RBC study busts North American free trade myths

Says Canada’s ability to adapt & prosper provides key lessons to the world on how freer trade should work

Canada’s free(r) trade lessons for the world
(pdf 8 pages,143 kB): http://rbc.com/newsroom/pdf/20061106economic-FTA.pdf

TORONTO, November 6, 2006 — Showing strong economic growth, solid domestic demand, and a favourable investment climate, Canada has flourished since the implementation of free trade agreements 18 years ago, according to a new report by RBC Economics, which will be presented at the Canadian American Business Council’s North American Competitiveness Policy Forum in Toronto on November 8.

“Canada is the envy of many other nations,” said RBC Chief Economist Craig Wright. “Few countries have provided as shining an example of how to adapt and prosper in a post-freer trade world than Canada.”

According to the report, despite the fear-mongering that took place during the adoption of the 1989 Canada-U.S. Free Trade Agreement and 1994 North American Free Trade Agreement, the reality is that the Canadian economy has thrived, and the most exaggerated fears have failed to arrive.

The report, entitled “Canada’s free(r) trade lessons to the world,” addresses eight myths that were promoted at the time and have since been dispelled in economic terms. One example was the fear that production would shift south once trade barriers such as tariffs, export restraints and import quotas were removed, and that exports would disappear. In fact, the opposite has occurred. Canada’s economy has outperformed the U.S. economy 50 per cent of the time over the past 18 years, and both countries have grown their goods and services output at similar long-run rates. Exports blossomed, while the two countries’ manufacturing sectors also shared similar experiences.

The fear of a massive wave of permanent job losses with the implementation of the FTA and in the U.S. with NAFTA, is another myth the report addresses.

“While some industries have gained and others have lost, the net picture is overwhelmingly positive for both Canada and the U.S.,” said Wright. “There has been an unprecedented wave of job creation, and unemployment stands at record lows on both sides of the border. In fact, a skilled labour shortage has emerged, driving wages up for consumers and challenging business competitiveness.”

A large part of the debate at the time also centered around the removal of ownership restrictions, as it was also feared that Canada was for sale. Critics suggested that U.S. companies would swoop in and buy up their affordable counterparts or Canadian businesses would disappear, unable to compete globally. Despite the recent headline-grabbing mega deals, more foreign companies have been purchased by Canadian companies than vice versa since FTA and NAFTA. In fact, so far this decade, small and medium-sized businesses have led M&A activity in Canada to improve productivity and compete globally.

“Canada has resisted being a branch plant economy as NAFTA critics once predicted,” said Wright. “The trade agreements helped accelerate the necessary reshaping of Canada’s business landscape. As a result, we are now seeing micro, small- and medium-sized businesses mature into a more powerful growth phase, leading productivity gains in Canada.”

Canada’s full freer trade potential not yet unleashed
While Canada has experienced significant free trade success, there are still some questionable areas. Despite a strong Canadian dollar and record corporate liquidity, businesses have under-invested in machinery and equipment, lagging behind their U.S. counterparts over the long-term.

While small businesses are driving strong productivity growth, larger Canadian firms continue to slip, with only 0.5 per cent per year over the past decade. One other area of concern is direct foreign investment. Most companies around the world have engaged in more cross-border investment, but Canada has not kept pace. While there have been increases, Canada’s share of this type of investment has slipped.

“Even within Canada’s own borders, we still have not achieved free trade on goods, services, capital and labour, nor a level regulatory field across some key industries. Furthermore, while there have definitely been some irritants in specific sectors like the issues of softwood lumber and BSE, the focus in assessing the overall success of the post-FTA and NAFTA environment clearly has to be on the bigger picture,” noted Wright.

Policymakers cannot afford to be complacent
While governments deserve credit for turning Canada’s economy around and into a more orderly setting for business development, work still remains to be done. Addressing barriers to competitiveness such as high and inappropriate forms of business taxation, infrastructure deficiencies, challenges to seamless borders, and skilled labour shortages are areas that both governments and businesses need to focus on in order to continue to succeed.

“With the rise of South Asian economies and impeding political environments towards free trade, fears have begun to manifest again,” said Wright. “In the coming years, 9/11-induced security concerns and stalled policy reforms are among the biggest threats facing Canadian, U.S. and global economies.”

For a full copy of the report, please visit www.rbc.com/newsroom.

Contact Information

Jackie Braden

Manager Media Relations

Royal Bank of Canada

Contact via E-mail