Free Trade between the United States and Canada

This study is the first major attempt to estimate what would happen in Canada if all trade restrictions between that country and the United States were removed.

In an intensive and far-reaching examination, the authors begin by confronting the generally held assumption that the lowering or eliminating of tariff protection would be disastrous for Canadian manufacturing. On the contrary, their findings lead them to conclude that, given present wage and exchange rates, the Canadian industrial complex would benefit substantially. The basis for this conclusion is a detailed analysis of the growth prospects—in the event of free trade—of five Canadian regions along with thirteen similarly definable regions in the United States. Sixteen manufacturing sectors (food, paper, textiles, etc.) are covered.

The second part of the study explores resulting general equilibrium pressures on wages and exchange. The probability, the authors believe, is that the Canadian dollar would rise to parity, and Canadian wages would reach the U.S. average level although they would remain below wage rates in contiguous areas of the U.S. North. The adjustments would necessarily be of a long-term nature and would be contingent on an effective reorganization of Canadian industry.

The historical effects of protection on Canada are then considered. Inefficiencies in Canadian production are estimated by comparing recent Canadian costs with costs which would exist in a free-trade situation. (The auto industry is singled out for special treatment, and an analysis of recent developments in that industry is appended.) The conclusion is that Canadian per capita real income is 10 to 11 percent lower because of protection. Higher Canadian prices explain about 4 percent of this figure, and lower money incomes 6 to 7 percent.

Finally, the authors discuss the possible structure and implications of various alternative forms of economic integration (Free Trade Area, Customs Union, Common Currency Area); various means of staging tariff reductions; and proposals for adjustment assistance. The techniques they suggest, although focusing specifically on Canada and the United States, are applicable to other countries considering similar programs.