Better Off Without NAFTA, Part 2: Canada—Localized Profit, but a Net Outflow of Capital

In Part 1, details on trade and investment between Canada and the US were presented that showed the US has run surpluses in the trade in goods and services, and more investment came into the US from Canada than the other way around. Both of these have the effect of draining capital away from Canada. While Trump’s victimology about Canada in the NAFTA framework generally holds little water—except that the US would have likely retained more of its steel production if it had never allowed its capacity to go low enough that Canadian imports were needed—his statements would generally be true if they had been uttered by a Canadian leader instead. The problem is, however, that Canada currently does not have a strong nationalist leader and quite the opposite—with some in the media even fearful of imposing counter-tariffs against the US, coming out in recent days with statements that could be easily read as ones professing fear, cowardice, disregard for national interests, and offering weakness as they advocate that Canada should just take the blows (in particular, see Andrew Coyne, Meredith Lilly, and Don Pittis). What is likely behind what many will see as treasonous propaganda, is a fear by neoliberal globalist elites that, in responding with tariffs, we end up playing “Trump’s game,” thus “fanning the flames” of nationalism in Canada, and apparently Canadians are not allowed to be nationalistic about Canada (presumably that job is being outsourced to UNICEF).

As mentioned in Part 1, one can read Canadian statements defending the value of NAFTA, to American audiences, as a way of understanding what loss NAFTA represents for Canada. For example, former trade minister, Chrystia Freeland, boasted of NAFTA’s value, but to the US more than Canada. Her office stated, and this was intended for a US audience, “thirty-five states count Canada as their number one customer. We do over $2.4 billion in trade every day.” That dollar amount does not say who is profiting more. But the revelation that Canada, with fewer people than California, is the top customer of 35 US states, suggests an acute degree of Canadian dependency—not something one would ordinarily boast about, and indeed the boasting was not meant for Canadian ears. A similar pattern is echoed by Canadian officials who almost triumphantly point out that Canada runs trade deficits with the US, not just overall, but in various specific and sensitive industries—as if our loss to the US were a Canadian gain.

These considerations aside, let us now tally what critics have pointed out as being the losses incurred by Canada since NAFTA came into force.

Jobs, Manufacturing, Productivity, Real Incomes

Since 2000, Canada lost more than 23% of all its factory jobs in that time, with employment falling to 1.7 million from 2.2 million. Data from Statistics Canada show that since 2004, about 559,000 manufacturing jobs have been lost in Canada (for all of the years that NAFTA has been in effect, there has been a slight decline in the number of manufacturing jobs overall). For the same period, since 2004, roughly 48,000 jobs were lost in automobile manufacturing (including parts). Another StatsCan data source, tracking numbers for “total automotive industries” from 2004 to 2012, showed a loss of over 51,000 jobs. StatsCan reports that since 2000 there has been a consistent decline in the number of manufacturing jobs: “The manufacturing sector lost over 500,000 jobs in the nine-year period from 2001 to 2010”. While economists may be unable to explain how many of these jobs were lost specifically because of NAFTA, one has to logically assume that at least a portion were due to NAFTA. Either way, NAFTA has not produced the employment boom that was promised.

In a report on the Canada-US Free Trade Agreement (CUFTA), which was NAFTA’s predecessor, Industry Canada revealed that, “for the most impacted industries, the tariff cuts reduced employment by 18 percent, output by 12 percent, and the number of establishments by 12 percent. For manufacturing as a whole, the numbers are 4 percent, 2 percent, and 4 percent, respectively”. Between 1988 and 1994, “Canada lost 334,000 manufacturing jobs, equivalent to 17% of total manufacturing employment in the year before CUFTA came into effect” (CCPA, p. 3). In the years prior to CUFTA, manufacturing productivity in Canada stood at 83% of the US level; however, by 2000, it had dropped to only 65%, “so the productivity gap widened rather than narrowed, as promised by the proponents of free trade” (CCPA, p. 2).

Real incomes declined for most Canadians in the 1990s, with median income in 1999 having dropped by $1,100, or 2%, from the 1990 level (CCPA, p. 4), though not all of that decline was due to NAFTA. The Canadian Centre for Policy Alternatives stated in a report (p. 3) that, “during the first 13 years under CUFTA [the Canada-US Free Trade Agreement] and NAFTA, Canada created less than half as many full-time jobs as during the previous 13 years. Moreover, many of the jobs created during the NAFTA period have been part-time, insecure jobs with fewer benefits, particularly for women”. Free trade was sold as inevitably leading to a major boost in Canadian labour productivity. That too has failed to materialize. The growth in productivity has recovered in recent years, only to match what it was before free trade. Real wage gains continue to lag behind increases in productivity as employers, not workers, reaped the benefits of higher hourly output (p. 2).

The “capital stock” of Canadian manufacturing—“the value of all the equipment, buildings, infrastructure and intellectual property in the industry—is almost 10% lower today than it was when NAFTA came into force in 1994”. When it comes to manufacturing, Canada has fared worse than the US:

Agriculture in Canada has also suffered from the effects of NAFTA, contrary to the mainstream mythology. The National Farmers Union pointed out that, since 1988, “agricultural exports have almost tripled, but net farm income (adjusted for inflation) has fallen by 24%. Over the same period, farm debt has doubled, 16% of Canadian farmers have been forced off the land, the number of independent hog farmers has dropped by 66%, and there are 2,400 fewer jobs in the agri-food processing industry”. The NFU concluded that free trade agreements “may increase trade, but they dramatically alter the relative size and market power of the players in the agri-food production chain. Free trade helps Cargil and Monsanto, not farmers.” The experience of Canadian farmers clearly demonstrates that “more trade does not necessarily translate into more prosperity” (CCPA, p. 4).

Trade, Continued

When it comes to CUFTA, NAFTA’s predecessor, the elimination of tariffs explains the increase of trade. Interestingly, “most of Canada’s increased trade was in industries that had no tariffs in 1988,” when CUFTA went into effect.

Heavy truck shipments out of Canada collapsed by 75% between 2006 and 2011. under NAFTA, Mexico has gone “from a bit player in the North American auto sector to the second-largest participant with almost 20% of total production, compared with Canada’s 16%”. Overall, the proportion of Canadian exports sent to Mexico has grown only modestly under NAFTA, from 0.7% in 1997 to 1.5% in 2015.

For more on trade, specifically with the US, see Part 1.

Economic Growth

One of the arguments by advocates of free trade was that “it would increase Canada’s disappointing rate of economic growth,” which in the eight years prior to free trade with the US “had averaged only 1.9% per capita per year”. Instead, in the first five years of free trade, “real GDP growth per capita was actually negative, averaging -0.4% a year”. The GDP rate rose after NAFTA came into effect, but “for the entire free trade era has averaged 1.6% annually,” which is still below the rate pre-free trade (CCPA, p. 1).

Capital Loss, Increased US Ownership

Canada has also lost capital to the US, thanks to free trade: “from 1985 to 2002, there were 10,052 foreign takeovers of Canadian companies, 6,437 of them by US corporations” (CCPA, p. 1). The CCPA reported: “Of all the new direct foreign investment in Canada over this period, an extraordinary 96.6% was for takeovers of existing Canadian businesses”. Many of these takeovers were financed through borrowing within Canada. At the same time, there was “a marked increase in Canadian direct investment in the U.S., showing a pattern of disinvestment from Canada”. By 2002, “Canadians held about US$133 billion in the US,” three times more than they did in 1990 (CCPA, p. 1).

Sovereignty Diminished: Loss of Control over Domestic Policy

The investor settlement dispute system and its secret tribunals, were incorporated into NAFTA. If a corporation, typically an American one, is unhappy with Canadian policies on the environment and natural resources, they can sue for lost potential profits as a result of Canadians legislating for their own welfare. As a result, Canada has become the most sued developed country in the world because of NAFTA’s ISDS process. Canada loses “about half the time when foreign investors sue it under NAFTA’s Chapter 11, while the U.S. has never lost”.

Net Benefits of NAFTA for Canada?

The Canadian Centre for Policy Alternatives summed up the impacts of NAFTA as follows: “the impact of NAFTA on most of the people in all three countries has been devastating. The agreement has destroyed more jobs than it has created, depressed wages, worsened poverty and inequality, eroded social programs, undermined democracy, enfeebled governments, and greatly increased the rights and power of corporations, investors, and property holders” (p. 1).

How Will the New Tariffs Impact Canada? What does that say about NAFTA’s value to Canada?

Since President Trump announced his new tariffs on Canadian steel and aluminum, with Canada responding in equal measure, a number of reports have sought to detail the impacts. We are told by some that steel exports to the US represent about 45% of total Canadian steel production, according to the Canadian Steel Producers Association. Steel production in Canada accounts for a total of 122,000 direct and indirect jobs, and $14 billion in exports. Aluminum production in Canada accounts for 28,300 direct and indirect jobs, with $12 billion in exports, and a massive 80% of Canada’s aluminum is exported to the US market. But other reports present very different figures, inexplicably since they are all from experts in the field and those with a direct interest—we are thus told that the US “is the destination for about 90 per cent of Canada’s steel exports, more than $5 billion worth per year. Canada is the source of 17 per cent of all steel the U.S. brings in from abroad, making it the number-one source of imports”. Some, who should be knowledgeable, instead claim to know little—for example, in the bastion of steel production in Canada, Hamilton (Ontario), Mayor Fred Eisenberger said, “he did not know how much steel Hamilton steelmakers sell in the U.S. But he said about half of the steel produced across Canada” is exported into the US. Meanwhile the Hamilton Chamber of Commerce reported that: “more than 10,000 Hamilton-area people work in steelmaking with up to 30,000 more employed in related industries that could be affected”.

Trump’s steel tariffs address a problem that may not even exist: “Canada supplies more tonnes of steel to the United States than the other way around, but the value per tonne is higher on the American side, so there is a surplus” in favour of the US, according to Peter Warrian, a steel industry expert and senior research fellow at the Munk School of Global Affairs at the University of Toronto.

We also know that some steel companies in Canada are US-owned and without steel-making operations in the US (Stelco in Hamilton, owned by US’ AmericanBedrock); others, like Luxembourg-owned ArcelorMittal Dofasco, with operations in the US, could shift production to the US to avoid the tariffs.

Does Canada need to rely on the US? This is a key question. It seems that the new US tariffs “should not be terribly damaging to Canada. Because the United States does rely on Canada for substantial steel and aluminum imports, and that can’t be replaced quickly, if at all. But for specific firms and for specific steel and aluminum products, the immediate impact could be significant,” according to Scotiabank deputy chief economist Brett House. But this too is a problem—if such tariffs should not be terribly damaging it suggests that, conversely, NAFTA was not terribly essential, or beneficial to Canada. As an article in the Financial Post put it, NAFTA may not be all that great for Canada, nor all that important.

Thus Chuck Bradford, a US-based metals analyst, says that there will be “no effect” on Canadian steel producers. Their US customers, he said, “may not have any choice: there may not be any steel available of the grades they need”. Jean Simard, president of the Aluminum Association of Canada, said it is “impossible” for American aluminum producers to step in and fill that country’s demand. Stelco CEO Alan Kestenbaum is reported to have said that, “80 per cent of Stelco’s sales are in Canada and would not be harmed by a tariff”. One thing one can say about NAFTA, is that at the very least it cannot be defended as indispensable.

However, the country that can be said to have been truly harmed by NAFTA, and very deeply, is the only one which provoked an armed uprising by an indigenous people’s army on the very day NAFTA came into effect: Mexico.

See:
Better Off Without NAFTA, Part 1: Introduction—the US, Trump, and Facts and Fictions about Winners and Losers
and
Better Off Without NAFTA, Part 3: Mexico—Armed Rebellion, Mass Migration, Flat GDP

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