From: sitomlin@undergrad.math.waterloo.edu (Stephen I. Tomlinson)
Subject: Re: NAFTA
Organization: University of Waterloo
Date: Sat, 15 Aug 1992 17:43:44 GMT

In article <1992Aug13.214828.6067@alchemy.chem.utoronto.ca> golchowy@alchemy.chem.utoronto.ca (Gerald Olchowy) writes:
>. . . the FTA forced much of the restructuring that the US will only 
>begin to have to face with NAFTA.  . . .

We sign a Free Trade Agreement.  The country goes into recession.
And almost everyone assumes that one caused the other, even though
the evidence suggests otherwise.

People say "Free Trade" as if we now have free trade and before we didn't.  
But that isn't the case at all.  Tariffs, through both bilateral agreements 
with the U.S. and multilateral agreements (especially GATT), have been
falling steadily for more than 50 years.  The average Canadian tariff
on imports was about 17% in 1935, 13% in 1940, 10% in 1955, 8% in 1965,
6% in 1975, and 4% in 1985.  The Free Trade Agreement does not even eliminate
all of the 4% over the next 10 years since those figures include all imports,
not just imports from America.

So the evidence is quite clear: Tariffs between Canada and America 
are **not** falling significantly faster than have been for decades. 
During most of that time the standard of living of both Canadians
and Americans has increased considerably.  Some of that increased wealth
has come from specializing and trading more.

>. . . The dropping of tariff
>barriers has meant that US companies could close many of their
>branch plants in Canada, and increase by 10% or so production
>in US plants to supply the Canadian market since the FTA.

Studies by the Economic Council of Canada on the effect of freer trade
in the 1970's and 1980's on specific industries revealed that what normally
happened was not the closing of plants on either side of the border, but 
instead plants on each side specialized in particular product lines.
For example, paper producers specialized in certain paper products and 
fashion good producers specialized in certain fashion goods--much less 
adjustment than would have been necessary if we had had to reallocate 
resources entirely away from paper products to fashion goods or vice versa.  

While not all adjustment is intra-industry, all the talk about the closing
of branch plants is mostly people just seeing what they expected to see;
people are looking at the exceptions, not the rule. 

>. . . US companies, because of the FTA, rationalized,
>taking their Canadian production back home...our unemployment rate
>is 11.5% in Canada . . .  The US-Canada FTA caused much more 
>restructuring and dislocation in Canada than it did in the US.

Labour leaders point to all of the lost manufacturing jobs that they say
were lost because of the Free Trade Agreement.  It is a fact that
between 1989 and the end of 1991, the number of manufacturing jobs
fell 14% in Canada, while falling only 6% in the United States.

But the labour leaders intentionally overlook the hiring spree by
manufacturers during the mid-1980's to take advantage of a temporarily
low Canadian dollar.  In both Canada and the U.S., manufacturing
employment levels are back to where they were at the trough of the
1981-82 recession--the U.S. just didn't have the employees of a hiring
boom to get rid of.

Note that the rise in the Canadian dollar (it was 70 cents U.S. in 1986,
and was 87 cents U.S. in 1990) has had more impact on Canadian trade in 
a short period of time than the Free Trade Agreement will have on most 
industries over its entire 10-year phase-in period.  

When you have had a long period of strong growth, inflation is rising, 
and the governor of your central bank has announced a policy of reducing 
inflation, necessitating rising interest rates ostensibly to slow down 
the economy, you might just expect a recession to occur.  You don't need 
to point to slightly falling tariffs to explain the recession.  And there 
is no history of the signing of trade deals preceding recessions any more 
than would be expected by random chance.

Unemployment has risen from 7.5% in 1989 to 11.6% today.
Unemployment also rose from 7.5% in 1980 to 12.8% in 1982.  
If the Free Trade Agreement had come into effect in 1980, I'm sure people 
would have blamed it for the 1981-82 recession, and especially would have 
blamed it for all of the manufacturing jobs lost back then.

NAFTA comes into effect in 1994, and it seems likely by that time
our economies will be growing at a good clip and employment will be rising,
just like after the 1981-82 recession.  You can bet some people will
give all of the credit for that to NAFTA.  Don't believe them either.

-Stephen

Note on Sources:
1) Blomqvist, Wonnacott, Wonnacott, _Economics_, 2nd ed. 1987, p. 683.
     Contained graph showing average Canadian tariff rates (i.e. duties
     collected as a percentage of imports) over the decades.
2) Lipsey, Purvis, Steiner, _Macroeconomics_, 7th ed. 1991, p. 433.
     Reported Economic Council of Canada study on effects of falling tariffs
     on industry and contained paper/fashion-good example.
3) Jan 23/92 Financial Post, p. 14.
     Reported T.D. Bank study which argued a low Canadian dollar caused
     a temporary manufacturing hiring spree because returns on a short-term
     boost in output were very high; the low dollar allowed manufacturers to 
     increase their profits while failing to address productivity concerns.
Xref: sparky talk.politics.misc:40507 sci.environment:10737