Yesterday the Harper government presented additional details in Parliament on the long-awaited trade deal between Canada and the European Union. Not surprisingly, there’s been debate about the likely economic impacts of the deal.
Proponents cite a government study that estimates the agreement will increase Canadian gross domestic product by about $12-billion annually. This would be a big boost – economically equivalent, they say, to 80,000 new Canadian jobs. Critics, including Jim Stanford, a respected economist for Canadian labour unions, think the deal will reduce Canadian employment.
While there are other important issues to consider, such as wages, purchasing power and the ability of Canadian businesses to compete globally, these public debates often focus narrowly on jobs – and with good reason, as everyday Canadians and politicians care first and foremost about keeping theirs.
A key question, then, is whether this new trade deal will ultimately kill or create Canadian jobs. A definitive answer has to wait until the deal is implemented and sufficient time passes for its evaluation. In the meantime, this legislation should act as both a job killer and a job creator – which is, after all, a key feature of trade agreements.
To understand why, first note that in an average month more than 200,000 Canadian jobs are lost, for numerous reasons. But even more jobs are typically created, resulting in a net employment gain. The continual turnover of jobs and businesses is an inescapable feature of modern economies. This creative destruction is largely unavoidable, and can be socially desirable over the long term.
The Canada-EU trade deal – which covers most industries, government procurement, regulations and more – will likely add to this ongoing economic churn by encouraging entry and exit of businesses on both sides of the Atlantic. This exit is bad news in the short term for those who are downsized, but over time, entry brings larger net benefits.
Economists have long understood that trade isn’t a zero-sum game, with one country’s gain exactly offsetting another’s loss. Instead, trade can increase economic efficiency and purchasing power for all. It lets people specialize in activities they’re comparatively good at. The result is that they can collectively produce more things at cheaper costs than if they each had to perform these individual tasks themselves. This basic principle of trade applies within our borders; international trade deals merely increase competitive pressures for this specialization beyond those borders.
The Canada-EU deal will have several effects on Canadian business – some good, some bad. On the positive side, it will improve Canadian access to the large and affluent European market. This will increase trade in things we already exchanged before the deal. It also lowers entry cost for Canadian firms in European markets. This encourages new Canadian businesses and new products in these markets. As a recent study on the Canada-Chile trade deal shows, the vast majority of trade gains didn’t come from simply exchanging more of existing stuff, but from new products that weren’t traded before the agreement.
Trade deals can also lower production costs. First, access to larger markets can increase the scale of operations, thereby lowering average costs. Second, this deal will allow Canadian firms to buy cheaper or better European inputs for their production. (Similarly, Canadian consumers will benefit from a wider variety of products at cheaper prices due to reduced Canadian tariffs and possibly thinner profit margins.) Lastly, freer trade strengthens incentives to adopt the latest technologies and invest in better production processes. Interestingly, research on the Canada-U.S. Free Trade Agreement finds the largest productivity gains for businesses with lower productivity before the deal – not for the initially most productive, who had already adopted better technologies.
On the other hand, this deal will also improve European access to our market, which means Canadian firms will face tougher competition. This will force some businesses to downsize or exit. Displaced workers and their families will be the hardest hit, particularly long-tenured employees who can suffer large and persistent earnings losses.
These issues highlight how trade deals create a tension within societies, by imposing short-term pain in exchange for longer-term gains. This trade-off is evident in another prominent study of the Canadian manufacturing sector’s experience with the Canada-U.S. trade deal. It finds that productivity increased dramatically, prices fell and welfare improved – all good things. But manufacturing employment fell, and this is a key political metric.
This tension underscores the need for a well-functioning social safety net, including access to employment insurance for displaced workers, and opportunities for life-long skills development and training to improve the adaptability of Canada’s labour market.
The bottom line is that proponents of this deal shouldn’t overlook its inevitable adjustment costs and the need for social policies to support freer trade. At the same time, critics shouldn’t ignore the strong evidence from previous Canadian trade deals that finds significant economic gains.
Stephen Tapp is a research director at the Institute for Research on Public Policy. Follow him on Twitter @stephen_tapp.