The long and short of the Canada-U.S. free trade agreement

The Canada-U.S. Free Trade Agreement (FTA) provides a unique window onto the effects of a reciprocal trade agreement on an industrialized economy (Canada). For industries that experienced the deepest Canadian tariff cuts, employment fell by 12 percent and labour productivity rose by 15 percent as low-productivity plants contracted. For industries that received the largest U.S. tariff cuts, there were no employment gains, but plant-level labour productivity soared by 14 percent. These results highlight the conflict between those who bore the short-run adjustment costs (displaced workers and struggling plants) and those who are garnering the long-run gains (consumers and efficient plants). Finally, a simple welfare analysis provides evidence of aggregate welfare gains.