Shannon Roddel | July 27, 2019
Research has long indicated that the elimination of the North American Free Trade Agreement (NAFTA), or simply the withdrawal of the U.S. from NAFTA, would reduce standards of living in Canada, Mexico and the U.S.
A new study from the University of Notre Dame shows the move would indeed economically hurt all three countries, but with a surprising twist — Canada would suffer the most.
Typically, the smallest economy — in the case of NAFTA, Mexico — loses the most in per capita income because smaller economies tend to rely more on international trade, but not here, according to the study, “Putting Canada in the Penalty Box: Trade and Welfare Effects of Eliminating NAFTA,” forthcoming in The World Economy by Jeffrey Bergstrand, professor of finance in Notre Dame’s Mendoza College of Business.
“When a free trade agreement is eliminated, tariffs between the former members rise,” Bergstrand explains. “With NAFTA, as each country’s tariffs rise, it makes goods in non-member countries cheaper to buy and export. And it makes goods at home relatively less expensive. However, the fall in members’ trade does reduce demand in each country and lowers wage rates in all the countries, which we found. It also — due to higher tariffs among the former members — raises prices in all the countries, which we also found. This is what lowers standards of living.”
The study’s determination that Canada’s standard of living fell the most is due to the economic and geographic structure of the Canadian economy.
Jeffrey Bergstrand. Photo by Barbara Johnston/University of Notre Dame.Jeffrey Bergstrand
Read more here.