Impact of NAFTA in Canada

Weighing the Effects of NAFTA in Canada

The Impact of NAFTA in Canada

History of Treaties in Canada

Finding relationships between varied intrastate and international governments and business assets is one of the most valuable things a mature democracy has on its side of development bloom. What’s moving together? What relationships help move products in and out a country? And what are the potential long term benefits and demerits of the relationship? Political scientists are always asking these questions. But how do we find out these relationship in the first place? In plenty of instances, these relationship are given the title of treaty – a formally concluded and ratified agreement between states – which gives some intuitive sense that two or more countries are related. For example, most neighbouring nation around the world organize themselves to one kind of block or another to the give and take benefit of enhancing their trading terms in cognizance of their geographical patrimony. But what if you wanted to analyse some relationships within a nation that were less obvious? One place to start is by looking into the treaties made throughout the history of each nation. Here’s an interesting one: Most historical atrocities against the minorities and less powerful have, in high degree of correlation, been hell bent on using one or another variant of treaties.

The impact of treaty making in Canada has been extensive and long standing. The first cardinal intra-national treaty was signed in the 18th century between the British Empire (the Crown) and the Aboriginal Community (First Nations in Canada), permitting the evolution of Canada as we know it. “This treaty-making process, which has evolved over more than 300 years between Aboriginal and non-Aboriginal people in Canada, has its origins in the diplomatic relationship developed between European settlers and Aboriginal people. As the two parties made economic and military alliances, Canada began to take form. These key diplomatic proceedings were the first steps in a long process that has led to today’s comprehensive claims agreements between the Crown and Aboriginal groups” – Government of Canada. Hence many treaties ensued, including: The Treaty of Albany, 1701, to resolve the colonial conflict between the British and French Era between 1534-1763; The 1713 Treaty of Utrecht ceding the mainland of the Maritimes, or Acadia, to Great Britain, leaving Cape Breton Island and and Prince Edward Island as the sole French possessions in the area; The Royal Proclamation of 1763 establishing protocols for all dealings with First Nations people, among many. In 1869, after nearly 200 years of control, the HBC sold the Rupert’s Land Charter to Canada. Through this transfer, Canada gained full control of all resources in what is now widely known as the Northwest Territory.

Canada History – Timeline and Animation in 5 Minutes

Brief Overview of NAFTA

The new ratification put in to North American Free Trade Agreement (NAFTA) on November 30th, 2018, between Canada, the United States and Mexico set to improve the domestic process towards the mutual benefit of the key agreement. Advances in mass production and artificial intelligence, as well as a paradigm shift in the global markets, are remaking the terms of the treaty and the terms of trade, with the NAFTA block vying to bolster their territorial trade alongside their competitive advantage against other great trading blocks. NAFTA became effective on January 1st, 1994, in Canada, United State and Mexico to forms the world’s largest free-trade zone, that brings together approximately 365 million consumers in the three member countries. By and large, the treaty is a pact that calls for the gradual removal of tariffs and other trade barriers on most of the good produced in North America. A tariff in its most common adaptation refers to a tax on consumption that raises the price of imported good and services. In 1995, during the Presidency of Bill Clinton, there were suggestions to include Chile in the trade-zone. However, the administration was unable to conclude the discussion and opted to keep the agreement with the initial three members. The concept of NAFTA borrows heavily from the classic work of Adam Smith, who convincingly demonstrated in his masterpiece “The Wealth of Nations” published in 1776 that, individuals are better off if they specialize instead of trying to be economically self sufficient. Likewise, countries are better off if they exchange the services and products they are relatively good at producing for those things that other cooperating countries are relatively better at producing.

From the onset, member states were apprehensive of the new agreement.  Many feared that jobs would be lost because as NAFTA facilitated the movement of US production plants to Canada and Mexico where plants would take advantage of abundant cheaper labour and lax enforcement of environmental and workers rights. More than one environmental group also raised concerns that pollution and food safety controls would be more difficult to enforce and could even be challenged or eliminated on the ground that they were trade barriers.  In a swift response to these concerns, two supplementary agreements were added to the former treaty, one addressing environmental issues and the other labour issues. In theory, NAFTA was intended to lower barriers to trade in Mexico, United States and Canada.  The projected effect of the agreement was, and is, that the three countries involved benefit from the increased exchange of goods.  New market for goods was anticipated to result in augmented industry as well as enhanced access to cheaper goods and services.  While the net economic impact of NAFTA to the three countries may be positive, models of international trade envisage that certain segments of the economy in each country benefit from the agreement while others lose.  Its effects on Canada’s bloom have been objected. 

Section of Toronto City in Canada. Image courtesy of Trip Savvy
Section of Toronto City in Canada. Image courtesy of Trip Savvy

The Norm of the Treaty

Communities from different nations have bought and sold from each other for centuries, but rarely have they traded fairly.  Historical evidence points out that countries have different terms for goods made in other countries with those for goods made at home.  These adjustments are primarily made by changing taxes and tariffs on exported goods.  In theory, the concept of free-trade is originated when nations sign and agree to reduce or eliminate trade tariffs and quotas. In relation to NAFTA, activists from the three member countries have often times criticized free trade on the grounds that businesses are simply attempting to exploit low-wage labour.  That free trade does not, as proponents argue, directly create jobs.  The net effect of the whole process is nil. Exports create jobs while imports frequently destroy the local industry potential. Atkinson and Kollman, both distinguished economists, have written widely on the negative impacts of NAFTA on employment, largely.  They suggest that free trade does not change the composition of employment.  Instead, as trade barriers decline, workers in industries that are no longer competitive in the regional and international markets experience increased unemployment.  The losses are accompanied by increased employment in export oriented industries in which the United States enjoys a comparative advantage.  Other sympathizers of Canada’s plight argue that the primary purpose of free trade was to move Americans out of unskilled jobs to high productivity jobs such as in software and in computer production.

Besides the plain to see oversight in sketching an all inclusive agreement for the three nations, the negative impact of NAFTA on Canada’s environment, both air and water pollution, remains a rather serious problem for the opposers. While for the most part the environmental issues had the most innovative ideas, they are the most controversial aspects of NAFTA.  The environmental provisions included in the agreement itself, as well as in the Supplementary Agreement on the environment, purport NAFTA as the most environmentally conscious trade agreement ever negotiated.  As per its numerous requirements, Canada, United States and Mexico are prohibited from relaxing their environmental regulations in order to attract additional investments to their economies. But in other ways, the environmental impacts have received mixed reviews. On the one hand, the Canadian Environmental Commission created an action plan to phase out four dangerous pollutants in North America and established systems to improve the monitoring of various environmental quality measures.  On the other hand, it investigated a number of complaints, only to report the results as inconclusive.

Negative Impacts of NAFTA in Canada 

Perhaps the most conspicuous negative impact of NAFTA in Canada is the lack of a significant improvement in environmental conditions, to a large extent due to the unwillingness and inability of the three governments. Economists have often lamented that the negative impact on the environment has been scaled further by the power and rights accorded to corporations.  The so called free trade agreement gives foreign corporations the power of intolerance, attenuated by an unexpected liberalism, weakening the Canadian, Mexican and United States governments from enforcing standards on home soil. This concept is not new to the US. In 1994, the US Environmental Protection Agency (EPA) issued a rule to ensure all gasoline sold in the US met certain levels of cleanliness.  In retaliation, Brazil and Venezuela complained to the World Trade Organization that the rules would put them at a disadvantage.  The WTO ruled against the United States forcing it to change these rules, thereby weakening the air quality.

Generally speaking, the negative impacts on trade for Canada, with constantly vacillating terms of NAFTA, manifest themself in two major ways: The race to the bottom effect; and imbalance in trade. The race to the bottom results when major businesses increasingly move factories in and out of different countries.  This mobility gives the companies power to make demands on governments to lower labor and environmental standards, failure to which the companies make threats of laying off workers.  Since its passage, hundreds of US firms moved their production to Canada and Mexico, where the laws protect them and not the workers.  As far as the imbalance in trade goes, workers in Canada suffer the effects of their living standards slowly getting degraded.  The state government revealed that in five years after NAFTA went into effect, real wages adjusted for price changes fell by a considerable percentage. Likewise, according to Vogel, the rift occurs when business is protected while labor and environment are not. 

NAFTA explained by avocados. And shoes.

Negative Impacts: Economic theories perspective

A great number of models of international trade identify the winners and losers within NAFTA. The Hecksher-Ohlin-Samuelson (H-O-S) model focuses on three factors of production which can be divided into labour, land and capital. And, based on the supposition about protective barrier and factor mobility to trade, H-O-S model infers that scarce factors in Canada, relative to its trading partners, suffer falling demand for their services if trade barriers are reduced.  For example, skilled labour is relatively abundant in United States and Canada as compared to Mexico; and the inverse is true.  The economy of Canada, being highly developed, is predicted to have a comparative advantage in the supply of highly-skilled labour.  So that those with fewer skills in Canada are at a certain disadvantage.  The effect is a decline in demand for semi-skilled workers in Canada – since goods that they once produced can be imported from Mexico. Ricardo-Viner theory focuses on economic sector effects rather than factors of production.  The theory assumes that sectors are economic groupings which contain comparable or closely related industries such as agricultural sector and the finance sector.  A sector may be disadvantaged or advantaged based on the type and profusion of resources available; land, technology and labour.  This theory boldly infers that people within certain sectors will experience the same positive or negative effects, regardless of skill level.  This argument is based on the supposition that there are costs in re-deploying resources that will prevents people from freely moving across sectors and taking advantage of the market changes. NAFTA has had harmful effects on a variety of sectors across Canada, most notably, in agriculture where farmers are faced with a range of adjustment costs. This theory predicted that losses for one trading partner will results in benefits for another. The consequence was negative for vital sectors in Canada. 

The Human Capital Model postulates that nations with high skill levels are better at adjusting to changing economic circumstances like new trade policies. Their skills allow for mobility.  As a result, only that segment of the Canadian population will benefit from the free trade policies of NAFTA, because they are well positioned to take advantage of new opportunities.  Only the highly skilled workers are more secure in their jobs, for their marginal productivity is greater than that of unskilled workers.  Concomitantly, unemployment in Canada after the NAFTA rose alarmingly. The impact in Canada has often been obscured by the “boom-and-bust” cycle that drove investment, domestic consumption, and speculation in the mid to late 1990s. Between 1994 and 2000 total employment rose swiftly in the Canada, causing overall unemployment to fall to record low levels. While Canada’s trade levels did increase, and jobs were created in export industries, many more jobs were lost. Between 1989 and 1997, 870,700 export jobs were created, but during the same period 1,147,100 jobs were destroyed by imports. Consequently, Canada’s trade boom resulted in a net obliteration of 276,000 jobs.  This huge job loss transformed into a sustained countrywide rise in unemployment levels. Unemployment since the 1990s in Canada has fallen lately to around 7%, but this is still far above the 5% average unemployment rate for the entire three decades from 1950 to 1980.  Canada has also witnessed the dismantling of the United States owned branch plant sector. Hitherto, the Ontario Ministry of Labour documented 397 entire plant closures from 1989 to August 1992. The closure of these branch plants, while contributing to Canada’s rise in unemployment, is also proof of a reduction in U.S investment in Canada.

The economic impact of a (partial) NAFTA breakdown - RaboResearch
The economic impact of a (partial) NAFTA breakdown – RaboResearch

The Negative Impact of NAFTA on Trade

As it boosted a new division of labour, NAFTA also encouraged the investment pattern that fueled the division. NAFTA encouraged investment in areas where production is cheapest.  The result, Canada became a much less desirable place to invest. Canada is a high tax, wage and regulatory cost jurisdiction making it a less attractive production site. There is substantial empirical evidence that this new era of capital mobility has resulted in a diversion of investment away from Canada. Cheap labour in Mexico then spurred on former investors in Canada to move their investments south to Mexico – becoming the new investment lure in North America. Canada received a lesser share of total U.S. direct investment. U.S. direct investment has heaved into Mexico in the latter years exceeding the total cumulative inflow for the previous ten years. The net inflow of U.S. direct investment to Mexico in 1990 and 1991 was $US 4.7 billion, greater than the net U.S. direct investment flows into Canada during this period of $US 4.4 billion. This is offbeat considering how much smaller in size of the Mexican economy is.

NAFTA has also contributed to rising income inequality and to the declining relative wages of Canadian workers without college degree, who made up 68 % of the workforce in 2001.  The growth in Canadian trade and trade deficits has put hard downward pressure on the wages of workers without a college degree especially to those who have no formal education further than a high school degree. This group consists of most middle and low-wage workers including the 65% of the total workforce with the lowest pay.  A large and growing body of research demonstrates that increasing trade has abridged the price of import-competing products and put downward pressure on the real wages of workers engaged in producing those goods. Because Canada tends to import goods that make intensive use of skills of less-educated workers in production, it is not at all surprising to find that the increasing openness of Canada’s economy to trade has reduced the wages of less educated workers relative to other workers in U.S.

North American Free Trade Agreement

The Future of the NAFTA Treaty

The effects of growing Canadian trade and trade deficits on wages goes beyond just those workers exposed directly to foreign competition. As the trade deficit limits jobs in the manufacturing industry, the new supply of workers to the service sector largely from displaced workers not able to find manufacturing jobs depresses the wages of those already holding service jobs. The growth in import competition and capital mobility under NAFTA has also contributed to stagnant and falling wages in Canada.   The “threat effects” arises when firms threaten to close plants and move them abroad while haggling with workers over wages and working conditions. Employers credible threats to relocating plants, outsourcing portions of their operations and purchasing intermediate goods and services directly from foreign producers has had a substantial impact on workers’ bargaining power. The use of these kinds of threats is widespread according to a Wall Street Journal survey of 1993.  The report stated that one-fourth of almost 550 American corporate executives polled admitted that they were “very likely” to use “NAFTA” as a bargaining element to hold down wages.

In Canada free trade has destroyed the balance of imports and exports.  In the sense of the definition of free trade, the markets are operating without rules and this does not work between countries any more than it works within countries.  The key question therefore is, are there any cues capable of boosting economic interest and persuading people from Canada to adopt the policy standards that conflict with their objective economic situation? The answer lies in research.  Based on this post, there are research question that attracts the need for further research.  As per the HO-S model there’s need for further research to determine how the low-skilled workers in Canada should oppose NAFTA while the high-skilled workers support it.  Based on the Ricardo-Viner model, there is need for research to identify the sectors harmed by NAFTA and if they should oppose it and what support for NAFTA should come from the sectors the benefit greatly?

On November 30, 2018, Canada, the United States and Mexico signed the new Canada-United States-Mexico Agreement (CUSMA), on the margins of the G20 Leaders’ Summit in Buenos Aires. CUSMA outcomes preserve key elements of this trading relationship and incorporate new and updated provisions that seek to address 21st-century trade issues and promote opportunities for the nearly half a billion people who call North America home. Since 1994, NAFTA has generated economic growth and rising standards of living for the people of all three member countries. In 2017, total trilateral merchandise trade (the total of each country’s imports from one another) reached nearly US$1.1 trillion. Total merchandise trade between Canada and the United States has more than doubled since 1993, and has grown over nine-fold between Canada and Mexico.

Infogram of the Benefits of NAFTA