The Long and Short of the Canada-U.S. Free Trade Agreement

62 Pages Posted: 10 May 2001 Last revised: 31 Aug 2022

See all articles by Daniel Trefler

Daniel Trefler

University of Toronto - Rotman School of Management; National Bureau of Economic Research (NBER)

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Date Written: May 2001

Abstract

The Canada-U.S. Free Trade Agreement (FTA) provides a unique window on the effects of trade liberalization. It was an unusually clean trade policy exercise in that it was not bundled into a larger package of macroeconomic or market reforms. This paper uses the 1989-96 Canadian FTA experience to examine the short-run adjustment costs and long-run efficiency gains that flow from trade liberalization. For industries subject to large tariff cuts (these are typically low-end' manufacturing industries), the short-run costs included a 15% decline in employment and about a 10% decline in both output and the number of plants. Balanced against these large short-run adjustment costs were long-run labour productivity gains of 17% or a spectacular 1.0% per year. Although good capital stock and plant-level data are lacking, an attempt is made to identify the sources of FTA-induced labour productivity growth. Surprisingly, this growth is not due to rising output per plant, increased investment, or market share shifts to high-productivity plants. Instead, half of the 17% labour productivity growth appears due to favourable plant turnover (entry and exit) and rising technical efficiency.

Suggested Citation

Trefler, Daniel, The Long and Short of the Canada-U.S. Free Trade Agreement (May 2001). NBER Working Paper No. w8293, Available at SSRN: https://ssrn.com/abstract=269543

Daniel Trefler (Contact Author)

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