Canada and free trade, mostly with the US, has it hampered or encouraged growth in the country? RBC economics released a report on the subject and this is what they’ve concluded. Despite the fear-mongering that took place during the adoption of the 1989 Canada-U.S. Free Trade Agreement and 1994 North American Free Trade Agreement, the reality is that the Canadian economy has thrived, and the most exaggerated fears have failed to arrive.
THe RBC report entitled “Canada’s free(r) trade lessons to the world,” addresses eight myths that were promoted at the time and have since been dispelled in economic terms. One example was the fear that production would shift south once trade barriers such as tariffs, export restraints and import quotas were removed, and that exports would disappear. In fact, the opposite has occurred. Canada’s economy has outperformed the U.S. economy 50 per cent of the time over the past 18 years, and both countries have grown their goods and services output at similar long-run rates. Exports blossomed, while the two countries’ manufacturing sectors also shared similar experiences. The fear of a massive wave of permanent job losses with the implementation of the FTA and in the U.S. with NAFTA, is another myth the report addresses.
A large part of the debate at the time also centered around the removal of ownership restrictions, as it was also feared that Canada was for sale. Critics suggested that U.S. companies would swoop in and buy up their affordable counterparts or Canadian businesses would disappear, unable to compete globally. Despite the recent headline-grabbing mega deals, more foreign companies have been purchased by Canadian companies than vice versa since FTA and NAFTA. In fact, so far this decade, small and medium-sized businesses have led M&A activity in Canada to improve productivity and compete globally.
While Canada has experienced significant free trade success, there are still some questionable areas. Despite a strong Canadian dollar and record corporate liquidity, businesses have under-invested in machinery and equipment, lagging behind their U.S. counterparts over the long-term. While small businesses are driving strong productivity growth, larger Canadian firms continue to slip, with only 0.5 per cent per year over the pastï¿½ decade. One other area of concern is direct foreign investment.ï¿½ ost companies around the world have engaged in more cross-border investment, but Canada has not kept pace. While there have been increases, Canada’s share of this type of investment has slipped.
What about policy makers? While governments deserve credit for turning Canada’s economy around and into a more orderly setting for business development, work still remains to be done. Addressing barriers to competitiveness such as high and inappropriate forms of business taxation, infrastructure deficiencies, challenges to seamless borders, and skilled labour shortages are areas that both governments and businesses need to focus on in order to continue to succeed.
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