Increases in the intra-industry trade between the US and Canada led to enhanced productivity in the Canadian manufacturing sector. Tariff reductions associated with trade liberalization in Canada resulted in a surge in exit rates among non-export-oriented manufacturers with moderate production (Lileeva, 2008). The result meant that more market share had to be reallocated towards plants exhibiting higher output levels, thus accounting for aggregate increases in productivity that followed free trade in the Canadian sector (Lileeva, 2008). In this particular case, liberalization lowered demand for agricultural products in the smaller Canadian market, increasing home production for export, which, in turn, attracted foreign companies. In contrast, tariff cuts in the United States spurred what Lileeva (2008) called “within-plant productivity gains” in export-focused plants, mostly new plants penetrating the export market (p. 362). Consequently, only non-export-focused manufacturers suffered any cyclic unemployment and lack of production responses resulting from the treaty, while export-bound manufacturers harnessed the advantages from the agreement. Therefore, the US gained more from tariff cuts due to the larger size of its home market.
Canada had several motives for proposing and signing the FTA. First and foremost, Canada aimed at reducing barriers to trade in agricultural products and other items between the two countries. The FTA contributed to an unprecedented rise in the volume of commerce across the free trade area. This outcome is attributed to tariff cuts, which are a significant hindrance to free trade (Lileeva, 2008). Second, Canada hoped to compete fairly with the US after negotiating for better terms of business. The FTA would establish and foster conditions of fair competition between the two nations (Lileeva, 2008). Third, Canada sought to scale up its investment within the free-trade area which would have been facilitated by tariff reductions. Lastly, Canada aimed at establishing a framework that would help the two countries to resolve mutual disputes amicably and enhance their cooperation in the future.
Lileeva, A. (2008). Trade liberalization and productivity dynamics: Evidence from Canada. Canadian Journal of Economics/Revue Canadienne d’Economique, 41(2), 360-390.