RBC study busts North American free trade myths
Says Canada's ability to adapt & prosper provides key
lessons to the world on how freer trade should work
TORONTO, November 6, 2006 — Showing strong economic
growth, solid domestic demand, and a favourable investment
climate, Canada has flourished since the implementation of
free trade agreements 18 years ago, according to a new report
by RBC Economics, which will be presented at the Canadian
American Business Council's North American Competitiveness
Policy Forum in Toronto on November 8.
"Canada is the envy of many other nations," said
RBC Chief Economist Craig Wright. "Few countries have
provided as shining an example of how to adapt and prosper
in a post-freer trade world than Canada."
According to the report, despite the fear-mongering that
took place during the adoption of the 1989 Canada-U.S. Free
Trade Agreement and 1994 North American Free Trade Agreement,
the reality is that the Canadian economy has thrived, and
the most exaggerated fears have failed to arrive.
The report, entitled "Canada's free(r) trade lessons
to the world," addresses eight myths that were promoted
at the time and have since been dispelled in economic terms.
One example was the fear that production would shift south
once trade barriers such as tariffs, export restraints and
import quotas were removed, and that exports would disappear.
In fact, the opposite has occurred. Canada's economy has outperformed
the U.S. economy 50 per cent of the time over the past 18
years, and both countries have grown their goods and services
output at similar long-run rates. Exports blossomed, while
the two countries' manufacturing sectors also shared similar
experiences.
The fear of a massive wave of permanent job losses with the
implementation of the FTA and in the U.S. with NAFTA, is another
myth the report addresses.
"While some industries have gained and others have lost,
the net picture is overwhelmingly positive for both Canada
and the U.S.," said Wright. "There has been an unprecedented
wave of job creation, and unemployment stands at record lows
on both sides of the border. In fact, a skilled labour shortage
has emerged, driving wages up for consumers and challenging
business competitiveness."
A large part of the debate at the time also centered around
the removal of ownership restrictions, as it was also feared
that Canada was for sale. Critics suggested that U.S. companies
would swoop in and buy up their affordable counterparts or
Canadian businesses would disappear, unable to compete globally.
Despite the recent headline-grabbing mega deals, more foreign
companies have been purchased by Canadian companies than vice
versa since FTA and NAFTA. In fact, so far this decade, small
and medium-sized businesses have led M&A activity in Canada
to improve productivity and compete globally.
"Canada has resisted being a branch plant economy as
NAFTA critics once predicted," said Wright. "The
trade agreements helped accelerate the necessary reshaping
of Canada's business landscape. As a result, we are now seeing
micro, small- and medium-sized businesses mature into a more
powerful growth phase, leading productivity gains in Canada."
Canada's full freer trade potential not yet unleashed
While Canada has experienced significant free trade success,
there are still some questionable areas. Despite a strong
Canadian dollar and record corporate liquidity, businesses
have under-invested in machinery and equipment, lagging behind
their U.S. counterparts over the long-term.
While small businesses are driving strong productivity growth,
larger Canadian firms continue to slip, with only 0.5 per
cent per year over the past decade. One other area of concern
is direct foreign investment. Most companies around the world
have engaged in more cross-border investment, but Canada has
not kept pace. While there have been increases, Canada's share
of this type of investment has slipped.
"Even within Canada's own borders, we still have not
achieved free trade on goods, services, capital and labour,
nor a level regulatory field across some key industries. Furthermore,
while there have definitely been some irritants in specific
sectors like the issues of softwood lumber and BSE, the focus
in assessing the overall success of the post-FTA and NAFTA
environment clearly has to be on the bigger picture,"
noted Wright.
Policymakers cannot afford to be complacent
While governments deserve credit for turning Canada's economy
around and into a more orderly setting for business development,
work still remains to be done. Addressing barriers to competitiveness
such as high and inappropriate forms of business taxation,
infrastructure deficiencies, challenges to seamless borders,
and skilled labour shortages are areas that both governments
and businesses need to focus on in order to continue to succeed.
"With the rise of South Asian economies and impeding
political environments towards free trade, fears have begun
to manifest again," said Wright. "In the coming
years, 9/11-induced security concerns and stalled policy reforms
are among the biggest threats facing Canadian, U.S. and global
economies."
For a full copy of the report, please visit www.rbc.com/newsroom.
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Media contact:
Jackie Braden, Manager Media Relations, (416) 974-2124
Craig Wright, Chief Economist, (416) 974-7457
Derek Holt, Assistant Chief Economist, (416) 974-6192
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