Winners and Losers in International Economic Integration: The Distributional Effects of the NAFTA

Abstract

While trade liberalization is, in theory and for the most part in practice, a win-win proposition at the national level, when one drills down to the industry level, and further to the firm and household level, it becomes evident that the distribution of costs and benefits is almost inevitably uneven. This paper addresses some of the distributional issues raised by the North American Free Trade Agreement (NAFTA), including the balance between short-run adjustment pains and long-run productivity gains and the implications for incidence of costs and benefits across generations. Focusing on Canada, it finds that, while Canada emerged from the trade liberalization experience as a stronger and more competitive economy, the hoped-for strengthening of long-run productivity growth was disappointingly small (productivity growth remains an issue in Canada today) and the adjustment period and associated distributional costs were large. The paper concludes by drawing possible lessons from the NAFTA experience for other economies entering into international integration agreements.

Keywords: F14, F15

JEL Classification: NAFTA, distributional effects, trade agreement, adjustment costs, inter-generational transfers