(Statistics Canada)
At the end
of the 1980s, Canada and the United States reached an agreement to phase out import tariffs over a 10-year period. This tariff reduction scheme was a major centrepiece of the Canada-US Free Trade Agreement
(FTA).
Two new studies released today shed light on the impact of these cuts on employment and profits. They show that manufacturing firms were not affected equally by the reductions: they positively
affected some manufactures and negatively affected others.
The first study, entitled Tariff Reduction and Employment in Canadian Manufacturing, examines the impact of the reductions on employment in firms
with various productivity and financial leverage characteristics.
This study concluded that firms that were less productive, as well as those with weaker balance sheets, lost more jobs than other
firms when domestic tariffs fell.
The second study, Trade Liberalization, Profitability and Financial Leverage investigated the impact of tariff reduction on profitability and financial leverage. It
found that tariff reductions reduced profits for firms in import-oriented industries, but increased profits for firms in export-oriented industries.
Employment changed little in manufacturing firms as
a result of declining domestic tariffs between 1988 and 1994. However, firms which were relatively less productive downsized considerably. Low-productivity firms lost 15 per cent of their work force in the
wake of declining Canadian and U.S. tariffs.
Furthermore, firms with more debt also downsized more than others in response to declining domestic tariffs.
These findings suggest that firms that
were more productive and those that were less heavily in debt gained little employment from declining U.S. tariffs but were better able to adjust to increased competition from foreign firms.
Manufacturing firms typically gained more profits from falling U.S. tariffs than they lost from falling Canadian tariffs. Consequently, profits rose by approximately 10 per cent a year on average as tariffs
fell.
However, the net profits associated with declining tariffs varied extensively across firms. More particularly, firms in export-oriented industries gained much more profits from declining U.S.
tariffs than they lost from declining domestic tariffs.
Conversely, firms in import-competing industries lost proportionately more profits from declining domestic tariffs and gained relatively little
from declining U.S. tariffs. |
