Canada and US Free Trade Agreement

Introduction

Ten years has passed since the signing of the Canada-United States Free Trade Agreement (FTA). This accord was followed by the North American Free Trade Agreement (NAFTA), which has been in effect since January 1, 1994. These two free trade agreements were expected to create a more competitive economy in Canada through increased competition and open access to a larger export market (U.S. Trade Representative, http://www.ustr.gov/reports/naftareport/contents.pdf). Canada was not alone in forming preferential trade agreements (PTAs). France, West Germany, Italy and the Benelux established the European Community (EC) in 1957. One objective of the EC was to form a common market within Europe, which was finally realized in 1993. Between 1957 and 1993, there were a series of developments, such as the formation European Free Trade Association (EFTA) in 1960, to facilitate and strengthen economic linkages within Europe.2 Moreover, there are other regional trading blocs such as MERCOSUR (“Common Market of the South”) formed by Argentina, Brazil, Paraguay and Uruguay, which has been in effect since November 29, 1991. As with other PTAs, one goal of this regional trading block is to facilitate movements of goods, services and factors of production within the region.

Thesis Statement

In this paper we will be analyzing the Canada and US free trade agreement and will be discussing the negative side of this Agreement.

Literature Review

There have been many studies analyzing the effects of trading blocs on trade among bloc members, and between bloc members and other countries. This has been an important focus of international trade theory as well, and of computable general equilibrium (CGE) models of international trade. The theoretical literature shows that the formation of free-trade areas, customs unions, or other preferential trading blocs has uncertain effects on economic welfare. While there is a general presumption of gains from increased trade, based on a fuller specialization to achieve economies of scale and to match comparative advantage, there is always the possibility that trade diversion may reduce trade with non-members in such a way as to offset the otherwise expected gains from increased trade among member countries.

Empirically-based CGE models have been used frequently to resolve the theoretically ambiguous effects of trading blocs, and to assess their likely net costs and benefits, usually from the perspective of potential members, but sometimes from a global perspective as well. There were several such studies before the FTA was passed, followed by several applications to the subsequent North American Free Trade Agreement (NAFTA). Most of the ex-ante CGE studies of the FTA showed net gains, although there were substantial differences depending on the assumptions made about the nature of competition and the degree of unexploited economies of scale. Although most CGE models are static in nature, researchers are beginning to consider the dynamic effects of trade. For instance, McKibbin (1994) considers dynamic gains through capital accumulation in his study. His results suggest that higher productivity in participating countries will dominate trade diversion effects thereby increasing income for all countries in the long run. There have ...