What is Free Trade?
Free trade is the exchange of imported and exported goods between a country without any tariffs or restrictions. Tariffs are extra taxes that are placed on goods to regulate the cost of importing and exporting products from a country. Free trade is meant to benefit industrial, financial and business enterprises in both Canada and the United States. The FTA will eventually eliminate all customs duties on goods. (Whaley, 1988)
A Brief History of Free Trade
Free trade has been considered by Canadians for over a century. Canada has always been a trading nation, dating back to its founding days of the fur trade with the Americans and Britain. In 1846, free trade existed between Canada and mother Britain. Canada sought an agreement with the U.S., and in 1854, there was temporarily free trade between the two neighbours. The Confederation ended this agreement. In the early 1900s, tariffs were relatively low. During the first World War, the tariffs had reached an all time low, and the dream for free trade seemed once again possible. Canada's population was expanding greatly, and the desire for a free trade agreement became greatly increased. In 1911, the Liberals made an attempt at reciprocity with the U.S. and were successful, but the agreement was rejected at the polls. Trade did not undergo any great changes except during the Great Depression, during which tariffs were lower than ever. Then, in 1930, the Smoot-Hawley Tariff Act brought tariffs to an all time high, an incredible 60%, higher than any other tariff in the world. U.S. Congress realized their mistake in the high tariffs, and the Reciprocal Trade Agreements Act allowed them to change the tariffs to more suitable levels. Following World War II, the General Agreement on Tariffs and Trade was introduced. This allowed Canada to trade with both the U.S. and Britain without having to suffer consequences from choosing one over the other. In the 1980s, Canada's economic dependance on the U.S. was great. The United States and Canada finally began to seriously consider a free trade agreement. In 1987, an agreement was reached, and in 1989 the U.S. - Canada Free Trade Agreement was born and signed by Prime Minister Brian Mulroney and President Ronald Reagan. (Hart, 1999)
Advantages of Free Trade
i) Increased production
Free trade enables the countries to specialize in the production of those commodities in which it had a comparative advantage. With specialization, countries are able to take advantage of efficiencies generated from economies of scale and increase output. International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity.
ii) Production efficiencies
Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services.
Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods.
iii) Benefits to consumers
Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures goods and services, as well as inputs, are supplied at the lowest prices.
iv) Foreign exchange gains
When Canada sells exports overseas, it receives hard currency from the countries that buy the goods. This money is then used to pay for imports such as electrical equipment and cars that are produced more cheaply overseas.
Trade liberalization creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold in the competitive environment. With free trade many jobs have been created in Canada, especially in manufacturing and service industries.
vi) Economic growth
The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. (Whaley, 1988)
Disadvantages of Free Trade
Although free trade has benefits, there are a number of arguments put forward by lobby groups and protesters who oppose free trade and trade liberalization. These include:
i) With the removal of trade barriers structural unemployment may occur in the short term. Companies will need to lay off workers to maintain their profit.
ii) Increased domestic economic instability from international trade cycles, as economies became
dependent on global markets. The Asian economic crisis in 1998 and economic slowdown in the
global economy in 2001 illustrate this situation.
iii) International markets are not a level playing field as countries with surpluses may dump them on the world markets below cost. Some efficient industries may find it difficult to compete for long periods under such conditions.
iv) Developing or new industries may find it difficult to become established in a competitive environment with no short-term protection polices by governments.
v) Free trade can lead to pollution and environmental problems as companies fail to include these costs in the price of goods. (Stop the FTAA, 2002)
How Canada has benefited from free trade
i) The expansion of exports has strengthened Canada's industrial base.
ii) Greater access to imports has benefited consumers and businesses by widening the choice of products available and by boosting the living standards for many Canadians.
iii) Reducing tariffs over the past decade has resulted in savings of $2,000 per year to the average Canadian family.
iv) Exporters pay more to workers and sell more per worker than non-exporters. Having a bigger market to sell to means that a business can sell more, earn more profits and pay higher wages.
v) Export growth has been essential to economic growth and job creation. According to one study, the removal of all tariffs would create another 40,000 jobs within the next two years.
The Controversy Surrounding Free Trade
Some citizens protest free trade, because it ruins jobs in their country. Government imposed tariffs are taxes placed on goods from other countries, to discourage other countries from trying to sell their products to the country. If other countries are able to freely sell their products without tariffs to the country, then many jobs will be lost in the country for producers of that particular product. For instance, pretend that Canada is restricted to sell a bushel of corn to the U.S. for $2, while in the U.S., it is only $1.50 per bushel. This allows for corn in the States to be sold in the States, without a great deal of competition from Canada. When you take away the price restriction on Canada, suddenly Canada is able to sell it for less than $1.50. This is bad for the U.S., because now most of the corn will be purchased from Canada, and the corn industry in the States will plunge. This is why we impose tariffs. (Stop the FTAA, 2002)
This does not mean that free trade is a bad thing. When there are tariffs in place, citizens are forced to pay higher prices. For every job that is saved, citizens are forced to pay over $200,000 more for goods. While many jobs may be lost, this is overshadowed by the millions of dollars that are saved by consumers each year.
There are many advantages and disadvantages to the USCFTA. Economically, the free trade agreement a great benefit towards our society. The FTA saves us all money, it allows for more productive efficiency, and offers us more products to choose from, which increases our quality of life. However, many jobs are lost in the process. Depending on other countries can be dangerous. If the United States were to suffer an economic collapse, Canada would fall right down with it. Presently, the free trade agreement between Canada and the United States has benefited Canadians much more than it has disadvantaged them.
Works Cited and Consulted
Hart, Michael. A History of Canada-US Free Trade. Mosaic Design, 1999.
Whalley, John. Canada - United States Free Trade. Toronto, Ontario : University of Toronto Press, 1985.
Government of Canada. Canada-U.S. Free Trade Agreement. Chapter 65 of Statues of Canada 1988.
_________. Stop the FTAA. http://www.stopftaa.org/info. May 2002.
_________. Government Documents on Free Trade. http://www.info.library.yorku.ca/depts/bg/ft-cont.htm. August 16, 1995