Tuesday, February 01, 2005

Free Trade - No pain, no gain

There was an excellent article on NAFTA in the New York Times and how it affected the Canadian economy a few days ago. (yes I should have posted it a few days ago, but occasionally my education diverts my attention) However, it offers a rather concise view of the effects the transition to free trade had. As a former economics student, its basically text book. A period of increased unemployment as the economy adapts to increased competition and tariff reliant businesses suffer. However, high productivity firms make inroads into new markets eventually offsetting those losses. Prices fall from competition eventually resulting in consumers having a greater range of products at lower prices available to them.

Before the agreement went into effect in 1989, more than one in four Canadian industries were, in fact, protected by tariffs of more than 10 percent. Those industries included not only businesses known for their protectionism, notably apparel makers, but manufacturers of a wide range of products, from beer and pretzels to coffins, plastic pipes and paper bags.

Not surprisingly, the Canadian industries that had relied on tariffs to protect them "were hammered" when those barriers disappeared, Professor Trefler said. "They saw their employment fall by 12 percent," he said, meaning one in eight workers lost their jobs. In manufacturing as a whole, the trade agreement reduced employment by 5 percent.

"Employment losses of 5 percent translate into 100,000 lost jobs and strike me as large," he wrote, "not least because only a relatively small number of industries experienced deep tariff concessions."

This is the pain part which makes assorted lefties get flustered about the mention of the words "free trade" and NAFTA, you know whom I mean the David Orchards and Bill Blakies of the world.

"Within 10 years, the lost employment was made up by employment gains in other parts of manufacturing," Professor Trefler found.

Nor, contrary to predictions, did Canadian wages drop because of competition from less-educated, nonunionized workers in the southern United States. Quite the opposite: using payroll statistics, he found that "for all workers, the tariff concessions raised annual earnings" by about 3 percent over eight years.

The productivity gains were huge. In the formerly sheltered industries most affected by the tariff cuts, labor productivity jumped 15 percent, at least half from closing inefficient plants. "This translates into an enormous compound annual growth rate of 1.9 percent," he wrote.

But closing plants is not the whole story, or even half of it. Among export-oriented industries, which expanded after the agreement, data from individual plants show an increase in labor productivity of 14 percent. Manufacturing productivity as a whole jumped 6 percent.

This is why we go ahead with free trade anyhow. Its the most effective way to decide what your country should produce - comparitive advantage. Furthermore, there is nothing like a healthy dose of competition and the ability to expand to cause companies that would otherwise be fairly docile to become far more productive. The rank stupidity some people display is wishing to overturn NAFTA and stop free trade over a few minor disputes displays a patent ignorance for economics. We've already sustained all the suffering which goes with realignment from the removal and tarriffs from severely sheltered industries, why would we now wish to forego the benifets? The only thing those on the left who oppose free trade have to go on are a few disputes, while on the whole the relationship is tranquil and their own irrational anti-Americanism (i.e. feelings of personal inadequacy).


At 1:10 p.m., Blogger angry_in_t_o said...

Now that we've gotten used to not having tarriffs, Canadian companies need to be weened off the low dollar. Every time the dollar rises, you hear the wailing of exporters saying their goods won't be able to compete. If you can't compete on price, compete on quality, or get out of the business. Leave the competition-based-on-cheap-labour strategy to the Chinese -- they'll always beat you on that.


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