North American Free Trade Agreement Economics Essay

The North American Free Trade Agreement (NAFTA) is an agreement signed by Canada, Mexico, and the United States of American that came into effect January 1st, 1994. This agreement established the world’s largest free trade region involving over 400 million people and 11 trillion dollars in annual production. [1] It established a new trading relationship based on more secure and more open access to each other’s markets. It was supposed to bring benefits to several sectors of the Canadian economy. Overall, consumers in all three countries were supposed to reap the benefits of the more efficient distribution of resources and by paying less for goods and services. NAFTA advocates that capital owners win, workers win, consumers win therefore everyone is better off living under NAFTA. Many government officials, businesses, and citizens however, have debated whether NAFTA has been beneficial to Canada. Proponents of NAFTA claim that because the agreement will increase trade throughout North America and moderate product prices, it will lead to creating new jobs in all three countries. NAFTA, while it has brought some disadvantages for Canada, as a whole it has had a positive effect. The positive effects of job creation and higher wages has been outweighed by the negative effects on the manufacturing industry specifically, the auto sector. In addition, Canada has succeeded in maintaining high labour standards and laws compare to its NAFTA partners due to Canadian legislative environment that alleviate against downward harmonization.

This paper will examine three aspects of NAFTA and its effects on Canada. First, it will look at labour and discuss the effects of NAFTA on employment and wages. Then it will examine the manufacturing industry, in particular Canada’s automotive industry. Finally, the paper will look at why Canada has been able to maintain high labour standards and laws compare to Mexico and the United States. It will conclude that any loss for Canada is outweighed by the gains.

One of the main issues by labour rights advocates was that increased trade liberalization would jeopardize the Canadian economy to compete with low-wage workers in México and the southern United States. [2] This was supposed to push investments away from Canada, especially from low-skilled industries, leading to plant closures and cutbacks resulting in job losses. It was further argued that the competitive environment would causes wages to decrease. Gunderson simulated the possible impact of NAFTA and analyzed the expected wage and employment impact of trade liberalization. His study showed that the overall impacts are likely to be positive but extremely small for both Canada and the United States, as job created associate with export expansion is slightly higher than job destruction associated with increased imports. He also found that job gains would be at the high end of the wage spectrum, while job losses, which can be significant in some sectors, would be at the lower end. [3] Opponents may argue that this is not beneficial to the economy as there are more people in Canada working in low-end jobs than there are in high-end jobs. When the low-end job workers are unable to find employment they would be forced to go on social welfare such as unemployment insurance. This would cost the government more because the government would lose a source of income due to the elimination of tariffs, less people paying income tax, and supporting the unemployed through unemployment insurance and other welfare programs. However, this is not the case because studies have shown NAFTA has had no effect on unemployment, instead since NAFTA came into effect Canada’s employment rate has increased.

In a recent study conducted by the Bank of Montreal involving 109 senior executives in Canada, it concluded that majority of the businesses have either hired more or employed the same number of people since NAFTA came into effect. In addition, most employers reported that NAFTA has not affected their labour costs and it has increased their productivity level. [4] This increase in productivity may have to do with fear of relocation to southern United States or Mexico. In Canada, 50 percent of the senior executives reported that they had hired more workers, 39 percent stated no changed in work force size, and merely 11 percent reported they had lost workers. [5] This study shows critics that NAFTA has not resulted in unemployment and companies have either hired more or employed the same number of people while increasing productivity levels.

A study conducted by Vicario, an economist with the North American Agreement on Labour Cooperation (NAALC), supports the findings of the Bank of Montreal. Using Canada Labour Force statistics, she found that the average growth rate of employment from1994-1998 remained at 1.9 percent per year, or an annual increase of 258,000 jobs. Most of these jobs were full-time, as matters of fact, in 1998, 9 out of 10 jobs created were full-time. What is more surprising is that workers salary increased by 2.6 percent between 1994 and 1997 and 0.3 percent in 1998. [6] This study goes a step further because it proves to NAFTA critics that NAFTA has helped create jobs and increased wages for the employees. It is safe to say that employers are making a larger profit because they would only increase wages if their profits increased. This research shows that NAFTA has not only created jobs but also increased company profits and employee wages.

Kumar and Holmes conducted a study in the auto industry of Canada, a sector that NAFTA critics feared would have harsh negative impact due to low-wage competition from Mexico and southern United States. Their study concluded that production level and employment in the Canadian automotive parts industry grew significantly between 1991 and 1996. They further claim that there is no evidence to suggest that NAFTA has had any negative effects on the Canadian auto industry. [7] Regardless of these positive effects, employers and unions have been pressured to reduce wages and cut jobs in the manufacturing sector. [8] This is a small price to pay because overall Canada has become a richer country since NAFTA came into effect. Overall, Canada has had a higher employment rate, higher company profits, and higher wages.

According to Canadian unions, companies would invest where there are reasonably low labour and environment standards. These investment decisions, and the threat to re-invest, would consequently force governments to lower their labour standards in order to attract new or retain existing business. [9] Although these fears are legitimate, studies have shown when investors choose a country to invest, they place the value of workforce, social, and political steadiness over labour cost. [10] They do so because high labour standard result into high levels of productivity and economic performance. Satisfied workers are an outcome of high wages and high work place standards that results in a higher quality of performance. Higher safety standards have proven to reduce costly workplace accidents and save on health care bills. Freedom of association and collective bargaining will result in better cooperation between management and workers, thereby reducing if not eliminating costly strikes and improve social stability. [11] Since Canada has a higher rate of unionization than the United States thanks to Canada’s beneficial labour laws, downward harmonization posed a serious threat to Canadian unions. [12] 

There are a number of factors that prevent downward harmonization in Canada. First, labour laws fall mainly under provincial jurisdiction and therefore, ideological forces are more influential. [13] For example, the New Democratic Government in Ontario under the leadership of Bob Rae passed several pieces of pro-labour legislation such as, prohibition on the use of replacement workers. The social democratic governments in British Columbia and Saskatchewan have also passed several labour-friendly legislations to protect the interest of workers. [14] The successful implementation of these legislations proves that NAFTA has strengthened Canadian labour standards and laws.

Secondly, labour boards and independent arbitrators have enjoyed greater autonomy in enforcing their decisions though court orders in Canada. Over time, and with relevant court decisions, a significant body of “case law” [15] has developed, and it would be tough for pressure from free trade to weaken this base. In the United States, employers often use the means of courts to oppose decisions by the National Labour Relations Board (NLRB). This however, is not a problem in Canada. [16] 

Third, unions in Canada are often more cautious and political than in the unions United States. Their constant support from left-leaning New Democratic Party governments has strengthened their agenda on the legislative process. In addition, their vigilance against free trade was in a large part responsible for public dissatisfaction of NAFTA in Canada, as shown in national polls, and making NAFTA an election issue. [17] These kinds of tactics will most likely continue to prevent anti-labour laws being passed in Canada.

According to research conducted by Gunderson, four relationships must exist for downward harmonization of labour laws and standards to occur because of trade liberalization. First, the labour laws must be implemented and actively enforced. Secondly, the laws must lead to an actual or perceived increase in labour costs to business. Third, the higher labour costs must discourage investments and influence plant location decisions. Fourth, jurisdictions must compete against each other for investments and jobs based on decreasing their costly labour laws. [18] Though it is possible for the race to the lowest common denominator, considering the inter-connectivity of these relationships and the political and institutions influence working to prevent downwards harmonization, it is highly unlikely it will ever occur in Canada.

Many critics argue that there has been a decline in Canadian social standards, such as cutbacks in employment insurance, pensions, and health insurance since NAFTA came into effect [19] However, these cuts back are probably due to fiscal problems facing governments rather than NAFTA. There is also persistent pressure on both provincial and federal governments to cut taxes that may result in less spending on social welfare programs.

Thus, the optimistic results of job creating and higher wages have outweighed the negative results on the auto sector. Canada has also been able to maintain its high labour standards and laws compare to México and the United States. Critics have argued that Canada would lose jobs due to re-location to other NAFTA partners this has not been the case as studies have shown NAFTA has not resulted in unemployment. NAFTA has shows to increase company profits, employee wages, crate jobs, and increase productivity levels. Though unions in the auto sector have been forced to reduce wages and cut jobs, it is a small price to pay for higher employment rate, higher company profits, higher wages, and the ability to retain business in Canada. Unions thought Canada would have to lower its labour standards and laws to compete with Mexico and the United States however, studies have shown when investors choose a country to invest, they rank the quality of workforce, political, and social stability above low labour cost. There are also several institutions and ideological forces in place that work against downward harmonization of labour standards. After 16 years of living under NAFTA, it is safe to assume that Canadian consumers will keep reaping up the benefits for many decades to come.