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Study of 16 years of U.S.-Canada Free Trade Agreement finds that workers were not hurt by freer trade

In a study amid current and at times heated debates over U.S.-Canada trade policy, researchers have assessed the long-term effects of the 1989 Canada-U.S. Free Trade Agreement (FTA) on the Canadian labor market using data from the mid-1980s to the start of the 2000s. They found that workers were not harmed by a dramatic increase in trade between the two countries.

The study, by researchers at Carnegie Mellon University and the University of Toronto, is in the Review of Economic Studies.

"The bilateral nature of the FTA allowed us to study the effects of both import competition and export expansion in response to a policy change," explains Brian K. Kovak, professor of economics and public policy at Carnegie Mellon's Heinz College, who coauthored the study. "Our findings have practical implications: Canadian workers are less disrupted when Canada trades with the United States than when it trades with China."

Using longitudinal administrative data from Statistics Canada from 1984 to 2004, the study examined the labor market effects of increased export expansion and import competition in Canada. Researchers compared the career trajectories of workers initially employed in industries that were subsequently subjected to different Canadian and U.S. tariff concessions legislated by the FTA.

While the study found adverse effects of Canadian tariff cuts and favorable effects of U.S. cuts on Canadian workers, both effects were small and disappeared with time as workers quickly recovered lost earnings by transitioning to other firms, industries, and sectors.

Canadian tariff reductions did not lower total years worked or cumulative earnings for workers 16 years following the FTA's enactment. Even when Canadian tariff cuts reduced employment and wages, reciprocal U.S. tariff reductions offset these negative effects of Canadian tariff cuts on average. In other words, the tariff cuts had the expected effects, but workers' adjustment to changing labor demand was relatively speedy and successful. The results suggest that the bilateral nature of the FTA was an important feature facilitating workers' transitions.

In addition, Canadian tariff cuts reduced industry employment growth largely through less hiring and not more firing, which insulated existing workers in affected industries. These findings contrast starkly with much research on the China Shock, which generated layoffs and cut incomes among both incumbent workers and new entrants.

"Our findings are relatively optimistic and run counter to those of other studies," notes Peter Morrow, associate professor of economics at the University of Toronto, who coauthored the study.

"Canadian workers left affected industries quickly and transitioned to other manufacturing industries, construction, and services, and the bilateral nature of the FTA gave import-competing workers employment options in potential alternative manufacturing industries benefiting from larger U.S. tariff cuts."