The 1989 Canada-US Free Trade Agreement (CUSFTA) resulted in short-term job losses for Canadian workers that were later offset as export opportunities appeared, a new University of Toronto study has found.
The study, published recently in The Review of Economic Studies , used a novel and confidential Statistics Canada dataset that enabled researchers to track individual workers' earnings from each employer between 1984 and 2004.
"We took workers who were employed in 1988, on the eve of CUSFTA, and followed them over time as the tariff cuts went into effect," says Peter Morrow, an associate professor in the department of economics in the University of Toronto's Faculty of Arts & Science who co-authored the paper with Brian Kovak of Carnegie Mellon University.
Morrow adds that the prevailing conventional wisdom about tariff reduction and labour market effects comes from studies of the China shock, a period in the early 2000s when the United States saw a significant increase in Chinese imports.
"That literature persistently finds that import competition from China is bad for workers and things stay bad for a long time," he says. "[But] that is not what we find here."
While cuts to Canadian tariffs did lead to an increased likelihood of layoffs and reduced earnings for workers, the losses proved to be short term.
Morrow and Kovak found that Canadian workers recovered lost earnings over time by moving into other firms, industries and sectors. The researchers also found that Canadian tariff cuts did not reduce the total number of years worked or workers' cumulative earnings during the 16 years that followed the agreement taking effect.
"The tariff cuts did have the expected effects," Morrow says, "but Canadian workers' adjustment to changing labour demands was relatively speedy and successful."
It's not clear how Canadian workers made the transition so successfully.
"There's no smoking gun," Morrow says. "Whether it's the education system, or the portability of health benefits or of retirement funds through the CPP - we just don't know. We do know that when workers left industries that faced increased competition, there were other expanding industries for them to move into. There were places to go."
The bilateral nature of the agreement also played a role.
"Canadian workers left affected industries quickly and transitioned to other manufacturing industries, construction and services - and the bilateral nature of the FTA gave import-competing workers employment options in potential alternative manufacturing industries benefiting from larger U.S. tariff cuts," Morrow says.
The results suggest that the success of labour market transitions applied both to older workers, who were highly attached to the labour force and specific employers in the period before the trade agreement went into effect, and to workers with lower levels of attachment. That includes young workers and women, who tend to move between jobs more often.
"Even low-attachment workers moved easily into new industries," Morrow says. "It really was a case of short-term pain offset by long-term gain."
For Morrow, the results should inform policy discussions surrounding trade agreements.
"Don't fear trade," he says. "We should not be afraid of engaging in international trade because it creates new opportunities and workers can - and do - take those opportunities."
