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Was NAFTA just a ‘one decade wonder’ for Canada?

These are stories Report on Business is following Tuesday, March 11, 2014.

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20 years on
As Canada focuses today on its new deal with South Korea, a Bank of Nova Scotia economist takes a look back on the North American free-trade agreement two decades later.

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And, Derek Holt finds, the 20-year-old deal with the United States and Mexico seems to have been a "one decade wonder" where Canada is concerned.

His point being that Canada's trade troubles largely relate to "our challenged bilateral relationship" with America.

The share of Canadian exports to the U.S. has plunged to just about where it stood prior to the 1994 NAFTA deal, Mr. Holt said in a new report.

"I don't recall anyone actually forecasting such an outcome in that NAFTA, it appears, was a one decade wonder to Canada if measured by the steep climb in the share of Canada's exports going to the U.S. that only lasted over the 1990s," he said.

"It probably helped to put handcuffs on a protectionist minded U.S. Congress throughout much of this period, but Canada's broad trade picture suggests structural challenges with Canada's biggest and most important trading partner by far."

The problem, Mr. Holt said, is Canadian competitiveness in the U.S., not just in relation to American producers but also to other foreigners.

"At first it was China's entry into the [World Trade Organization] that accelerated that country's relative rise in the U.S. imports market and displaced Canadian exports," the Scotiabank economist noted.

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"Over time, Canada has also lost import market share in the U.S. to countries like Mexico."

A stronger Canadian currency was certainly part of the issue, Mr. Holt added, but high unit labour costs compared to export competitors is a "big part" of the problem.

Where the South Korean deal is concerned, Mr. Holt said he doesn't buy into fears that Canada "gave away too much" in the negotiations.

"There are always winners and losers in any trade deal, however, and the overall terms of the agreement appear to represent a net gain to consumers and producers across all industries combined," he added, noting, too, that the estimated export benefit of $1.7-billion a year accounts for less than 0.1 per cent of the economy in nominal terms.

Ford in fight with Harper
Canada's prime minister is in a war of words today with the chief of Ford Motor Co.'s Canadian operation over a free trade deal with South Korea.

Dianne Craig, chief executive officer of Ford Canada, objects to the trade agreement, warning in a statement today that "we believe that South Korea will remain one of the most closed automotive markets in the world under the deal negotiated by the Canadian government.

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Ford, she said, can "compete and win" when the playing field is level.

"But no Canadian manufacturer can compete with a market controlled by non-tariff barriers and currency manipulation," Ms. Craig said.

"The trade agreement negotiated by the Canadian government with South Korea fails to address these issues."

As The Globe and Mail's Nathan VanderKlippe reports from Seoul, Prime Minister Stephen Harper, who unveiled the trade deal, cited the fact that Ford Canada's U.S. parent had no problem with an America-Korea agreement two years ago.

"What we are doing here is allowing other Canadian companies and other Canadian sectors to have the same access that Ford already has," he said.

OECD sees pick-up
The harsh Canadian winter is playing havoc with the economy, but the OECD expects something of a rebound in the second quarter of the year.

"The United States and Canada are both also expected to experience an uneven pattern of growth in the near term, owing in part to the disruptive effect of repeated episodes of severe winter weather," the Organization for Economic Co-operation and Development said today in its interim economic assessment.

"A number of activities were restrained by the storms and cold temperatures, which is likely to depress first-quarter GDP, with some bounce-back effect in the second quarter in the absence of further negative shocks."

Canadians are, of course, used to wretched winters, but this one has been particularly ugly, as the OECD noted.

In its new report, the group forecasts first-quarter economic growth of just 0.5 per cent in the current quarter, but, given "one-off factors," could not update its projection for the second quarter.

In November, it forecast second-quarter growth at 2.4 per cent.

According to the latest reading by Statistics Canada, the economy expanded in the fourth quarter at an annual pace of 2.9 per cent, though contracted 0.5 per cent in December, the month of an ice storm.

Over all, the OECD said today that "most signs" point to stronger growth in the world's big advanced economies, boosted by the easy money policies of their central banks and "reduced fiscal drag."

But, as others have warned, emerging market countries have a "more mixed" showing, with some "continuing to grow strongly while others, where underlying vulnerabilities have been highlighted by reversals of capital inflows, are experiencing a marked loss of momentum."

The group pointed directly to the easing of stimulus measures by the Federal Reserve, which is hitting some of the emerging markets.

That, the OECD suggested, means the U.S. central bank should "proceed cautiously, with a careful communications policy to smooth expectations."

A number of one-off factors, such as the U.S. government shutdown last fall and December's weather woes, have hurt the overall pace of economic growth in the Group of Seven nations.

"Nonetheless, in most of the major advanced economies fourth-quarter GDP growth was better than expected, and consensus forecasts for 2014 have ratcheted up over the last few months," the OECD said.

China in pilot project
China is embarking on a pilot project to develop private banks that will involve 10 companies.

The national regulatory group said today the program will be tested in Tianjim, Shanghai, Zhejiang and Guangdong, Reuters reports.

Among the companies are the large Alibaba and Tencent Holdings, two e-commerce groups.

The program will see the creation of five institutions, with two investors apiece.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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