Fifteen years of "free trade"

OTTAWA--Free trade's promises of a significant boost to productivity growth and positive restructuring of Canadian industry have been largely unrealized, according to a report released today by the Canadian Centre for Policy Alternatives.

From Leaps of Faith to Hard Landings: Fifteen Years of "Free Trade" by economist Andrew Jackson, evaluates the impacts of the Canada-U.S. Free Trade Agreement (FTA) and the North American Free Trade Agreement (NAFTA) in the context of the great "free trade debate" of the late 1980s.

According to Jackson, "it is hard to sustain the argument that workers have fully shared in the relatively modest productivity gains that some have attributed to the FTA, and hard to deny that economic integration has tended to tilt the bargaining scales against workers."

The report examines the impacts of closer economic integration on wages, income distribution, and social programs, and argues that fears of "downward harmonization" were amply justified:

• Over the last 15 years, there has been a significant increase in income inequality among working-age Canadian families caused primarily by stronger wage growth for high income earners and cuts in social transfers which have reduced the income-equalizing effects of social programs.
• The FTA and NAFTA have exerted downward pressures on wages in sectors most exposed to the threat of relocation of production or new investment to the U.S. and Mexico.
• The very sharp decline in the unionization rate in Canadian manufacturing, (and the more modest decline in the private sector) reflects the disproportionate closures of unionized plants, and the disproportionate concentration of new hiring in non-union plants.
• During the post-FTA era real wages have not kept pace with increases in productivity, and corporate profitability has increased.

"The striking fact of the matter is that getting the so-called 'fundamentals' right -- free trade, balanced budgets, low interest rates, lower corporate and personal taxes -- has failed to build a much more sophisticated industrial economy," Jackson concludes. "Leaving it all to the market has not worked, and debate over appropriate industrial and energy policies to actively shape comparative advantage should resume. This does not necessarily mean a return to pre-FTA policies, though there is a role for the state in leading the transition to a knowledge-based and environmentally sustainable economy through public investment, regulation, and subsidies."