Misguided trade protectionists argue that low wages give countries like Mexico, Malaysia, the Philippines, and India an unfair competitive advantage and induce North American firms to move their facilities to these jurisdictions. If it costs $16 per hour to employ a worker in Canada, but only a dollar an hour in Mexico, free trade, the argument goes, will undermine the prosperity of rich countries like Canada.

But let’s reflect on this assertion. If low wages automatically meant low costs, the world’s poorest countries would dominate world trade. They do not, however, because different wages reflect different levels of productivity. Low wages go hand-in-hand with low productivity.

The article "Not so absolutely fabulous," in the November 4, 1995 issue of The Economist, presents evidence by Stephen Golub of the Federal Reserve Bank of San Francisco showing that in 1990, manufacturing wages in Malaysia were only 15 percent of those of the US. However, after calculating productivity differences and adjusting for purchasing power parity (taking into account differences in price levels), Golub estimates that the average productivity of a Malaysian manufacturing worker was, in fact, also roughly 15 percent that of an American manufacturing worker. Thus, the average unit labour costs were similar in both countries. Golub also showed that the average American unit labour costs were lower than those in some Third World countries. For example, the average unit labour costs in India and the Philippines were higher than those in the US. Therefore, low wages do not mean much unless they are considered in light of productivity differences between different sets of workers.

It is also important to remember that many firms base the choice of where they locate not only on nominal labour costs, but also on labour productivity, intermediate input costs, transportation costs, and infrastructure. In fact, the evidence suggests that Canada and the US continue to attract increasing levels of foreign investment even after the implementation of the North American Free Trade Agreement. Hence, it appears that Canada can certainly compete with Third World countries.