manufacturing employment by 5 percent, which translates into about 100,000 jobs lost; the large transition costs appear borne primarily by the most heavily protected industries.

Canada incurred a disproportionate amount of the job losses; with those industries competing with imports losing about one in eight jobs. Nevertheless, Trefler says the FTA had no long-run effect on the Canadian employment rate.

Furthermore, Canadian manufacturing has remained more robust over the period of the FTA than most other developed nations. For example, between 1988 and 2002, manufacturing employment in Canada rose by 9.1 percent, but fell by 12.9 percent in the United States and by 9.7 percent in Japan.

Source: Daniel Trefler, The Long and Short of the Canada-U.S. Free Trade Agreement, American Economic Review, September 2004.

For text (subscription required) http://www.aeaweb.org/aer/contents/#4

For more on Benefits of Trade http://www.ncpa.org/iss/tra/

FMF Policy Bulletin/ 25 January 2005