Free trade transformed Canada’s economy

Jan. 1, 2014, marks the 25th anniversary of the entry into force of the Canada-U.S. free-trade agreement (FTA), followed exactly five years later by that of the North American free-trade agreement (NAFTA). Together these events profoundly transformed Canada’s economy.

Canadians have since demonstrated their ability to successfully compete within the much larger, integrated continental market. In spite of severe manufacturing job losses over the past decade, Canada’s manufacturing employment has outperformed most G8 countries since the FTA came into effect.

In a quietly revolutionary reversal of history, Canadians now sell more high-value-added commercial services to the United States than they purchase from it. Open trade in services was a key pioneering goal of the FTA and NAFTA.

While resources remain the cornerstone of Canada’s economy and strong commodity prices have been a trade lifeline in the wake of the prolonged global recession, in volume terms non-resource exports have slightly outpaced resources since the onset of continental free trade. Not surprisingly, Canada’s labour productivity growth in the business sector improved markedly in the decade and a half following free trade with the United States.

Twenty-five years on, these agreements inform Canada’s contemporary approach to global markets – an approach that combines efforts to further remove obstacles to trade with the U.S. with a thrust toward deeper trade and investment ties with overseas partners.

The relative disappointment in the pace at which trade with the U.S. has advanced is partly due to events beyond our control. The most traumatic was undoubtedly the terrorist attacks of Sept. 11, 2001, on U.S. soil, which profoundly altered the trade-security nexus between Canada and the United States. The economic effect was akin to that of reimposing some of the border tariffs done away with by the trade agreements. Efforts to mitigate these impacts in the form of easier passage at the border for secure cargo and passengers and enhanced border infrastructure have been successful, but border delays still cost the Canadian economy billions annually.

The rise of lower-wage Asian economies has also altered the competitive equation as Canadians saw it at the onset of free trade. Here again, we have tried to mitigate these impacts, by improving Canadian firms’ access to these emerging markets.

Legislative and regulatory developments and old trade-dispute chestnuts have also, on occasion, cast a pall on the ease of doing business among North American economies. These have affected areas as diverse as meat, lumber, financial services and pipelines, or in general the ability of individuals to do business across borders.

We can do better at implementing our respective regulatory objectives in ways that are least harmful to trade. The joint Canada-United States Regulatory Co-operation Council – answering directly to the executive levels in both countries – is painstakingly making progress on that front. But bilateral regulatory co-operation, and triangulating between Canadian regulatory processes, those of the U.S., and those of other large partners such as the European Union and China, will be a key challenge for Canadian international competitiveness in the future.

The FTA and NAFTA themselves also contained the seeds of some disappointment. For example, NAFTA rules of origin, which determine the tariff-free status of goods across North American borders, are now among the most complex in the world, by virtue of massive simplification of trade rules elsewhere. This impedes the operation of continental value chains and hence North American competitiveness. The three NAFTA partners should renew efforts to seek to simplify rules of origin among themselves and with current and future common free trade partners such as the EU.

An unavoidable takeaway of 25 years of North American free trade, however, is that the benefits of open trade depend on what we make of the opportunities it presents. Disappointingly, Canada’s productivity jump following the entry into force of the FTA and NAFTA was a one-off event. Significant barriers to domestic productivity growth and innovation still exist, for example, in activities we continue to shelter from competition. The need for Canada’s international trade and domestic economic strategies to work in sync to enable Canadians to perform strongly on the world stage – then as now the foundation of our prosperity – has never been clearer.

This has been written by Daniel Schwanen, assistant vice-president, research, at the C.D. Howe Institute, for the 30 December 2013 edition of the Globe and Mail.