Free trade divide, 25 years after deal
Economists split on whether agreement with U.S. was good for Canada
Twenty-five years after Canada and the United States first signed the preliminary agreement that would eventually lead to the landmark Free Trade Agreement, the debate rages on over whether it was a good move.
Not unlike the impassioned 1988 federal election that gripped and divided the country, opinions differ over whether Canada has benefited from the trade policy.
Bank of Montreal economist Douglas Porter says it was one of the critical ingredients in helping to modernize the Canadian economy, and played a significant role “in transforming Canada from a relative underachiever among industrial world economies to a relative overachiever.”
Others like Bruce Campbell, executive director of the Canadian Centre for Policy Alternatives, believe it depends on where you stand on the economic food chain.
“I think from the perspective of the proponents, both in Parliament and outside, specifically, big business they have certainly done fairly well,” said Campbell, who worked on Parliament Hill for the NDP when the original deal was inked.
“Look at profits in relation to labour income, or incomes at the top,” Campbell said, adding the energy sector, especially the oil industry, has benefitted.
However, he pointed to economic indicators including a levelling off of exports to the U.S. as well as a continuing productivity gap in Canada, relative to the U.S. as evidence the deal has not accomplished one of its primary goals.
Campbell points out that Canada’s exports as share of GDP have fallen despite an initial jump after the agreement went into effect.
According to a BMO Capital Markets report, authored by Porter, exports to the U.S. as a share of Canadian nominal GDP stood at about17 per cent before the agreement, but surged to 33 per cent in 2000, before tumbling back down to below 18 per cent in 2009. They now stand at just a little above 19 per cent.
“It’s hard to see what the great trade benefit was,” said Campbell.
Porter attributes the drop to other factors including the rising Canadian dollar, which jumped 75 per cent in value from 2002 to late 2007, the tech bubble bursting, the global financial crisis, and the subsequent deep recession in the U.S.
He concedes that there’s no way of knowing how Canada would have fared without the free trade agreement, but he suspects “we would have seen an even bigger hit on some of these fronts, from all the shocks that hit the U.S. economy in the last 10 years.”
He believes the U.S. economy will come back, and when it does, Canada will be ideally positioned.
Porter points out that Canada’s inflation rate has steadily remained lower than the U.S., which helped to lower the cost of goods for consumers.
“The FTA was neither the cure-all nor the great threat that either side tried to portray it as back in the 1980s,” Porter said.
“I would say on balance, it has worked out relatively well, and it did lead to many other reforms in the economy in the ensuing years to have put Canada in a relatively good position.”
Robert Wolfe, a professor at the Queen’s School of Policy Studies, said it is difficult to measure whether the free trade deal was good for Canada
“Economics as a profession cannot prove to you the consequences of any policy.” ROBERT WOLFE QUEEN’S UNIVERSITY
“There is no consensus and there can’t be one. Economics as a profession cannot prove to you the consequences of any policy. They can’t do it, and particularly not on a trade policy,” he said. Add to that, significant changes in the global economy over the past 25 years, including the rise of China, as well as changes in how goods are manufactured — where many parts of an item are made all over the world, such as the iPhone 5. However, Wolfe said if Canada did not have access to the U.S. market as the global economy changed, it would be facing stiffer competition in the U.S. market. Joe Martin, director of Canadian business history at the University of Toronto’s Rotman School of Management, believes the agreement was good for Canada. “The world we’re going into, and more so every year, every decade, is that you’ve got to be global. Or somebody is going to come eat your lunch from a country you’ve never heard of,” he said. Canada has signed other trade pacts with other countries as a result, and has been working on deals with the European Union and possibly China. “The American market was great, but we have to diversify,” Martin said. “It’s an evolutionary process.”