October 24, 2017

As discussed in earlier posts, Canada and the United States have a long history of trade agreements, going back to before Canada was a unified country. In 1854, the Reciprocity Agreement between all of British North America and the United States was put into place. This agreement greatly reduced tariffs for many types of raw materials. Trade integration between the two nations accelerated in the post-war years with the advent of GATT (later the World Trade Organization) and the Canada-US Auto Pact. After the Second World War, Canada’s geographic, political, and cultural ties with the United States made economic reliance virtually inevitable. Trade integration reached a climax in 1987, when both countries agreed to enter into the Canada-United States Free Trade Agreement (officially created in 1989). Tariffs and obstacles to trade between the two countries were nearly completely eliminated. Five years later, in 1994, this agreement was superseded by the North American Free Trade Agreement (NAFTA), which extended the free-trade zone to include Mexico. NAFTA created the largest free-trade zone in history, and has helped integrate production and trade between its three nations.

Many Ontarians were critical of the Canada-U.S. Agreement and NAFTA. They feared being economically and culturally absorbed into the United States (a persistent concern in Canada since the 19th century), as well as being reliant on America’s demand. Many in the manufacturing industry also worried that business would be lost to cheaper Mexican producers. While it is true that Ontario’s manufacturing employment has dipped since the 1990s, it is not clear if this change is directly related to NAFTA. At the same time, NAFTA has reduced the cost of inputs for many Ontario manufacturers (allowing for cheaper final goods), and allowed them to reach new markets in America and Mexico. Further, North America has seen its gross domestic product double since 1994. Thus, despite criticisms, economists generally see NAFTA as a net benefit for Ontario as well as Canada, Mexico, and the United States—one that has created more efficient markets, cheaper final and primary goods, and more integrated production processes. Many Ontario producers import primary goods and supplies from NAFTA parties and sell the finished goods to consumers or companies in the NAFTA region. These transactions would be far more difficult and expensive without a free-trade agreement.

In late 2017, NAFTA will likely undergo formal renegotiations between the parties involved, and its costs and benefits will be intensely scrutinized. It will be interesting indeed to see how NAFTA—or any agreement that replaces it—will impact Ontario manufacturers in the future.