April 2001 | EPI Briefing Paper
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NAFTA AT SEVEN
Its impact on workers in all three nations
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False Promise
Canada in the Free Trade Era
by Bruce Campbell, Canadian Centre for Policy
Alternatives
It has been 12 years since the Canada-U.S. Free Trade Agreement
was implemented and seven years since it was renegotiated, extended
to Mexico, and renamed NAFTA, the North American Free Trade
Agreement. And NAFTA is now the template for the Free Trade Area of
the Americas (FTAA) initiative), for which presidents and prime
ministers from the hemisphere were scheduled to meet in Quebec City
in April 2001 to set a course for its completion by
2005.1
"[F]ree trade agreements are designed to force adjustments on our
societies," says Donald Johnston, former Liberal government minister
and head of the Organization for Economic Cooperation and
Development (quoted in Crane 1997a). His words display a candor rare
among free trade proponents. Indeed, major adjustments have taken
place in the Canadian economic and social landscape since the
government promised a new dawn of prosperity in 1989, when the FTA
went into effect:
- Trade with the U.S. has expanded dramatically during these 12
years. Canda's exports are now equivalent to 40% of its gross
domestic product, up from 25% in 1989. (More than half of Canadian
manufacturing output now flows south of the border, and Canadian
producers account for less than half of domestic demand). This
north-south trade boom has been mirrored by a relative decline in
trade within Canada. Trade has also become more concentrated with
the U.S.-from 74% to 85% of exports-and less concentrated with the
rest of the world. Two-way investment flows have also increased
greatly. Both Canadian foreign direct investment and portfolio
flows to the U.S. grew much faster than did U.S. flows to Canada
during this period.
- Growth performance in the 1990s was worse than in any other
decade of the last century except the 1930s. Average per capita
income fell steadily in the first seven years of the decade and
only regained 1989 levels by 1999. By comparison, per capita
income in the U.S. grew 14% during this period (Sharpe 2000).
- Canada has become a noticeably more unequal society in the
free trade era. Real incomes declined for the large majority of
Canadians in the 1990s; they increased only for the top fifth.
Employment became more insecure and the social safety net
frayed.
- While productivity has grown-rapidly in some sectors-wages
have not, a trend mirroring the de-linking that has taken place in
the U.S. But the overall productivity gap with the U.S. has not
narrowed as free trade proponents predicted; rather, it has
widened recently.
- Successive waves of corporate restructuring-bankruptcies,
mergers, takeovers, and downsizing-have been accompanied by public
sector restructuring-downsizing, deregulation, privatization, and
offloading of state responsibilities. Public sector spending and
employment have declined sharply, and publicly owned enterprises
in strategic sectors such as energy and transportation have been
transferred en masse to the private sector.
FTA and NAFTA boosters did not promise vague social adjustments,
however; they sold the agreements based on rising productivity and
rising incomes. By this standard the treaties have clearly not
delivered, and their proponents can only offer the weak defense that
things would have been worse in the absence of the agreements.
Workers and policy makers in the FTAA countries may want to take the
Canadian experience into account before buying into these unproved
promises.
The Canadian labor market during the free trade era
As
noted above, exports to the U.S. have grown rapidly during the
FTA/NAFTA era. Imports from the U.S. have also grown but not as
quickly, resulting in a growing trade surplus (Figure
3-A).2 The average annual trade surplus was $C19.7
billion during the 1990s, more than double the $C9.4 billion average
in the 1980s. Canada's current account surplus with the U.S., which
includes net payments to U.S. investors, was also positive albeit
much lower, averaging $C6 billion annually. Here too, though, it was
a lot higher than in the 1980s when the bilateral current account
was roughly in balance.
Manufacturing employment bore the brunt of corporate
restructuring, most severely in the first wave (1989-93), falling by
414,000 or 20% of the workforce. (The number of manufacturing
establishments fell by 19% during 1988-95). High-tariff sectors were
especially hard hit-leather experienced a 48% drop in employment,
clothing 31%, primary textiles 32%, and furniture 39%. But
employment was also slashed in medium-tariff sectors such as
machinery (32%) and electrical and electronic products (28%). By the
end of the decade manufacturing employment was still 6% below its
1989 level. Employment in clothing, for example, was still 26% below
1989, and electrical/electronics was down 19%. Wages were flat or
falling even in the so-called winning export sectors.
Unemployment in the 1990s averaged 9.6% compared to the U.S. rate
of 5.8%-a doubling of the gap compared to the 1980s (Sharpe 2000).
This level of unemployment was higher than in any other decade since
the 1930s. While average worker earnings were stagnant, casualized
(or nonstandard) employment exploded, as people struggled to cope
during the prolonged slump and restructuring.
Paid full-time employment growth for most of the decade was
almost nonexistent (Jackson and Robinson 2000). The absolute number
of full-time jobs did not recover its 1989 level until 1998.
Self-employment skyrocketed, accounting for 43% of new job creation
between 1989 and 1999. Part-time employment accounted for another
37% of net employment growth during 1989-99. More than half of this
growth was involuntary-due to the inability of people (mainly women)
to find full-time work. Temporary work grew from 5% to 12% of total
employment during the first half of the decade. Labor force
participation rates dropped sharply, and at the end of the decade
they were still well below their 1989 rates.
Evidence that the trade expansion and economic integration under
NAFTA have had adverse employment effects in Canada comes from the
government itself, in the form of a little-known study commissioned
by Industry Canada.
The authors, Dungan and Murphy (1999), found that, while business
sector exports grew quickly, import growth also kept pace. At the
same time, the import content per unit of exports also grew
markedly, while the domestic content per unit of exports fell.
What did this mean for jobs? Employment (direct and indirect) in
export industries rose from 19.6% of total business sector
employment in 1989 to 28.3% in 1997. However, the rapid rise in
imports displaced (or destroyed) even more employment. The
job-displacing effect of imports rose steadily from an equivalent of
21.1% of total business employment in 1989 to 32.7% in 1997. The
authors conclude: "imports are displacing 'relatively' more jobs
than exports are adding" (Dungan and Murphy 1999).
What did this mean in terms of actual jobs created and destroyed?
It is a simple matter to derive these numbers from Dungan and
Murphy's data (see Figure 3-B). The result is striking.
Between 1989 and 1997, 870,700 export jobs were created, but during
the same period 1,147,100 jobs were destroyed by imports. Thus,
Canada's trade boom resulted in a net destruction of 276,000
jobs.
With this evidence, we can say more convincingly than ever that
the conventional wisdom propagated by the business and political
elites-that the trade expansion under NAFTA has meant a jobs bonanza
for Canada-is false. On the contrary, trade expansion caused, at
least in the first eight years of free trade, a major net
destruction of jobs.
The study also found that the labor productivity of the jobs
displaced by imports was moderately lower than that of exports,
though the productivity of these displaced jobs was still higher
than the average productivity level for the business sector as a
whole. This the authors see as beneficial for the economy as
whole.
However, the positive spin on the study's findings is premised on
the existence of macroeconomic policies whose priority is creating
full employment conditions and on the expectation that displaced
workers will find other jobs, and that those jobs will be at higher
levels of productivity and income. There are three problems with
these assumptions. First, it is not clear that these displaced
workers are, by and large, finding higher productivity jobs
elsewhere in the economy. In fact, to the extent that they are
finding jobs outside the tradable sector, the jobs they find are
likely at lower levels of productivity. Second, workers both in the
tradable sectors and in the economy generally have not seen
productivity growth translate into income gains. Third, and most
importantly, macroeconomic policy in the 1990s (as will be described
shortly) has not focused on employment creation. Rather, policy
makers have focused on ultra low inflation and wage control to
enhance business competitiveness under NAFTA. Unemployment since the
grim 1990s has lately fallen to around 7%, but this is still far
above the 5.4% average unemployment rate for the entire three
decades from 1950 to 1980.
As for incomes, market income collapsed for low-income earners
and inequality widened, most strikingly during the first half of the
decade. Market incomes of the bottom 10% of families with children
fell an astounding 84% during 1990-96, and those of the next 10%
fell 31% (Yalnizyan 1998). But the restructuring and the massive
labor market failure was offset by public transfers, keeping the
overall distribution of income after taxes and transfers stable for
a while. The consequent accumulation of fiscal deficits became
politically unpalatable, though, and the government's ensuing "war
on the deficit" provided the rationale for the social cuts that
resulted in a widening of overall income inequality in the latter
half of the decade-the first such widening in the postwar era.
(Inequality in Canada still remains much lower than in the United
States.)
The top 20% of families increased their share of market income
from 41.9% to 45.2% during 1989-98, while the bottom 20% saw their
share drop from 3.8% to 3.l% (Robinson 2001). Even after taxes and
transfers, the bottom 40% of families saw their inflation-adjusted
income fall by close to 5% during 1989-98. The next 40% saw almost
no change in their incomes. Only the top 20% saw a significant gain
in per capita disposable income, an increase of 6.6%.
These have been difficult times for Canadian unions as well. The
waves of layoffs and plant closures and the threat of closures in
heavily unionized manufacturing sectors cut into their numbers:
unionization rates in manufacturing fell from 35.0% to 33.4% during
1988-92. Years of defensive bargaining have resulted in unions'
inability to appropriate a share of productivity increases for their
members. This, too, signals an erosion of labor's bargaining power.
And yet, despite the disastrous labor market conditions in
manufacturing and throughout the economy, despite negative changes
in labor laws and employment standards in some provinces, total
union membership (not just in manufacturing) has remained remarkably
stable: the overall unionization rate slipped only slightly from
32.0% of the paid workforce in 1987 to 30.7% in 1998 (Jackson and
Robinson 2000).
NAFTA's role
To what extent should NAFTA take credit
(or blame) for these changes? It is impossible to examine NAFTA in
isolation from the broad anti-government and pro-deregulation policy
agenda that has for the last two decades been transforming national
economies and restructuring the roles and relationships among
governments, markets, and citizens in the push to create an
integrated global market economy. As a cornerstone of this
well-known neoliberal family of policies-privatization,
deregulation, investment and trade liberalization, public sector
cutbacks, tax cuts, and monetary austerity-NAFTA has made it easier
for Canadian policy makers to bring about a "structural adjustment"
of the economy in line with the dominant U.S. model. Advancing and
entrenching these policies in a treaty has secured investor rights,
reined in interventionist government impulses and bargaining table
demands of labor, and provided insurance against future governments'
backsliding.
These policies have had, with some exceptions, an adverse impact
on the employment and income conditions of working people in Canada.
This is not an unintended consequence since, in essence, these
policies transfer power from workers to management and investors,
from wages to profits, from the public sector to the market.
But assessing causality is a complex task. Outcomes are the
result of policies interacting with each other in mutually
reinforcing ways. They are shaped by technological forces, corporate
strategies, and a varied landscape of social and labor market
institutions. NAFTA and its siblings have put downward pressure on
employment and income conditions, but their impact varies from
country to country, from sector to sector, from province to province
depending on the strength of social and labor market institutions
and the commitment of governments to either counter or reinforce
these pressures. To be sure, policy choices do exist, but their
range is more constrained, and with each turn of the "free market"
screw the NAFTA legal framework makes it more difficult and often
impossible to go in the other direction. For all these reasons
isolating NAFTA impacts is exceedingly difficult.
The key provisions of the agreement itself that directly or
indirectly affect product or labor markets are a good place to
start. NAFTA removes tariffs and other non-tariff barriers on all
goods and services, thus impeding governments' ability to protect
strategic or vulnerable sectors from import competition. These
tariff restrictions also prevent governments from granting tariff or
duty waivers to foreign multinationals in exchange for commitments
to strengthen domestic capacity and employment.
NAFTA's most important provisions apply to investment. The treaty
entrenches a set of rules protecting private property rights of
investors, and virtually all types of ownership interests, financial
or non-financial, direct or indirect, actual or potential, are
covered. NAFTA liberalizes investment, enhancing its ability to
operate less hampered by non-commercial considerations and reducing
the risk of future governments unilaterally imposing new conditions
on investment.
The very broad national treatment provisions of NAFTA oblige each
member country to treat foreign investors exactly the same as it
treats its own national investors, regardless of their contribution
to the national economy. These provisions create an impetus for
powerful alliances between foreign and domestically owned businesses
to promote further deregulation and resist new regulation, since any
policy to regulate foreign capital has to be applied equally to
national capital. They remove important industrial policy tools,
from local sourcing to technology transfer-tools that seek to
channel foreign investment to strengthen domestic industrial
capacity, create jobs, etc.
NAFTA prevents governments from regulating the outflow as well as
the inflow of capital. It prevents governments from placing
restrictions on any kind of cross-border financial transfer,
including profits, dividends, royalties, fees, proceeds of sale of
an investment, and payments on loans to subsidiaries. It also
prevents governments from restricting the transfer of physical
assets and technologies. While NAFTA claims to break down
international protections and barriers, it provides strong
intellectual property protection (patent, copyright, trademark,
etc.) for corporations' technology. This is another instance of
taking power out of the public realm and empowering
corporations.
NAFTA limits the ability of state-owned enterprises to operate in
ways that are inconsistent with commercial practice and in ways that
impair benefits expected by private investors of the other NAFTA
countries. This clearly affects the ability of public enterprises to
pursue public policy goals that may override commercial goals. It
also limits the ability of future governments to re-regulate or
re-nationalize industries once they have been deregulated or
privatized. It provides the legal framework for greater private
penetration into traditionally public areas, notably health care and
education.
Finally, NAFTA guarantees investors the right to prompt
compensation at "fair market value" for measures that are deemed to
be "tantamount to expropriation"-a vague term for measures that are
seen in some way to impair commercial benefits, including any future
benefits that might be expected. Claims under these and other
provisions may be adjudicated through various dispute panels,
including an investor-state disputes tribunal, where in recent years
a flurry of corporate challenges have forced governments to reverse
policy decisions. The likelihood of these kinds of challenges is
putting a chill on any policy or regulation that might be perceived
as an infringement of investor rights.
Under these rules of continental integration, considerations of
competitiveness tend to trump all other policy considerations. In
Canada this dynamic has had three major impacts:
- Corporations cut costs, restructure. On the corporate level,
Canadian companies rationalize their cost cutting and
restructuring through takeovers, downsizing, closure, and
relocations as the only means to stay competitive against their
NAFTA partners. Increased competition also intensifies the
pressure on employers to demand worker concessions. Workers
(except certain elite categories) are legally confined by national
borders. Capital has the upper hand, since it can move more easily
under the new regime or threaten to move if labor does not make
wage and other concessions. It also increases the pressure to
lower costs through production and work reorganization, leading to
the increased use of part-time, temporary, and contract workers
and outsourcing to non-union firms in low-wage jurisdictions.
- The government adds corporate breaks, drops worker and
environmental protections. The Canadian government is shifting its
fiscal and regulatory policies in order to be more competitive
under NAFTA. This translates to raising subsidies while lowering
taxes, regulations, and standards to maintain and attract
investment. There are no common rules governing acceptable and
unacceptable subsidies or limiting subsidy wars among governments.
And labor and environmental side agreements, which purport to
limit the competitive bidding-down of labor and environmental
regulations, are ineffectual. Policy levers such as performance
requirements and (conditional) tariffs, which aim to nudge
investors in accordance with public policy priorities, have been
largely removed. Thus, the need to provide incentives to attract
investment has created dual stresses-downward pressure on
regulations and upward pressure on government spending.
- Macro policy tilts to capital, away from labor. The
macroeconomic policy priorities and choices, especially on the
issue of wage control, changed under NAFTA. They have included
disciplining labor through monetary policy austerity, reducing
government income supports-notably unemployment insurance and
other social program spending-and lowering corporate and personal
taxes. As a result the wages and well-being of Canadian workers
are declining.
The last point requires further explanation, since the connection
between macroeconomic policy and NAFTA is not usually made (Jackson
1999).3 Most economists agree that the great Canadian
slump of the 1990s was caused mainly by bad macroeconomic policy
choices-first by severe monetary tightening, which coincided with
the implementation of the bilateral FTA, and later in the decade by
fiscal retrenchment, which, according to the OECD, was the harshest
of any industrial country in the postwar era. At its peak in 1990,
short-term interest rates were five points above U.S. rates. The
massive federal spending cuts began in 1995 and over four years cut
spending from 16% to 11% of GDP, the lowest level since the late
1930s. Program spending at all levels of government fell from 45% to
less than 35% of GDP during 1992-99, an unprecedented structural
shift in the public-private sector balance (Stanford and Brown
2000).
Many economists look at this disastrous economic record as the
consequence of macro-policy error. The NAFTA-induced structural
changes have been largely ignored. Were policy makers-in both the
Mulroney and Chretien regimes-simply incompetent, or were they
acting out of conviction that the top priority was to administer a
structural jolt to the economy in order to enhance the conditions
for Canadian business competitiveness?
Monetary policy in the late 1980s and early 1990s was driven by
the determination of monetary authorities to virtually eliminate
inflation from the Canadian economy (which at the time was roughly
the same as U.S. inflation and thus was not a problem). Canadian
authorities were also concerned about falling labor cost
competitiveness with U.S. manufacturing as Canada entered free
trade. Productivity was growing more slowly, and real wages were
growing faster, than in the U.S. These wage increases were certainly
justified by productivity increases, but in the de-unionized United
States, wages were rising more slowly than productivity.
Policy makers also believed that a major fiscal adjustment was
required to bring Canadian social programs and policies into line as
integration with the U.S. proceeded. A 1996 report from the
government's Privy Council Office noted: "the basic affordability of
the [social safety net] system and the benefits payment regime has a
direct consequence on competitiveness.…By raising the cost of labour
as a productive input, such programs can either drive jobs south or
encourage further substitution of capital for labour" (Privy Council
Office 1997).
Thus, the Bank of Canada deliberately raised unemployment to
discipline labor. The federal government later massively cut
unemployment insurance programs and welfare transfers to (in its
view) strengthen the incentive to work and enhance labor market
flexibility. (The deep recession-induced deficits were the main
justification to the general public for the social cuts that
followed). As the unemployment insurance changes kicked in, the
proportion of the unemployed collecting benefits dropped
dramatically, from 75% in 1990 to 36% in 2000 (Canadian Labor
Congress 1999), essentially the same as the U.S. level (37% in 2000;
Mishel et al. 2001). Though monetary tightening (punishing interest
rates and an overvalued Canadian dollar) would have short-term
negative consequences for the economy, including a deterioration in
competitiveness, policy makers believed it would, along with the
fiscal adjustments, accelerate the necessary restructuring and
strengthen the long-term competitiveness of Canadian business in the
new North America.
The bulk of the social program destruction was implemented by
1997, and with the budget balanced, the government began the second
phase of the fiscal adjustment-corporate and upper-end income tax
cuts. In 2000, the finance minister announced tax cuts totaling more
than $100 billion over five years.4 Canadians are far
enough along now in this adventure to answer the question: "Have the
FTA and NAFTA delivered the goods that were promised?" The answer
depends on who you ask. For those who wanted to diminish the role of
government as an active player in the economy and provider of
collective social protections, and for those whose wanted to improve
the environment for business competitiveness by disciplining wages,
NAFTA and its predecessor have been a success.
But in the public debate that preceded implementation of the free
trade deal, delivering the goods, according to proponents, meant
rising productivity levels and rising incomes. It meant ushering in
a golden age of prosperity for all Canadians. That was the promise
to the Canadian public. The answer here is clearly no.
The Canadian employment situation has unquestionably improved in
the last two years, though workers have yet to reap any benefits in
terms of improved earnings. However, with the erosion of their
social protections Canadians have become more dependent on the
private labor market than at any time in the last 40 years. As one
observer put it, workers are now flying without a net (Stanford and
Brown 2000). As the economy slows in 2001, this employment
resurgence may prove to be short-lived, and the future for Canadian
workers is once again clouded.
Endnotes
1. Data cited in this paper
are drawn directly or indirectly from various Statistics Canada
documents: Labour Force Survey, Employment Earnings and Hours,
Canada's Balance of Payments, Survey of Consumer Finances, Income
Distribution by Size, and Canadian Economic Observer.
2. Despite the dramatic increase in the share
of total economic output accounted for by exports, the share of
total employment accounted for by exports grew much more slowly
(Dungan and Murphy 1999), due mainly to the increased import content
of exports. Dungan and Murphy also observe that there was almost no
growth in labor productivity in the export sector. It should also be
noted that the proportion of imported inputs in Canadian exports is
much higher than the proportion of imported inputs in American
exports.
3. Andrew Jackson (1999) was the first to make
the connection between macroeconomic policy and NAFTA.
4. Whether the Canadian government made a
specific commitment to the Americans in response to congressional
pressure to raise the value of the Canadian dollar relative to the
U.S. dollar is not known. However, the Bank of Canada's raising of
short-term interest rates had the effect of pushing the Canadian
dollar to a peak of 89 cents in 1990.
References
Canadian Labour Congress.
1999. Left Out in the Cold: The End of UI for Canadian
Workers. Ottawa, Ontario, Canada.: Canadian Labour Congress.
(Author Kevin Hayes also provided useful information).Crane, David.
1997a. Toronto Star, May 3.
Crane, David. 1997b. Toronto Star, May
4.
Dungan, P. and S. Murphy. 1999. "The Changing
Industry and Skill Mix of Canada's International Trade."
Perspectives on North American Free Trade. Paper No. 4.
Industry Canada.
Jackson, Andrew. 1999. "Impact of the FTA and
NAFTA on Canadian Labour Markets." In B. Campbell et. al.,
Pulling Apart: The Deterioration of Employment and Income in
North America Under Free Trade. Ottawa, Ontario, Canada.:
Canadian Centre for Policy Alternatives.
Jackson, A., and D. Robinson. 2000. Falling
Behind: The State of Working Canada. Ottawa, Ontario, Canada.:
Canadian Centre for Policy Alternatives.
Mishel, Lawrence, Jared Bernstein, and John
Schmidt. 2001. The State of Working America 2000-2001. An
Economic Policy Institute book. Ithaca, N.Y.: ILR Press.
Privy Council Office. 1997. Canada 2005:
Global Challenges and Opportunities. Cited in Crane
1997b.
Robinson, D. 2001. State of the
Economy. Ottawa, Ontario, Canada.: Canadian Centre for Policy
Alternatives.
Sharpe, Andrew. 2000. A Comparison of
Canadian and U.S. Labour Market Performance in the 1990s.
Ottawa, Ontario, Canada.: Centre for the Study of Living
Standards.
Stanford, J., and A. Brown. 2000. Flying
Without A Net: The Economic Freedom of Working Canadians in
2000. Ottawa, Ontario, Canada.: Canadian Centre for Policy
Alternatives.
Yalnizyan, A. 1998. The Growing Gap.
Centre for Social Justice.
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