The Canada-U.S. Free Trade Agreement: an interim assessment - includes related articles

Business America, April 20, 1992 by Jeffrey Hawkins

When the comprehensive Canada-U.S. Free Trade Agreement (CFTA) was implemented Jan. 1, 1989, observers on both sides of the border anticipated that it would increase bilateral trade, encourage bilateral and foreign investment, and generate commercial cooperation in a number of domains.

In the interim, economic news in both Canada and the United States has been downbeat. Both economies slipped into recession in 1990, and the nascent recovery in the United States since the second half of 1991 has been weak. Canada has been especially hard hit, with unemployment currently above 10 percent.

However, the CFTA has been one of the truly bright spots on the economic horizon in both countries. Initial indications suggest that the agreement has lived up to its promise, and, as recovery takes hold in Canada and the United States, that its benefits will be magnified.

In the three years since the implementation of the CFTA, trends in trade, investment, and commercial cooperation have been promising. Overall trade has increased, and both partners have seen significant expansion in exports. The recession in both countries in 1990-91 slowed but did not stop export expansion in the United States and only decreased Canadian exports slightly. Investment activity was brisk in the years immediately before and after the signing of the agreement. Canadian investment in the United States has slowed recently, but U.S. and foreign investors continue to invest in Canada at a healthy rate. Commercial cooperation has brought increased access to government procurement, streamlined standards and certification processes, facilitated business travel, and provided an efficient new forum for the resolution of U.S.-Canadian disputes.

Trade

Many of the CFTA's provisions touch directly on trade. Perhaps the most important is the elimination of all tariffs on North American goods traded between the United States and Canada by 1998. When the CFTA was implemented, tariffs on some items were abolished immediately, while others are being gradually reduced over 5 to 10 years. The agreement also includes the elimination of a number of non-tariff barriers to trade, such as internal measures favoring domestic goods over imports and regulations restricting services.

Many U.S. producers are highly competitive in Canada, and the reduction and elimination of obstacles to trade, including some of the highest tariff rates in the industrialized world, has allowed American exporters to make important gains in the Canadian market. While U.S. tariff rates were on average much lower than Canadian rates prior to the agreement, elimination of tariffs has also increased Canadian price competitiveness in the United States, the largest import market in the world.

In fact, total merchandise trade flows between Canada and the United States have shown strong growth since the inception of the agreement. Total Canada-U.S. trade in 1991 was $176.2 billion, up 35 percent since 1987. Despite the recessions in both countries, trade continued to grow, with the 1991 figure up $1.1 billion from the year before.

On the U.S. side, merchandise exports to Canada totaled $85.1 billion in 1991, a gain of 42 percent over 1987 when U.S. exports to Canada came to $59.8 billion. Further, U.S. exporters have chipped away at a longstanding American trade deficit with Canada. In 1991, the U.S. trade deficit with Canada was $6.0 billion, down almost 50 percent from the 1987 figure of $11.3 billion.

The strong growth in exports to Canada since the inception of the CFTA has important ramifications for the American economy, especially job creation. According to one Department of Commerce formula, U.S. exports to Canada may have accounted for almost two million jobs in 1991. This includes 28,000 jobs created between 1990 and 1991, job growth which has softened the impact of the recession on the U.S. economy.

Canadian export performance since the signing of the CFTA has been equally solid. U.S. imports of Canadian merchandise grew from $71.1 billion in 1987 to $91.1 billion in 1991, an increase of 28 percent. In 1991, Canada saw a slight decline of about 0.3 percent in its exports to the United States over the year before, at a time when overall U.S. imports dropped by 1.7 percent. According to a Commerce Department estimate, Canadian exports to the United States may have accounted for as many as two million Canadian jobs in 1991.

Sectors in both countries which were previously subject to high tariffs have seen especially strong growth under the agreement. Indeed, of the 98 chapters of the Harmonized System of tariff classification (each chapter contains broadly related products, generally representing particular sectors) some 45 chapters showed growth in U.S. exports to Canada of 100 percent or more between 1987 and 1991. American producers and manufacturers of such diverse items as fish products, furniture, paints and dyes, soaps and polishes, chemical products, plastics, paper products, apparel items, and electric machinery have seen high Canadian tariffs come down and their exports to Canada increase.