Friday, January 28, 2005

NAFTA Numbers

Author/blogger Virginia Postrel defends free trade, and the North American Free Trade Agreement in particular, in today's New York Times:
Economists argue for free trade. They have two centuries of theory and experience to back them up. And they have recent empirical studies of how the liberalization of trade has increased productivity in less-developed countries like Chile and India. Lowering trade barriers, they maintain, not only cuts costs for consumers but aids economic growth and makes the general public better off.
What's new, says Postrel, is that economists have finally done the math:
"We talk a lot about the benefits of free trade agreements, but when it comes to academics studying it, we know next to nothing in terms of hard-core facts about what happens when two rich countries liberalize trade," Professor Trefler, of the Rotman School of Management at the University of Toronto, said in an interview.

His article, "The Long and Short of the Canada-U.S. Free Trade Agreement," uses detailed data on both Canadian industries and individual companies to address these gaps. . . The study looks at the effect of tariff reductions, the simplest kind of liberalization.
Tefler's paper examined the effect of NAFTA-mandated reductions in U.S. and Canadian import tariffs on Canadian employment and growth. According to Postrel,
[T]he 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. . .

As painful as those layoffs were, however, the job losses were a short-term effect. Over the long run, employment in Canada did not drop, and manufacturing employment remains more robust than in other industrialized countries.

"Within 10 years, the lost employment was made up by employment gains in other parts of manufacturing," Professor Trefler found. [see page 19 of Trefler's paper]
Moreover, Trefler's calculations show NAFTA increased both GDP growth and labor productivity in Canada. As Postrel says:
[L]owering tariffs set off a productivity boom.

Formerly sheltered Canadian companies began to compete with and compare themselves with more-efficient American businesses. Some went under, but others significantly improved operations.

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.

"The idea that a simple government policy could raise productivity so dramatically is to me truly remarkable," Professor Trefler said. [see page 21 of Trefler's paper]
Trefler's numbers on GDP in Canada's manufacturing sector -- supposedly most affected by freeing trade -- are particularly striking:


Canada GDP, before and after (click to enlarge)

Postrel notes Trefler's data disproves the assertion, principally from unions on both sides of the border, that NAFTA depressed earnings:
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.
Freeing trade undoubtedly creates short-term discontinuities. Lobbyists for those affected have become experts in communicating this side of the equation to lawmakers. But free trade benefits all consumers, by lowering prices and stimulating innovation. That's a point rarely heard or understood. Perhaps Professor Trefler's paper will help.

(via Instapundit)

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