© 1993 Karen Selick
NAFTA--The Good, The Bad and the Misunderstood
An edited version of this article first appeared in the April, 1993 issue of Canadian Lawyer.  If you wish to reproduce this article, click here for copyright info.


 NAFTA--The Good, The Bad and the Misunderstood

There are lots of ways in which a thinking person who loves Canada can question whether the North American Free Trade Agreement (NAFTA) will benefit the country.

For starters, one might question why a document that is supposed to unshackle us requires so many pages to do it.  The official synopsis alone contains 19 pages of dense type.  Naive freedom fetishists like me tend to think we should be able to do it in a couple of words: "Tariffs and quotas are hereby abolished."  What new unforeseen restraints on liberty might lurk in all that extra verbiage?

Secondly, one might wonder whether the increased flow of goods and services between Canada and Mexico which experts are predicting will really be new trade, or merely trade diverted from other places.

Suppose both Taiwan and Mexico produce similar quality widgets.  Taiwanese widgets can be bought for $1 each.  Mexican widgets cost $1.05.  If both are subject to a 17 percent import duty, Canadian consumers will prefer to buy the cheaper Taiwanese product.  If the tariff is eliminated for Mexico but not for Taiwan, consumers will switch.  Trade with Mexico will grow, but Canada as a whole will be worse off, because we'll be paying foreigners $1.05 for widgets instead of the $1 we used to pay.

Third, one might speculate on whether the elaborate new regulatory regime that replaces the old tariff system will stack the deck in favour of large enterprises, at the expense of small ones. 

One small manufacturer I know says that it was often less onerous to pay the import duties before the Canada-U.S. treaty came into effect than it is to comply with all the red tape now that he can bring things in "free."  He hasn't been able to determine whether the red tape is truly necessary under the treaty, or simply the result of feather-bedding by customs officials who fear their jobs slipping away. 

In any case, the cost of bureaucratic compliance is the same whether you are importing 100 widgets or 1,000.  The burden per widget is therefore much higher for small traders than for large ones.  When there was simply a tax on each widget, large and small enterprises were affected proportionately.

Unfortunately, few of the criticisms we hear about NAFTA are this insightful.  The most vocal opponents of the deal don't simply question whether NAFTA is the best way to implement free trade.  On the contrary, they attack the very notion of free trade as a desirable goal.

Their logic is usually rather myopic:  Mexicans are willing to work for one-ninth the wage that the average Canadian worker demands.  Therefore, all jobs will immediately move to Mexico.  Canadians will become impoverished.

This argument has been around for at least 175 years.  Fortunately, so has the answer to it.  An English economist, David Ricardo, developed what economists call "the principle of comparative advantage."

The principle holds that even if one country--for example, Mexico--can produce every imaginable product more efficiently (read "cheaply") than another country--for example, Canada--it will still be to the advantage of both countries for Mexico to specialize in producing some items and Canada to specialize in producing others, and for the countries to trade with each other.

A commonly used example of the principle of comparative advantage should strike a chord with readers of this magazine.  It goes like this.

Suppose the best lawyer in town also happens to be the best typist in town.  It still wouldn't make sense for the lawyer to do her own typing.  She can hire a secretary who is slightly less skilled than herself at typing, but totally unskilled at practising law.  That person has an absolute disadvantage in both skills, but a very much worse disadvantage in practising law than in typing.  Therefore, he has a comparative advantage in typing. 

The output of "legal product" which the two of them can achieve through division of labour is greater than what they would achieve if the lawyer spent some of her billable hours typing, and the typist spent some of his secretarial time trying to practise law.  They will both be better off if they each specialize in the activity where they have the comparative advantage, and then trade: typing services in exchange for some of the money the lawyer earns from clients.

Space does not permit me to include a neat numerical example of how this can work between countries, but if you're interested, you can find one in an introductory economics textbook, or in the Encyclopedia Britannica.

Here in Canada, we already have abundant evidence that jobs don't automatically migrate to locations where prevailing wage rates are lower.  Ontario manufacturers haven't rushed into the Maritimes.

Some economists go so far as to suggest that trade treaties are a waste of time, and that Canadians would benefit from abolishing tariffs and import regulations unilaterally, regardless of what our trading partners do.  Politically, this suggestion evokes derisive snorts from those feeding at the protectionist trough.  Morally, however, it's hard to argue against the case for freedom.  Empirically, the remarkable success which Hong Kong has achieved through exactly such a policy makes it worthy of further consideration.



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June 07, 2000