binational Great Lakes economy, The

Chicago Fed Letter,  May 2000  by Testa, William A,  Oppedahl, David A,  Merkel, Loula S

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The Canada-U.S. Free Trade Agreement (FTA) of 1989, recast in 1994 to include Mexico, predictably strengthened the Great Lakes region's binational integration. The region, comprising Ontario in Canada and Ohio, Michigan, Indiana, Illinois, Wisconsin, and Minnesota in the U.S., has long rivaled any binational region in the world in size, economic importance, and the degree of its integration. This Chicago Fed Letter reviews the region's features and progress toward integration as a path to success in the emerging global economy.

Population and work force

Ontario comprises close to two-fifths of Canada's population. On the U.S. side, the six states of Ohio, Michigan, Indiana, Illinois, Wisconsin, and Minnesota, comprise 18% of the much larger U.S. The Great Lakes states' share of national population declined from 21.5% to 18% from 1971 to 1999. Over the same period, Ontario's share of Canada's population edged up slightly from 37.4% to 37.8%.

Immigration between Canada and the U.S. is the exception rather than the rule. Canadian and U.S. citizens do travel frequently between the countries for work and leisure, but they generally prefer to maintain their citizenship. Instead, both countries have drawn significant streams of immigrants from other countries. In 1996-97, Ontario attracted 52.9% of Canada's immigration. In the Great Lakes states, immigration has helped to offset net domestic out-migration to the southern and western U.S. However, the net flow of immigrants to other U.S. regions outpaces that to the Midwest.

One concern about immigration in the U.S. centers on fiscal losses arising from the potential deficit in taxes paid by immigrants, net of the benefits they draw from government programs. Such losses may arise owing to the skill deficiencies of many recent immigrants to the U.S. A rising trend of immigrants from Central and South America accounts for a pronounced erosion in skill levels of successive groups of immigrants. This trend also raises concerns over downward wage pressures on low-skilled U.S. workers, and perhaps adds to widening income disparities among households.1 However, new immigrants also create new patterns of spending and new income, which may not skew the existing pattern of wages at all.

In contrast, recent immigration to Canada is often seen in a favorable light. Highly skilled Asian immigrants have provided a stopgap to the alleged "brain drain" of technical workers from Canada to the U.S.2 In part, the alleged brain drain derives from a roaring U.S. economy that is short of labor, especially in high-tech sectors. Also, the economic recoveries of Canada and Ontario have been unfolding later than those of the U.S. and the Great Lakes states in the 1990s, leaving a larger pool of untapped labor in Canada.

As a result of differing degrees of labor market tightness across the region's borders, one might expect to observe greater flows of workers from Ontario to the Great Lakes states and other U.S. regions. Immigration and cross-- border work and travel barriers are breaking down while, at the same time, there is a potential imbalance between the demand for skilled workers in developed parts of the world Japan, western Europe, the U.S., and Canada-and developing countries in eastern Europe and Asia, where population and educational levels continue to climb. Of course, given the recent tendency of trade flows to favor services rather than goods (such as software development), the need for immigration and personal business travel may actually wane rather than rise. Comparative advantages in producing such high-tech services may shift to locales with an abundance of skilled labor.

Regardless of these forces, the U.S. and Canada have tried to make business travel easier. NAYrA (North American Free Trade Agreement) facilitates cross-border work for three categories of workers: 1) professionals 2) intra-- company transfers; and 3) traders and investors. More than 26,000 Canadians obtained NAFTA visas in 1996, compared with 2,600 similar arrangements ten years earlier.3 Cross-border trips by Canadians and U.S. citizens run from 80 to 90 million per year (for all purposes). Overnight person-trips increased by 29.1% from 1979 to 1995; day trips have increased by 40%.

Manufacturing bulwark

Ontario and the Great Lakes states represent the manufacturing core of their respective countries (see figure 1). Ontario accounts for about 55% of Canada's manufacturing output, while the Great Lakes states account for about 25% of U.S. manufacturing. Although their share of manufacturing output has declined over the past 30 years, these states comfortably remain the manufacturing center of the U.S. Meanwhile, Ontario has maintained its share of Canada's manufacturing output.

Industry sectors in Ontario tend to be more labor and resource intensive, whereas in the Great Lakes states they tend to be more capital and technology intensive.4 For instance, an index of employment concentration for nonelectrical machinery (an important capital-intensive industry) scores 0.60 for Ontario (only 0.47 for all of Canada) but 1.88 for the Great Lakes states in 1996.(5) Ontario's apparent deficit of capital goods production in an otherwise manufacturing powerhouse tends to be filled by exports from the Great Lakes states. Imports of machinery to Ontario from the U.S. side of the Great Lakes exceeded exports by CN $6.3 billion in 1998.