Canada-U.S. Trade: What Happens When It Gets Personal?

A primer on how we got to this state of affairs, and where it may all lead
NAFTA

The essentials

As U.S. President Donald Trump digs in his heels on trade, David Detomasi, assistant professor of international business and strategy at Smith School of Business reflects on Canada’s trading history with the United States and considers the implications of today’s tariff tensions.

How long have the U.S and Canada been negotiating around trade?

Things really started in 1964 with the first big trade integration effort between Canada and the United States, the Canada-US Auto Pact. It was a free trade agreement in the automobile industry that allowed automakers to essentially integrate their supply chains across the borders. Trade between the two countries has continued since then and there are obvious reasons why: we speak the same language, we both have similar legal systems, and the geography more or less demanded it. Canada is a small country. It’s big – but small. So, it’s vital to us to be integrated into the global economy because we just don’t have enough economic mass to sustain our living standards if we are just trading amongst ourselves.

What effect does trade have on jobs?

Empirically speaking, in terms of job losses and job gains, signing onto free trade is a wash: it creates about the same number of jobs as are lost. Even in the United States, the number of jobs losses or gains that can be attributed to free trade is actually very, very small when compared with all the other things that might have had an influence.

What tends to happen is that instead of gains or losses, you to get different types of jobs. For example, in the automobile sector, at one point you would have had hundreds of thousands of people in mid-range, semi-skilled labour jobs in Detroit and in bedroom communities in Southern Ontario. With free trade, you see more companies specializing in really specific types of things because they can’t do it all. They have to pick and choose what part of the global value chain they want to play in, and then they have to be world-class at it. What gets lost are those mid-tier manufacturing jobs. Instead, you see more specialized jobs at the top end where the rewards are higher. The problem is that if you’re a worker and you can’t play up there because you don’t have the skills, well that’s where people get stuck and can end up not doing as well.

Is that what has happened in the U.S?

Yes, that’s happened on a broad scale, but it’s not Canada’s fault. [NAFTA] has been demonstrably beneficial for Canada and the U.S. in terms of growth, economic activity, and lower prices for consumers. The U.S. economy is, on average, growing quite strongly but that growth has – and this is the social problem of trade – been enormously skewed. Those that are wealthy and skilled have done much, much better. And those in the middle have not recovered as well since the 2008 recession, which I think led to the political rise of Trump. People kept pointing to American growth, which was generally pretty strong, but these folks kept saying ‘well, we don’t feel it.’

But surely other factors like increased automation have a role to play there?

Yes, that is a massive part of what I would call the misinformation of the Trump campaign, which is to argue that the reason you lost your job or the lifestyle that you had is due solely to these unfair trade agreements that we, the U.S., have so stupidly signed, while all the other nations in the world have been benefitting from our largess, and now everyone has to pay up.

How will Canada be affected by these new tariffs the United States is imposing?

Well, for one thing, companies will be less likely to invest. This is the issue Canada has with the so called sunset clause which Trump wants in any new NAFTA agreements. Essentially, it would mean that it would have to be renegotiated every five years, which would be a death knell for investment in Canada or Mexico because nobody would want to invest with only a five-year horizon – they want access to a market for much longer than that. It’s closet protectionism, designed to get all investment to go to the Americans instead. No one is fooled by it.

What are the implications of a continued trade war?

Well, the worst-case scenario is that you see progressively higher duties slapped on goods and services across the borders, meaning everything gets more expensive. It would slow down economic growth more. It would also lead to lower levels of overall business confidence, which would lead to less investment. You’re not going to open that third plant or hire that second shift because you aren’t sure what’s going to happen.

And beyond trade?

We’re starting to see trade spilling over into other areas, and it’s starting to get personal. For example, categorizing Canada as a national security threat is brutally insulting, particularly since the two countries have been allies for years. We have a history of clear military and strategic alliances that have demanded security cooperation. Either Trump is ignorant of this, or he doesn’t have a sense of how important it is. The whole idea behind multilateral trade negotiations, like NAFTA, and organizations like the World Trade Organization, is to minimize conflict and to keep it in the realm of trade so that it doesn’t spill over into domestic politics. Now this international system of economics that has allowed people to get generally prosperous could potentially come under question.

Trump is adamant that his trade tariffs will bring jobs back to Americans. Is that the case?

No, that was always a lie. It’s more likely that consumer demand will go down. Those companies that are working in export-dependent industries, like bourbon, will see demand potentially fall and so there will likely be layoffs from that. If automobile prices go up by, say $3,000 per car, then fewer people will probably buy them. It’s very visceral and visible to rip up a trade agreement, but trade has never been as big a deal as people made it out to be. It does improve economic growth, on average, and it does create some jobs, but its effect on the American economy isn’t massive one way or the other. Trade was not the reason the U.S. lost the manufacturing heartland. Ripping up trade agreements isn’t going to bring it back.

This interview has been edited and condensed.

Meredith Dault

Smith School of Business
Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

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