Impact of North American Free Trade Agreement on Canadian Employment - Research Paper Example

The Impact of the North American Free Trade Agreement on Canadian Employment Introduction Rigid markets, as well as financial and economic competition brought by globalization created a new trend in cross-border or inter country trading. Geographically situated trading partners intensified their bilateral or multilateral trading commitments. For example, the European Union, the Association of Southeast Asian Nations among others had created regional blocks to increase their competitive advantage in the global economy. The counterpart in North America is the North American Free Trade Agreement (NAFTA). The agreement created a free trade area in the continent and caused substantial impact on the economies of the member countries. This directly and indirectly affects their products, goods and services including their labor and employment situation. Canada’s membership in the NAFTA created a concern on employment issues such as wages and other benefits; productivity and efficiency; and labor conditions. There are differing views on this concern. Supporters argue that it will push Canada’s competitiveness on employment. On the other hand, detractors argue that it will just drag down Canada’s economy. Overview of the North Atlantic Free Trade Agreement The NAFTA is the largest trade bloc in the world. In 2004 the combined gross domestic product (GDP) of member countries reached $11.4 trillion, which is almost one-third of the world's total GDP. To further illustrate, NAFTA member countries conduct nearly $1.7 billion in trilateral trade daily (Myles and Cahoon, 2004). NAFTA is an offshoot from the original free trade treaty by Canada and the United States. Negotiations were subsequently entered into by the United States and Mexico and led to the creation of a trilateral trade bloc. The agreement was signed by the three countries on 1992 and become effective on 01 January 1994 (NAFTA Secretariat FAQs,2009). Like the objectives of other trade blocs, the goal of NAFTA centers on the elimination of barriers to trade and the facilitation the cross-border movement of goods and services between the territories of the three countries thus improving its member countries economic strength. Along side with these objectives are the promotion of fair competition in the free trade area; increase in the investment opportunities in the territories of the countries; the provision of an adequate and effective protection and enforcement of intellectual property rights in each country's territory; the creation effective procedures for the implementation and application of the agreement, for its joint administration and for the resolution of disputes; and the establishment of a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of the agreement. It is the undertaking of the three countries who are party to the agreement to fully implement the above mentioned objectives by 2008 (Article 102, North American Free Trade Agreement, 1992). Canada and the North American Free Trade Association The Government of Canada claims that the membership of Canada in the free trade agreement with the United States and Mexico has built a strong foundation in the country’s trade liberation as well as the prospects of future growth and other benefits. This is exemplified by positive changes in economic indicators such as the Gross Domestic and Gross National Products and the rising standards of leaving in Canada (NAFTA: A Foundation for Canada’s Future Prosperity, 2008.). This is illustrated by Canada’s increasing merchandise exports. It climbed 95 percent, from $117 billion in 1993 to $229 billion in 2001 to its NAFTA partners. In comparison to Canadian exports to the rest of the world in the same period which increased only by 5 percent, it is noticeable that NAFTA trade is much more higher. Also, during the first seven years of the implementation of NAFTA, the average annual foreign direct investment in Canada increased to $21.4 billion. This is almost four times the average registered annual foreign direct investment seven years before the implementation of NAFTA (The NAFTA’s Impact, 2009.). Canada is a strategic trading partner of the United States as well as Mexico because of their geographical closeness. Another is because it is the largest trading partner in agricultural products and by products. The trend in the trade is increasing between these countries (Myths Regarding the Impact of NAFTA on US Agricultural Trade, 2005.). This is the result of the zero tariff-rate on these products. It has created new market or employment and job opportunities to Canadian citizens. Furthermore, Canadian consumers will have more purchasing power in terms of greater freedom of choice for agricultural products in a more competitive marketplace (Myles and Cahoon, 2004). Canadian Employment Competitiveness as a result of its Membership in the NAFTA The effect of NAFTA in the Canadian employment competitiveness has not been clearly measured or put into a figure. As claimed by Karakowsky (2004), this resulted to contrasting views on how the competitiveness. One view is positive on the effect of the free trade or the NAFTA in particular as it has created new jobs in Canada. Another view opposes the first proposition as it claims that NAFTA has caused a negative effect on the competitiveness because of job losses. The pro NAFTA proposition argues that competition with products and services with NAFTA member countries will push for the improvement of the domestic goods which will eventually trickle down to the improvement of the employment situation such as improved labor skills and labor conditions. The elimination of tariff on products and services of NAFTA member countries means a non protectionism policy that is geared towards domestic companies and domestic labor force. This necessitates the adoption of new measures to enhance their present stance and develop for the better in order to survive. This will lead to more efficiency both of the company and that of the labor (Karakowsky, 2004). The argument above is supported by the government of Canada which states that, the enhanced economic activity and production in the region which affects Canada’s labor pool has contributed to the creation of jobs for Canadians. It reported that one in five jobs in Canada is related in part or due to trade with NAFTA. Also, the Canadian government cited that a close to 4.1 million net new jobs have been created in Canada since 1993. It is further claimed by the Canadian government that a strong, modern and flexible NAFTA is important for the country to maintain its competitiveness in an increasingly complex and connected global marketplace (NAFTA: A Foundation for Canada’s Future Prosperity, 2008.). On the other hand, the opposite view states that instead of job creation the NAFTA has caused job losses. The superiority of products and services from other NAFTA member countries such as that of the United States will not help domestic companies, instead they will be forced out of business which means that they will eventually loose in the competition and will result to closure of the business. This may be further illustrated by US companies closing their Canadian subsidiaries because of the no need to maintain a subsidiary because of the presence of the free trade. Another situation is that due to a relatively lower cost of labor from Mexico and its inadequate enforcement of labor standards, the tendency is for companies to look it as incentive for investment at the expense of Canada (Hufbauer and Schott, 1992). This is supported by a figure in the report of the Economic Research Service of the US Department of Agriculture that the United States use Mexican laborers for labor intensive jobs in agriculture. This may also cause a shift of the labor to accept lower paying jobs or lower labor conditions and even standards. (Zahniser and Crago, 2009). In addition, there are also critics reporting that NAFTA has instead of creating more jobs and other employment opportunities to Canadian citizens has caused job losses or the diminution on Canada’s employment competitiveness. In other words, the allowance of products and services to freely enter Canada has overpowered the Canadian employment competitiveness that it resulted to shrinkage or has put it in a disadvantageous position which will not enable it to compete or match products and services flowing from NAFTA (Karakowsky, 2004). This argument is supported by the Canadian Center for Policy Alternatives which accounted that Canadians were made to believe that free trade is the answer to Canada’s labor and employment problems. Hence, they claim that figures cited by the government is untrue as the comparing average unemployment 15 years before the NAFTA is the same that of 15 years after. The center has reported that unemployment rate is not very much different before the NAFTA and when CANADA was already engaged in the free trade. The figure it cited was in 2005 where Canada’s unemployment rate was 6.8% in 2005, and that of 7.6% in 1989. In which by looking at the actual figures persons looking for work it is almost the same 12 million people rate. Thus, the argument of the center is that there is no improvement in the unemployment rate. Furthermore, displaced workers in the trade sectors moved to lower-skill, lower-wage jobs in the services sector. Unstable types of employment such as part-time, temporary, and self-employment increased. This also caused great impact on women and colored laborers. Economic statistics further show that the Canadian labor productivity (GDP per hour worked) did not improved but instead diminished. As an illustration, the labor productivity of Canada rose steadily vis-à-vis to the U.S. productivity in the period of 1960s and 1970s, which peaked at 92% of the U.S. level in 1984. The labor productivity then slid to 89% in 1989 and by 2005 it dropped to just 82% of U.S. productivity which is way below where it was in 1961. There is also a very slow wage growth in Canada. This is exemplified by the status labor cost competitiveness (unit labor costs) that significantly decreased in contrast to cost in the United States. For example the unit labor costs fell 19.7% in Canada compared to 7.2% in the U.S. during 1992-2002. However, this advantage has been eliminated by the 40% appreciation in the Canadian dollar (Campbell, 2006). Also as reported by the center, evidence did not show that there is a rise in the living standards in Canada as the annual growth in average personal income per capita decreased to 1.55% per annum in the 1980s, from the rapid 3.9% annual average gain during the 1960s and 1970s and during the period 1989-2005, where NAFTA is supposed to be in operation, the personal income per capita growth continued its slide to 0.63% yearly. It is also alarming that in contrast with that of the United States the Canadian GDP per capita decreased from 86% of the U.S. level in 1989 to 81% in 1992. From 1997 to 2002 during a period of economic recovery driven in large part by a low dollar and strong U.S. demand for Canadian exports, it rose to 87% of the U.S. level. However, personal income per capita experienced no such recovery. It fell precipitously from 89% in 1990 to 78% of the U.S. level in 2000, where it is still in the same level in the present (Campbell, 2006). There is also another argument against NAFTA which states that instead of economic growth there is a structural imbalance in the free trade area. For example US or Canadian laborers will loose job in place of Mexican laborers (Campbell, Salas and Scott,2001). Conclusion The differing views regarding the impact of the NAFTA on employment competitiveness of Canada is brought about by the lack of a comprehensive measure which shows the effect particularly on whether it has improved the labor employment situation or not. Nevertheless, absent the said measure, it is the thrust of the free trade to improve the economies of its member countries that includes the labor productivity, competitiveness and situation. The arguments of both sides are accurate. The contention of those who are the critics of NAFTA is correct particularly on jobs losses as illustrated of Mexican labor getting more jobs because of cheaper cost. However, this will substantially support the argument of the advocates of NAFTA on efficiency. Due to the shifting of companies towards Mexican labor, Canadian labor must innovate itself to become more competitive. If there is an instant flow of the free trade, Canadian competitiveness will eventually die because of the shock it receive. Thus, there is a need to protect the economy for some time and that calls for the gradual implementation of the free trade. In the short run, employment competitiveness will suffer because of cheaper and more efficient labor competition brought about by the free trade. However, in the long run as Canadian employment labor sector learns and by application of proper measures, said sector may recover. It can adopt these more efficient measures brought by free trade and improve them. As recommended by Hufbauer and Schott (2005), there is a need to restructure labor standards and laws governing workers migration to ease trade dispute and problems which are created about by the agreement and as a result which affects laborers from Canada. In sum the NAFTA, if properly implemented with cautious measures and guidance from the government, business and labor sector will improve Canadian employment competitiveness. References Article 102, North American Free Trade Agreement. (1992) Retrieved April 25, 2009 from http://www.sice.oas.org/trade/nafta/CHAP-01.ASP#A101. Campbell, Bruce, Carlos Salas and Robert E. Scott. (2001). NAFTA at Seven: Its Impact On Workers In All Three Nations. Retrieved April 26, 2009 from http://epi.3cdn.net/3ec414c1e7d04464e3_z8m6bna2s.pdf. Campbell, Bruce. (2006). NAFTA’s Broken Promises. Retrieved April 25 2009, from http://www.policyalternatives.ca/MonitorIssues/2006/07/MonitorIssue1415/. Karakowsky, Len. (2004) The Challenges of Business-Managing the Canadian and Global Context. US: Captus Press. Hufbauer, Gary Clyde and Jeffrey J. Schott. (1992). North American Free Trade: Issues and Recommendations. Washington DC: Institute for International Economics. Hufbauer, Gary Clyde and Jeffrey J. Schott. (2005). NAFTA Revisited: Achievements and Cahllenges. Washington DC: Institute for International Economics. Myles, George C and  Matthew Cahoon (2004). Canada and NAFTA: a 10-year measure of success in Canadian-U.S. agricultural trade - North American Free Trade Agreement. Retrieved April 25, 2009, from http://findarticles.com/p/articles/mi_m3723/is_1_16/ai_114328141/. Myths Regarding the Impact of NAFTA on US Agricultural Trade. (2005). Retrieved April 25, 2009, from http://www.fas.usda.gov/itp/Policy/nafta/NAFTA%20Myths.pdf. NAFTA: A Foundation for Canada’s Future Prosperity. (2008). Retrieved April 25, 2008 from http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/over.aspx?lang=en&menu_id=33&menu=R. The NAFTA’s Impact. (2009). Retrieved April 25, 2009, from http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/nafta5_section04.aspx?lang=en. NAFTA Secretariat FAQs, (2009). Retrieved April 25, 2009 from http://www.nafta-sec-alena.org/en/view.aspx?conID=775. Zahniser, Steven and Zachary Crago. (2009). NAFTA at 15; Building on Free Trade, 2009. Retrieved April 25, 2009, from http://www.ers.usda.gov/Publications/WRS0903/WRS0903.pdf. Read More