Tenth Anniversary of the FTA is an Occasion to Celebrate

“The most immediate effect of free trade has been the accelerated de-industrialization of Canada...”
—Peter C. Newman,
(Maclean’s, October 23, 1989)

Can you see and hear the rapid de-industrialization of Canada? Do you hear a giant sucking sound of jobs and investment moving from Canada to the US and to Mexico, as predicted by the critics of the Free Trade Agreement (FTA) and the North American Free Trade Agreement (NAFTA)? It is an appropriate time to raise these questions since the tenth anniversary of the FTA is around the corner.

I certainly don’t hear the dismantling of Canadian industry, nor a giant sucking sound as investments and jobs disappear south. What I do hear is the clatter of high levels of economic activity. The evidence suggests that the level of trade is up, investment levels have increased sharply in Canada, and most importantly, Canada is producing thousands of jobs.

The FTA and NAFTA have helped to make Canada more attractive to investors. Increased competition from the US and Mexico has spurred Canadian firms to improve productivity. To the surprise of many free trade opponents, and in the face of high tax rates and labour market inflexibility, the Canadian economy also created 1.1 million new jobs between 1988 and 1997.

When confronted with the evidence of net job creation, the free trade critics argue that the jobs being created are mostly part-time. Is this criticism justified? The answer is a resounding no. According to Statistics Canada, 83 percent of Canadians were employed in full-time jobs in 1988. Much to the dismay of protectionists, however, by 1997, 81 percent were still employed on a full-time basis.

It is also important to point out that the share of total output in Canada attributable to manufacturing has, by and large, remained the same over the past 10 years. In fact, manufacturing’s share of GDP was 19.2 percent in 1988. By 1996, its share had declined marginally to 17.3 percent. This decline hardly suggests a decimation of Canada’s manufacturing base as predicted by the opponents of free trade.

Critics of the FTA and NAFTA also argued that there would be a diversion of investment from Canada and the US to Mexico. Indeed, some firms have relocated to Mexico. Mexico’s attractiveness as an investment location has increased because of NAFTA. However, the choice of location by firms is not only a function of labour costs, but also of labour productivity, intermediate input costs, transportation costs, and infrastructure.

When it comes to long-term investment, Canada still appears to have the edge. On an annual basis, direct foreign investment in Canada increased from $7.5 billion in 1988 to $8.7 billion in 1996. Annual portfolio investment in Canada grew from $13.7 billion in 1988 to $27.3 billion in 1996.

Contrary to the critics’ claims that with the FTA and NAFTA there would be a “giant sucking” of investment down to Mexico, the level of investment in Canada is up. A higher level of investment will result in faster growing capital stock and ultimately, in higher economic growth. Hence, we can expect that free trade will continue to raise our standard of living.

The positive legacy of free trade speaks for itself. Two-way trade with the US now represents about 80 percent of Canada’s total trade, compared with 69 percent in 1988. Meanwhile, the total value of imports from the US increased from $92.2 billion to $210.8 billion between 1988 and 1997. The total value of Canada’s exports to the US has increased even more, from $105.2 billion in 1988 to $243.3 billion in 1997. The evidence suggests that FTA/NAFTA has been responsible for the rapid increase in trade flows between Canada and the US.

The success of the FTA/NAFTA is clear. An increase in trade flows, investment levels, and jobs in Canada has occurred. On this, the tenth anniversary of FTA, Canadians should rejoice. Not only have the “doom and gloom” predictions of protectionists such as Maude Barlow of the Council of Canadians not come to pass, but we are now enjoying the significant benefits of free trade in North America.

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Last Modified: Wednesday, October 20, 1999.