Daniel Trefler
Abstract
This paper assesses the impact of the Canada-U.S. Free Trade Agreement (FTA) on Canadian, manufacturing over the period 1988-1995. The major conclusions are as follows. (1) The Canadian tariff cuts explain about half of the employment losses over the period. Note though, that by 1998 aggregate manufacturing employment had recovered to pre-FTA levels. (2) The FTA had no impact on earnings, wages, or average weekly hours. (3) The Canadian tariff cuts probably led to a 5%-10% decline in manufacturing value added and output. Note though, that by 1998 aggregate value added and output were 25% higher than pre-FTA levels. (4) The Canadian tariff cuts led to the closure of about 10% of all Canadian manufacturing plants and increased the size of the remaining plants. (5) The Canadian tariff cuts raised productivity (value added per hour worked) by between 2% and 4% over the 1988-95 period or by 0.25%-0.50% per year. For industries subject to large tariff cuts, these numbers rise to over 1% per year. The idea that a government policy could raise productivity this much is remarkable. (6) The FTA can account for only a small fraction of the boom in exports and imports. (7) The FTA reduced industry prices by 1%-2% over the period and, for industries subject to large tariff cuts, by closer to 5%. The effects of the FFA are both positive and negative, but are smaller than one would imagine given the heat generated by the debate. Overall, the FTA restructured manufacturing in a positive fashion as high-end manufacturing expanded at the expense of protected, low-end manufacturing. Low-end manufacturing has benefitted from productivity gains as have consumers who now face lower prices.