Myths and Facts About NAFTA and the FTA

In the remainder of this paper, we will discuss some of the popular myths about the effects of the FTA and NAFTA on the Canadian economy advanced by opponents of free trade and Canadian nationalists. We confront each myth with both economic theory and the empirical facts and find that the objections of the opponents of free trade to NAFTA and the FTA are either exaggerated or completely incorrect. [For an excellent defence of free trade from an American perspective, see Burtless et al. 1998.] Free trade with the United States and Mexico has not resulted in the demise of the Canadian economy. Rather, it has injected a much needed dose of competition into the Canadian economy and, in so doing, has improved the prospects for growth and prosperity in all three economies.

Myth 1: The FTA and NAFTA have caused enormous job losses in Canada

This is the first, and oldest, claim of opponents to free trade. Protectionists and nationalists everywhere have always argued that free trade causes significant unemployment at home. This claim is based on the erroneous belief that there is only a fixed amount of work to be done and, if some of that work gets exported to foreigners, then there will be less work to do at home. Economic theory and the empirical evidence show that this belief is both absurd and incorrect.

Consider the matter first at a theoretical level. Economic theory does not give us any reason to believe that trade liberalization should result in a net loss of jobs. As noted earlier, when economies open up to trade, they tend to specialize in the production of goods at which they have a comparative advantage. While this certainly means that employment in those sectors in which the country does not have a comparative advantage is likely to shrink, it is also the case that opportunities for gainful employment in those sectors where the country does have a comparative advantage will probably increase. Without question, there will be job displacement. However, there will be job creation too, as the economy specializes in the production of a different mix of goods. [On this score, it is interesting to note that the sectors most liberalized by the FTA have experienced the fastest export growth. These results are detailed in Schwanen 1993.]

Furthermore, as noted earlier, specialization raises overall national income. When individuals are wealthier, they will consume more of all goods—both domestic and foreign. In so doing, more opportunities for gainful employment are created as the demand for all goods increases. What opponents of free trade fail to realize is that the purpose of trade and economic exchange is to create wealth, not to create work. We value wealth because it enables us to consume. In fact, the only reason we work is to facilitate consumption. The reason free trade is desirable is that it raises wealth and thereby enables us to consume more of all goods. If we valued free trade because it creates work, we would be getting everything backwards!

Earlier, we made the claim that trade is simply another technology for the production of goods and services. In many instances, free trade is a more efficient technology than the physical production of those goods at home. Because the purpose of all economic exchange is to facilitate consumption (and not to create work), our only concern should be about what technology enables us to consume more, and not about what technology will create the most work. If Canada were to invest heavily in greenhouses and sophisticated temperature control systems, it would be feasible for us to produce bananas domestically and doing so would certainly create a great deal of work. However, this would be a very inefficient way for us to get bananas. A far better way to produce bananas would be for us to grow trees, chop them up, and export them to Mexico in exchange for bananas. This would involve less work, and would yield us many more bananas. Since the only reason we want bananas is so we can eat them, we should use the technology which gives us the most bananas for the least amount of work. Hence, the value of free trade is that it enables us to get a given amount of bananas for less work than before.

Of course, there will not be less work. There will, in fact, be the same or possibly even more work after we implement free trade. However, the work will be of a different kind. Instead of producing bananas, we will be growing trees and harvesting them in exchange for Mexican bananas. This work will create greater value, in the sense that any given amount of work will enable us to consume more bananas than before. For precisely that reason, this new work makes us richer than before. And with this additional wealth, we can consume not only more bananas but also buy more houses and more maple syrup too. This is why we value free trade.

Now, let us confront the empirical evidence. Protectionist rhetoricians like Maude Barlow and Mel Hurtig claim that hundreds of thousands of jobs have been lost since Canada signed the FTA with the United States 10 years ago (Hurtig 1991; Barlow 1990).   [Barlow includes a "Job Loss Register" in her book (1990) that lists every job lost in the aftermath of the FTA. According to Barlow (and the Canadian Labour Congress, which compiled the list), every job lost since 1988 was a casualty of the FTA. Barlow makes the naive logical error of assuming that if one event happens after another, the first event must necessarily be the cause of the second. Specifically, Barlow writes: "Canada's job-creation record in the years from 1982 until the signing of the free-trade agreement was a good one. If the five year average preceding the signing of the agreement had continued, the economy would have created an additional 650,000 new jobs. Instead it created only 50,000" (1990: v). Hurtig is also guilty of making this logical error. See the chapter entitled "Employment and Unemployment: The Devastating Impact of the FTA on Jobs in Canada" in Hurtig 1991.] Is there any evidence of this?

First, it is almost impossible to tie any job loss directly to a trade liberalization agreement. Jobs are lost for a multitude of reasons including incompetent management, changing macroeconomic conditions (i.e. changes caused by business cycles), sectoral adjustment strategies, and so on. It is certainly the case that unemployment rose during the early 1990s. However, this probably had everything to do with a severe recession in central Canada and rather little (if anything at all) to do with the FTA.  [Hurtig laments that "jobs in the goods-creating sector of the Canadian economy had been increasing steadily since mid-1986 until the end of 1988 but beginning in January 1989, they dropped all the way back to the level of 1984" (1991: 19). The inference here is that the FTA (which came into effect in 1989) caused all these job losses. Hurtig makes no effort to explain that the period from "mid-1986 until the end of 1988" was a time of significant macroeconomic expansion and that beginning in early 1989, the Canadian economy slumped into a recession. The expansion and contraction of employment that Hurtig discusses can be easily explained by macroeconomic influences that were entirely independent of the FTA.] Employment levels are largely a macroeconomic phenomenon that depend on the level of aggregate demand in the short run and the natural rate of unemployment in the long run, with tariff rates having at most a negligible effect (Krugman 1993b).

Second, employment has not declined since the FTA and NAFTA have taken effect. Figures 1 and 2 show that total employment has been rising in both Canada and the United States since 1988. Total non-agricultural employment in Canada has risen from 12.4 million to 13.22 million from 1988 to 1996 (Statistics Canada 1998). In 1997 alone, an additional 372,000 full time jobs were created (Canada, Department of Finance 1998). Meanwhile, the American economy has produced 14 million new jobs over the past few years (US Trade Representative 1998).   [In fact, these 14 million new jobs account for 95 percent of all jobs created among the Group of Seven (G7) nations over the past five years. See US Trade Representative 1998.] Furthermore, as shown in Figure 3, unemployment rates are falling in both countries. These statistics reveal that the thesis "free trade kills jobs" has no empirical basis whatsoever and that the link between free trade and employment is tenuous at best. Job creation is up and unemployment rates are down in both Canada and the United States because general macroeconomic conditions are good in the two countries. There is no solid statistical linkage between free trade and unemployment because the effects of free trade on aggregate employment are extremely tiny. [Taking an American perspective on this issue, Krugman writes: "the whole idea of counting jobs gained and lost through trade represents a misunderstanding of the way the US economy works. In particular, it overlooks the fact that other economic policies, especially monetary policy, will almost surely neutralize any potential impact of NAFTA on jobs" (1993c).]

Myth 2: Lower wages in Mexico will encourage Canadian and American firms to relocate their plants and factories and this will drive down Canadian and American wages

Another fear about free trade that has been popularized by nationalists, by protectionists, and, often, by organized labour, is that free trade will result in an exodus of investment from Canada as firms move to Mexico and the United States to take advantage of the lower wage structure.  [In a chapter entitled "Heading South," Hurtig documents the decline in business investment that occurred following the FTA. He writes: "The decline in business investment in Canada began shortly after the FTA went into effect, and investment has dropped drastically ever since. The last annual report of the governor of the Bank of Canada has a graph of business fixed investment in Canada showing year-over-year percentage changes; for the years since the FTA legislation, this graph heads straight downhill at an angle resembling the near-vertical north face of Mount Robson" (1991: 30). Once again, Hurtig makes the classic logical error of assuming that if one event precedes another, the first event must necessarily be the cause of the second. Hurtig fails to mention that the decline in business fixed investment also coincided with the recession of the 1990s, and that business fixed investment, like employment and unemployment rates, is largely determined by macroeconomic factors that are entirely independent of the trading regime.] It is also believed that this exodus of firms will drag wage levels in Canada down to Mexican levels.

First, let us deal with this fear on a theoretical level. Is there any basis in economic theory to support this claim? Consider the following hypothetical example. Suppose workers in Canada and Mexico are perfect substitutes for each other (i.e. assume that Mexican workers and Canadian workers are identical in terms of the skills they possess and their ability to produce goods). Assume also that, prior to free trade, wages are higher in Canada than in Mexico because there are fewer Canadian workers than Mexican workers. If free trade allows firms to relocate to Mexico, then certainly the demand for labour will fall in Canada and will rise in Mexico. As firms move from high wage Canada to low wage Mexico, wages will fall in Canada and rise in Mexico. This process will continue until wages are equalized across the two countries.

But Canadian and Mexican workers are not identical, and in the absence of this assumption, there is no a priori reason to suppose that firms and jobs will migrate to Mexico. In reality, Canadian workers are more productive than Mexican workers because they work in conjunction with more capital. Hence, when firms make decisions about location, they will consider not only the direct costs of employing labour but also the cost of labour adjusted for differences in productivity. In other words, what matters to the firm is not labour costs but "unit labour costs." Wage rates in Canada are certainly higher than wage rates in Mexico but this is completely justified and should not result in the migration of firms from Canada to Mexico if Canadian workers are proportionately more productive than Mexican workers.

The view that unit labour costs and not just wage rates is what matters receives considerable empirical support. In a paper entitled "Comparative and Absolute Advantage in the Asia-Pacific Region," economist Stephen Golub (1995) demons-trates that while Malaysian wages were only 15 percent of American wages in 1990, the average Malaysian worker was only 15 percent as productive as the average American worker. In other words, unit labour costs were identical in the two countries. America is able to justify higher wages because it is proportionately more productive than Malaysia.  [Golub (1995) also finds that unit labour costs are higher in both India and the Philippines than in the United States, in spite of the fact that wage costs are significantly lower in these two countries.] Likewise, Canada should be able to afford higher wages than Mexico because Canadian workers are more productive than Mexican workers. According to the OECD (1997), Canada's unit labour costs have been lower than Mexico's from 1992 onwards. There need not be an exodus of jobs or a reduction in real wages if Canadian workers are more productive than Mexican workers.

Indeed, a quick look at the data shows that these fears are unfounded. As noted earlier, total non-agricultural employment in Canada has risen between 1988 and 1996 from 12.4 million to 13.2 million. Meanwhile, average hourly wages have also risen over the same period. Statistics Canada's index of average hourly wages (set with 1986 = 100 as the base) increased from 107.7 in 1988 to 142.1 in 1996. Average weekly earnings increased from $460.67 to $568.06 over the same time horizon (Statistics Canada 1998). The fact that both total employment and average earnings have risen over this period shows that fears about jobs migrating south and wages falling to Mexican levels are without empirical support.

Of course, this is not to say that some firms (and hence, some jobs) will not leave Canada for Mexico. Certainly firms in some sectors may find it profitable to migrate from Canada to Mexico if their unit labour costs would be lower in Mexico than in Canada. But in other sectors, it may be profitable for firms to move in the opposite direction.  [For instance, Philips, the Dutch electrical products group, recently moved two light bulb production lines from Mexico to London, Ontario.] The net result is that the mix of jobs changes in both countries but overall economic welfare rises as well. The tendency for firms to migrate to where unit labour costs are lowest improves economic efficiency in both Canada and Mexico.

Myth 3: The FTA and NAFTA will destroy Canada's manufacturing base

This sentiment is reflected in the following excerpt from an article in Maclean's (October 23, 1989) by Peter C. Newman.  [Similarly, Hurtig claims that the process of "deindustrilization" sets us "on the road to a warehouse economy." He also believes that the "Free Trade Agreement" should be renamed the "Deindustrialization of Canada Agreement" (1991: 22–23).]

Since the Free Trade Agreement came into effect . . . our industrial base has been seriously eroded . . . In nearly every sector, factories are curtailing their operations, being abandoned, moving south of the border, or being converted to mainly distribution and storage functions . . . The most immediate effect of free trade has been the accelerated de-industrialization of Canada; we've gone straight from smokestacks to warehouses . . . Canada is establishing an unheard-of precedent. We are about to become the only country in recorded history to reverse the traditional evolution from underdevelopment to a manufacturing economy."

For reasons similar to those outlined in the previous section, critics of NAFTA and FTA have argued that manufacturing firms and manufacturing jobs will be lost to the United States and Mexico. The result, so they claim, is that Canadians will somehow be made worse off.

Our first objection to this claim is to simply shrug our shoulders and ask: Who cares? Why should we care where the manufacturing companies locate, so long as we get to consume manufactured goods? If the purpose of economic exchange is to raise our wealth so we can consume as much as possible, then why should we care how that wealth is created? And why does it matter where the goods we consume come from?

Consider the following hypothetical scenario. Suppose that Mexico has a comparative advantage in the production of manufactured goods while Canada has a comparative advantage in services. If Canada and Mexico sign a free trade agreement, the manufacturing base of Mexico will expand while Canada's manufacturing base will shrink. Meanwhile, Mexico's service industry will contract while Canada's will expand. But, specialization according to comparative advantage raises real incomes in both countries and with higher real incomes both Mexican and Canadian consumers will be able to consume more manufactured goods and more services. The fact that Canada does not produce any manufactured goods at home is immaterial if the ultimate goal of Canadians is to consume as many manufactured goods as possible. Indeed, by producing only services, Canadians will be able to consume more manufactured goods than they could have if they had to produce both manufactures and services domestically. Seen from this perspective, the shrinking of Canada's manufacturing base could be a very positive development in that it would allow Canadians to purchase even more manufactured products than before.

Perhaps what raises concerns about a shrinking manufacturing base is the mistaken belief that somehow manufacturing is better than services. Why might manufacturing be "better" than services? Because manufacturing jobs are "good jobs" while service sector jobs are "bad jobs?" Or because there is something more "virtuous" about producing very tangible manufactured goods than producing less tangible services?  [Hurtig maintains that service-sector employment "offers lower wages, fewer full-time jobs, poorer benefits, and overall substantially less income than is normally received in the goods sector" (1991: 19). Barlow claims that "the rise of the service economy accounts for almost all net employment growth and is a key factor in the growing poverty of women and young people. As public services are privatized, and as the goods-producing sector of our economy declines, more and more Canadians are going to be among the service-sector working poor" (1990: 104). Hurtig and Barlow fail to realize that many service-sector jobs are in high paying and rewarding professions like engineering, computer services, and financial services. They both seem to be under the mistaken illusion that service-sector employment is equivalent to working at McDonald's.] Whatever the case, this belief is puzzling. The only reason we work is to facilitate consumption. Alternatively stated, a good job (or a "virtuous" one) is simply a job that enables us to buy all the consumption items we want; meanwhile, a "bad job" is one that does not. What exactly we do is irrelevant because when there is free trade, there need be no correlation between what we produce and what we consume. The only reason we might want a large manufacturing base would be if the production of manufactured goods enables us to consume the largest quantity of both manufactures and services possible. If it does not, then we should allow free trade to decimate the manufacturing base and move our inputs into the service sector.

It is important to note, however, that manufacturing employment and the share of total output in Canada devoted to manufacturing have remained fairly constant over the past 10 years. Figure 4 displays the share of Canada's gross domestic product (GDP) due to manufacturing over the period from 1988 to 1996. Manufacturing's share of GDP was 19.2 percent in 1988 and declined only slightly to 17.3 percent in 1996. Meanwhile, as shown in Figure 5, the share of the non-agricultural labour force employed in manufacturing industries was 17.9 percent in 1988 and 15.8 percent in 1996. These small declines hardly constitute the destruction of the manufacturing base. In fact, we would not expect Canada's manufacturing base to simply disappear as a result of NAFTA or the FTA because Canada does have a comparative advantage in the production of many manufactured goods.  [See Schwanen 1993 for more details about which sectors have done better in terms of export growth under the FTA.] The central point that needs to be made here, however, is that there would be nothing inherently bad about the export of our manufacturing sector to Mexico. If Mexico has a comparative advantage in manufactures, then Canada is wealthier if Mexico specializes in manufactures. That we do not produce manufactured goods does not mean we cannot consume them.

Myth 4: NAFTA will hurt Canadian and American agricultural interests

Another claim made by critics of free trade is that NAFTA will hurt farmers and agricultural interests in the United States and Canada.  [For instance, Barlow writes: "No single group stands to lose as much under the new regime as farm families . . . this community has been hung out to dry . . . Free trade, and this government's insistence on abandoning farmers to the play of free-market forces, may destroy farmers . . . What will take its place will be a handful of transnational giants, committed to pesticides and other harmful farming practices, and supported by cheap labour" (1990: 91).] Under NAFTA, tariffs, import quotas, and licenses on agricultural products will be gradually phased out over a 15-year period (Globerman and Walker 1993). Because the agricultural sector is politically sensitive to trade liberalization, a longer transition period was granted for certain products. Special treatment was given to sugar, frozen orange juice concentrate and peanuts for the United States and for corn, dry beans, and powdered milk in Mexico. For Canada, poultry and dairy received special treatment. However, trade will be significantly liberalized in these sectors over the course of the next few years.

To the extent that the elimination of tariffs, quotas, and licenses lowers agricultural product prices, trade liberalization does make agricultural interests worse off since they must now sell their products at a lower price than before. However, this does not constitute a reason for opposing the liberalization of agricultural goods. Although agricultural producers who previously faced protection will be made worse off, consumers gain since the prices of agricultural goods will be lower. Lower prices will increase consumption of agricultural goods and this raises economic welfare.  [The most common error made in public-policy analysis is to concentrate on highly visible, politically concentrated costs and to ignore longer term, less visible, and more diffuse benefits. In her section on the impact of the FTA on the agricultural industry in Canada, Barlow (1991, p. 91-93) laments the effects that trade liberalization will have on small-scale family farms without mentioning once the gains to consumers from lower food prices.] Hence, the removal of trade barriers to agricultural goods is a positive development because it eliminates the deadweight losses caused by artificially insulating domestic agricultural producers from the world market (Grennes 1993).

Furthermore, it is important to note that while some agricultural interests (poultry and dairy in the Canadian context) may be made worse off, others may be unaffected (or possibly even positively affected). For instance, Canada's wheat farmers are extremely competitive by international standards and are currently unprotected by tariffs or other trade barriers. Hence, wheat farmers will not be made worse off by NAFTA. Indeed, NAFTA could potentially make Canadian wheat farmers better off if Canada has a comparative advantage in wheat production relative to either the United States or Mexico. It would be misleading to suggest, however, that all agricultural producers will be made worse off as a result of NAFTA.

Agriculture continues to be one of the most heavily protected industries worldwide. Without doubt, there will be some losers as a result of trade liberalization in agricultural products. However, to resist trade liberalization simply because there will be some who are made worse off would be short-sighted for the gains to consumers in the form of lower prices and greater product selection outweigh all losses to agricultural producers.

Myth 5: NAFTA will undermine Canadian food safety and health regulations

Some critics of free trade argue that NAFTA will force Canadian governments to lower their food and health safety standards.  [Barlow, for example, quotes American agricultural analyst Mark Ritchie who believes that as a result of the FTA, "[c]onsumers will have to accept the lowest common denominator in environmental, health, and safety standards" (1990: 93).] There is, in fact, no basis whatsoever for this belief. Under NAFTA, Canada, the United States, and all sub-national jurisdictions within each country are allowed to set their own health and safety standards as high as they want provided that a scientific basis is provided and both imports and domestic producers are treated the same way. Furthermore, the supplemental agreements to NAFTA include a commitment by the United States, Canada, and Mexico to harmonize food and health regulations upwards (J.W. Anderson 1993). Hence, concerns that NAFTA will result in a downward slide in health and food safety regulations are simply unfounded. If anything, these standards are likely to move upwards rather than downwards.

Myth 6: Canada is not protected against bullies in Washington, DC, who initiate arbitrary trade actions against Canadian producers

Another complaint levied by opponents of free trade is that it will make Canadian producers vulnerable to protectionist "bullies" in Washington, DC. This view is completely wrong: the FTA and NAFTA serve to protect our producers from the arbitrary whims of policy makers and politicians in the United States. A major reason for pursuing a free trade agreement is to shield international trade from domestic political pressures. From a public-choice perspective, a binding free trade deal is desirable because it prevents politicians from using trade-policy instruments (i.e., tariffs, quotas, export or import licenses) as redistributive tools in order to appease special-interest groups. This not only improves economic efficiency but also creates a more certain trading environment since the ability of politicians to interfere in the market place has been limited.

Under the FTA and NAFTA, trade disputes among member countries are referred to an impartial panel for review. To date, this panel has adjudicated approximately 30 disputes involving reviews of American countervailing and anti- dumping actions against Canada. In many major cases—including softwood lumber, red raspberries, and frozen pork—the dispute resolution mechanism worked in Canada's favour and American countervailing measures were overturned. The ability of politicians in Congress or the White House to "bully" Canadian producers has therefore been circumscribed by the dispute resolution process. In our opinion, this is a significantly better scenario than that which would have prevailed in the absence of a binding dispute resolution process.

Myth 7: As a result of NAFTA environmental standards will deteriorate

Environmentalists and opponents of free trade often claim that, as a result of NAFTA, environmental standards will decline. A common presumption made by environmentalists and opponents of free trade is that economic growth and free trade are inimical to the environment since production and consumption necessarily result in more pollution. These claims are wrong. For one thing, NAFTA does more than any existing trade agreement to protect environmental standards. In addition, both economic theory and the empirical evidence suggest that free trade and economic growth are perhaps the best thing we can do to improve overall environmental quality. The process of economic growth and development sets into play forces on both the supply side and the demand side that work to improve overall environmental quality.

Let us start by considering NAFTA itself. NAFTA ensures each country's right to safeguard its environment. Furthermore, it encourages Mexico to strengthen its environmental codes. NAFTA's side accords create a North American Commission on the Environment that oversees the enforcement of each country's environmental laws. Any individual, business, independent organization, or government is allowed to file a complaint with the commission. If the matter is not resolved, the disagreement will be forwarded to an arbitration panel of independent experts. If the panel finds that a particular country has failed to comply with the standards agreed upon, then it will be free to impose fines. Hence, NAFTA is "environmentally friendly" in that it sets up a credible mechanism for protecting and enforcing environmental standards (Anderson 1993).

Second, let us examine at the economics of environmental quality. Economic theory suggests that environmental quality is affected by the forces both of supply and of demand. On the demand side, environmental quality is what economists would call a "normal good." A normal good (as opposed to an "inferior good") is a good that we demand more of as our incomes rise. Sports cars and caviar are normal goods since people tend to buy more of these items as they become wealthier. In a similar vein, environmental quality is a "normal good" in that we desire more of it as our incomes rise. At low levels of income, one might be willing to trade environmental quality for more money: if one is very poor, one would probably prefer to have three meals a day than to enjoy an unobstructed view of the rain forest. However, as incomes rise, individuals become less inclined to make such trades. For each additional dollar in income, one is less and less willing to give up environmental quality. Alternatively stated, as individuals become wealthier, they "demand" a better environment.

On the supply side, pollution is generally, although not always, a by-product of production. For a given type of technology, more production may indeed result in more pollution. However, if technology changes, then more production need not cause more pollution. As noted earlier, technological change is one of the driving forces behind economic growth. Improvements in technology often enable firms to substitute into cleaner production methods.  [Consider, for instance, the difference in pollution emissions resulting from a substitution of hydroelectric power generation for generation of electricity by coal-fired plants.] Thus, by enabling firms to substitute cleaner and more efficient methods of production, the process of economic growth and development works to enhance overall environmental quality.

This positive relationship between economic growth and environmental quality receives considerable empirical support. In a paper recently published in the Quarterly Journal of Economics, Princeton University economists Gene Grossman and Alan Krueger (1995) show that environmental quality, as measured by various indices, declines until income per capita reaches approximately $5,000 (1988 US dollars). Beyond this threshold, most indices of environmental quality register an improvement. Similar results were found in a study completed by economists at the World Bank (1992).  [In fact, the World Bank estimates that the threshold is at $2,500 (1988 US dollars). According to Globerman (1993), Mexican income per capita in 1991 was $2,365 (1988 US dollars).] Hence, the empirical evidence suggests that economic growth is an antidote to a poor environment. Environmentalists and opponents of free trade have got the relationship between the two variables precisely backwards!

Indeed, the empirical evidence shows that environmental quality in both Canada and the United States has improved steadily over the past two decades (DeWeil, Jones, Hayward, and Smith 1997). Air pollution due to sulphur dioxide, nitrogen dioxide, carbon monoxide, particulates, and lead has decreased substantially in both countries. Between 1975 and 1993, the ambient level of sulphur dioxide decreased by 54.5 percent in Canada and 50.3 percent in the United States. Meanwhile, ambient lead concentration fell by 96.9 percent and 97.1 percent in Canada and the United States respectively between the same years. Since 1980, overall water quality in both countries has improved. These trends show that concerns about rapid environmental degradation are misplaced.

Liberalized trade among Canada, the United States, and Mexico will raise incomes as each country specializes in the production of goods at which it has a comparative advantage. With higher incomes, consumers in each country will demand a better environment. Furthermore, economic growth in each country will stimulate the development of newer and cleaner production technologies. Openness among these countries will ensure the rapid diffusion of these technologies. Combined, these forces will work to improve overall environmental quality in each country. It is for this reason that environmental economist Terry Anderson writes that "trade liberalization . . . is the friend not the enemy of the environment" (1993: xi).

Myth 8: National sovereignty is lost as a result of NAFTA

A final myth dear to critics of free trade is that it will result in the erosion of the nation state as we know it.  [This sentiment is reflected in the following quotation from Barlow: "In its policy of free trade, and the resulting process now leading to the destruction of the Canadian social network, the Tory government has sacrificed Canada's heritage, history, and sovereignty, and is leaving a bitter legacy of unemployment, poverty, and inequality" (1990: 104).] According to critics of free trade, the signing of regional and multinational free trade and investment accords will result in a loss of national sovereignty as power is transferred from governments to international organizations and free market forces. In such a climate, they claim, the ability of governments to pursue policies in the "national interest" is significantly circumscribed and the outcome of these trends will be the "sale" of Canada to faceless multinationals, a surrender of national autonomy, and the destruction of uniquely Canadian institutions and Canadian culture.

Without a doubt, the forces of globalization make it more difficult for governments to pursue certain types of economic policies.  [For an excellent discussion of the impacts of globalization on the state, see the survey entitled "The World Economy: The Future of the State" in The Economist, September 20, 1997. See also the survey entitled "The World Economy: Who's in The Driving Seat" in The Economist, October 7, 1995.] For instance, it is a well-known fact that the ability of governments to stimulate aggregate demand using fiscal policy instruments is limited under a regime of free capital mobility and flexible exchange rates. Additionally, when capital markets are truly global, greater fiscal discipline is placed on indebted governments, who must be more fiscally responsible if they are to remain competitive in the eyes of bond holders. Finally, when procurement policies are limited by binding multilateral agreements like the Multilateral Agreement on Investment (MAI), it becomes more difficult for governments to favour domestic producers above foreign producers. These limitations certainly do represent a loss of national sovereignty.

However, two important questions need to be raised here. The first is theoretical and asks whether sovereignty is as desirable an objective as it is made out to be. Is the loss of economic sovereignty which may have resulted from globalization something to lament? In an earlier part of this paper, we noted that one of the virtues of a free trade agreement is that it prevents politicians from using trade policy to serve domestic political interests. One positive outcome of the FTA is that it makes it more difficult for American politicians to impose tariffs on Canadian goods. Likewise, the FTA hinders the ability of Canadian politicians to impose retaliatory tariffs on American goods. Since the costs of trade wars are known to be large, it may be well worth sacrificing some national sovereignty (i.e., the ability to impose tariffs to protect domestic industry) in exchange for a less politicized trading environment. Hence, the loss of national sovereignty to the forces of globalization is not unambiguously a bad thing, at least from the perspective of economic efficiency.

The second important question is empirical. Specifically, have the forces of globalization truly resulted in the "shrinking" of the state? One way to examine this issue is to look at the ratio of government spending to GDP (a rough measure of government size) over time. What one finds is that, far from decreasing, government spending as a share of total output has increased over the past century in nearly every major industrialized country. As shown in Figure 6, government's share of total output in Canada was 13.3 percent in 1920, 28.6 percent in 1960, 38.8 percent in 1980, and 44.7 percent in 1996. In the United States, the proportion of total output taken by government was 7 percent in 1920, 27 percent in 1960, 31.8 percent in 1980 and 33.3 percent in 1996. The evidence suggests, therefore, that government has continued to grow in spite of globalization. Examining the data more closely reveals that most of this increase was due to the "blossoming" of transfers and subsidies to individuals and the growth of the welfare state (Tanzi and Schuknecht 1995). Hence, the increase in free trade and international capital mobility over the past half-century has not curbed the growth of the national social welfare state.

Of course, numbers alone will not capture everything. Cultural nationalists in Canada will argue that there are more subtle forces at work and that Canada's unique national identity has been sacrificed as a result of freer international trade and increased foreign ownership. This is a hard claim to assess since it is difficult, if not impossible, to know what exactly is meant by "Canada's unique national identity." In the absence of a well-defined benchmark, we cannot assess the view that our country is any less "Canadian" today than it was 10 years ago. To make such claims without a clear definition of terms is to engage in a level of subjectivism that renders intelligent debate impossible.  [It would be rather like trying to have an intelligent argument about whether "red" is a better colour than "blue."] Moreover, implicit in such a claim is a failure to recognize that national identity is not static;  [Or perhaps it simply reflects an unwillingness on the part of cultural nationalists to recognize that national identities do change over time.] Rather, national identity is something that can and should evolve over time as circumstances change. Indeed, to presume that Canada's unique national identity will simply dissolve in the wake of globalization is both insulting and absurd for it suggests that Canadians are incapable of redefining themselves as a unique national culture in the absence of the visible hand of the state.   [For a more detailed critique, see Law and Mihlar 1996: 65–68]