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The Social Cost of Free Trade Agreements


The social cost of free trade decreases the Canadian’s standard of living. This article analyzes the impact of these social costs.

Social Cost of Free Trade

The Social cost of the free trade agreements has affected Canadian’s through the following;

1. Fiscal Austerity Cuts to Social Programs
2. Decline in Unionization Rates
3. Growth of Income Inequality
4. Degradation of Provincial and Local Regulation


Fiscal Austerity Cuts to Social Programs

Fiscal austerity has historically been used as a tool for governments in order to reduce excessive expenditures.

This is also noted in the series on Monetary Reform  in which the Canadian government has decided to implement fiscal  austerity cuts to social programs in an futile attempt to reduce the compounding net debt.

The senior director at the Canadian Centre for Policy Alternatives, Bruce Campbell, notes that NAFTA pressures Canada into implementing fiscal austerity in order to increase the level of productivity in the economy.

Campbell argues that increasing productivity is necessary for Canada to remain competitive with the US.

Campbell outlines his arguments in the paper titled; Backsliding: The Impact of NAFTA on Canadian workers, where he writes,

The growing divergence between the ability of [Canadian] GDP and personal income per capita to keep pace with American performance after 1996 is explained by the massive cuts to social programs, the increased share of the national income pie appropriated by profits and interest income, and the stagnation of wage income during this period. Only those at the top of the income scale saw significant growth in their earnings. It is dramatic evidence of how NAFTA-driven integration had altered relations of power between labor and capital, between state and market in the Canadian economy.

Here, Campbell states that the pressure of keeping pace with US industry results in fiscal austerity cuts to various social programs.

His claims against the free trade agreements are illustrated in the following graph which compares the fiscal spending of Canada-US between 1992 and 2001.


As the above graph indicates, Canada has decreased its expenditures on social programs by nearly 10% between 1992 and 2001.

This has come at the expense of social programs including income security, education, health and recreation and culture.

Campbell also notes that the reduction of social programs allows Canada to bridge the fiscal spending gap between the US.

The graph illustrates that the gap on program spending has shrunk from 10.9% down to 2.9%.

Other academics have also noted a correlation between NAFTA and the decline in the funding of social programs.

University of Toronto Professor, Robert Johnson, and Chair of the Balsillie School of International Affairs, Rianne Mahon, note the “social cost” of the trade deals in their paper titled NAFTA, The Redesign, and Rescaling of Canada’s Welfare State, where they reveal,

The main effect [of NAFTA] on social programs could be through the economic impact of trade (and investment) liberalization. Certainly the CUFTA and NAFTA agreements have not delivered on the promise to address Canada’s fundamental economic weakness as manifested in the stubborn productivity gap between Canada and the United States. This affects social policy in that productivity gains might have increased government revenues as they did in the postwar years.

The authors state that NAFTA has not delivered on its promise to address the productivity gap between Canada and US. The productivity gap refers to the amount of goods and services produced by each country.

The Canadian government’s attempts to address the productivity gap have adversely affected Canadian social policy in a negative way

The authors also note the detrimental effects of the free trade agreements on employment rates and unionization rates in Canada.


Decline in Unionization Rates

The decline in the unionization rate is the human cost associated with the free trade deals.

The decline in the unionization rate is best illustrated in the following graph, courtesy of Statistics Canada.


The data in the above graph is obtained from several sources; including the Canada Labour Force Survey (LFS).

The LFS data is used to provide information on the  unemployment rate and employment rate by industry, occupation, public and private sector.

The LFS data is also used to collect information on union rates and wage rates, job permanency and workplace size.

The LFS  is conducted nationwide, in both the provinces and the territories and includes all individuals above the age of 15 that are non-institutionalized.

As the graph indicates, between 1981 – 2004 the unionization rate of workers decreased by nearly 10% in the Commercial (private) sector.

Authors Johnson and Mahon also discuss the impact of the free trade on unionization later on in their paper where they write,

… the restructuring of Canadian manufacturing has resulted in the closure of many unionized plants and the rise of numerous nonunion plants in their stead. It has thus contributed to the fall in unionization rates, especially in the private sector where the rate of organization has dropped to one in five workers. The weakening of Canada’s unions matters not only because unions make a difference when it comes to wage rates and benefits, but also because unions have been, and remain, an important force behind the development of social policies.

The authors note that the increase in the standard of living correlates with a higher unionization rate. Thus, they argue that a lower unionization rate correlates to a decrease in the standard of living.

The manufacturing sector has particularly been hit hard as illustrated in the following graph.


According to Statistics Canada, from 1991 – 2008, union jobs in the manufacturing sector disappeared twice as quickly as non-unionized jobs from 34.6% down to 26.2%.

The major contributing reasons for the decline in the unionization rate is due to the decrease in manufacturing productivity in Canada.

Campbell notes that in the years succeeding NAFTA, the manufacturing productivity in Canada has fallen in comparison to that of the US

The following graph, courtesy of Statistics Canada, shows the manufacturing productivity in Canada from 2000 – 2008.

The above graph indicates that between 2000 – 2008, the manufacturing productivity increased an average of 0.5% a year in Canada, compared to 4.6% in the US.

Due to the economic crisis in 2008, Canada’s manufacturing productivity declined even further  by -2%.

The productivity gap between the two nations is mainly due to the differences in manufacturing output and the fact that the American population vastly outnumbers Canada at a ratio of  9 to 1.

Based on this reasoning, Campbell argues that it is not feasible for Canada to bridge the productivity gap between Canada and the US.

Campbell also argues that the widening productivity gap between the two nations is due to the dominance of foreign transnational corporations in manufacturing sector of Canada.

He argues that foreign corporations  typically invest much less than domestic firms in industrial research and development (R&D) and this negatively affects the manufacturing productivity of the country.

In addition to the decline of the manufacturing sector, jobs in the forestries sector have also been declining.

The long-standing softwood lumber dispute between Canada and  US has facilitated in the loss of Canadian jobs.

The Government of B.C. published a paper titled Earnings and Employment trends September 2003. outlining the effects of the softwood lumber dispute on employment and effects of export tariffs.

The paper reveals

According to Statistics Canada’s Survey of Employment Payroll and Hours, in 2001, prior to the levy of the softwood duty, there were 85,000 employees in the forest sector in BC. Since then, 15,000 jobs were lost during 2002 and a further 3,000 jobs disappeared in the first 8 months of 2003. This represents a 21 per cent decline in the number of employees working in the forest sector since 2001.



Income Inequality

Academics  note the effects of free trade on the rising income inequality in Canada.

Researchers from the University of Ontario and Mexico, Mario Seccarecci and Eugenia Correa argue that the free trade deals perpetuate the growth of income inequality in Canada.

The authors reveal their arguments in their paper titled: Financial Crisis and its NAFTA Linkages, where they write,

Starting with the FTA, from 1989 onwards, income inequality grew a great deal in Canada until this ratio reached a plateau by the turn of the 21st Century. In the case of the U.S., the ratio rose consistently since the early 1990s to 2006.Undoubtedly other factors affecting income distribution were also at work, reflecting such tendencies as the long-term pattern of de-industrialization; but, as the shaded area for the FTA and then NAFTA period suggest, trade liberalization must have contributed by accelerating this trend towards greater income inequality.

The authors argue that  trade liberalization is a significant factor in the concentration of wealth into the top highest percentile.

Their arguments are illustrated in the following graph which depicts the Ratio of Income Quintiles in Canada, Mexico, and the United States, from 1986 to 2006.

Quintiles are a statistical value of a data set that represent 20% of a given population. The first quartile represents the lowest fifth of the data (1-20%); the top quartile represents the highest fifth of the data (80-100%).

As the above graph indicates, the income disparity in Canada between the highest and lowest income earners grew after the implementation of FTA in 1989 (represented by the shaded area).

The author’s findings correspond with Campbell’s graph which also depicts the rising income inequality of workers from 1980 – 2006.

As the graph indicates, the income share of the highest quintile increased by 44% whereas the lowest quintile only increased by 4.8%

Campbell notes that  trade liberalization plays a significant role in the growing  income disparity of Canadian citizens.

At the same time, he also noted that the aggregate income levels of Canadian citizens decreased since the implementation of the FTA and NAFTA trade deals.

Campbell  following graph illustrates the aggregate income levels in Canada from 1989 to 2005 as a share of the United States.


The above graph illustrates that the personal income per capita and personal disposable income per capita has been decreasing ever since 1989.

This stands in contrast to the GDP which did not suffer the same decline. Campbell notes that there is gap between the rising prosperity of the GDP and income per capita.

One possible reason for this gap is due to the foreign investments. Campbell argues that foreign investments only benefit the investors and not the majority of the Canadian public.

PhD candidate Jordan Brennan at York University observes that after the introduction of FTA and NAFTA, several measures of Canada’s economy had declined.

His observations are captured in his paper titled; NAFTA, Investiture, and Redistribution.

In his paper he presents the following graph which shows the ‘Real’ GDP, ‘Real’ Wages, Labour Productivity (Business Sector and Manufacturing) and the Unemployment rate in Canada from the 1950s to 2000.

Brennan states that NAFTA has failed to improve Canada’s economic situation since it did not contribute to the growth of labor productivity, real wages, or significantly reduce the unemployment rate for Canadian citizens.


Degradation of Provincial & Local Regulations

The degradation of provincial and local regulations is yet another social cost of free trade.

Various investors and foreign entities have used the free trading clauses (i.e. Chapter 11) in order to gain access to Canada’s cash flows and natural resources.

This is done through filing arbitration claims against Canada for disallowing investment opportunities.

Stan Sorscher, a member of the Washington State Economic Development Commission argues that the free trade agreements are designed to place the desires of rich investors above the needs of Canadian citizens.

Sorscher outlines his arguments in the paper titled The human cost of “free trade” policies where he writes,

By design, free trade agreements give investor interests highest priority – above the environment, human rights, labor rights, public health and financial regulation. Free trade agreements are full of rights for business, but conspicuously downplay rights for workers, people or the planet. Under free trade rules, a mining company can overwhelm the resources of a small country, ruin the water supply, and clear forests over the objections of local governments and people. Political power steadily concentrates in favor of those with the most money, while the middle class erodes and communities are weakened.

Sorscher’s arguments are clearly exemplified in the degradation of Alberta’s Natural Gas reservation Act, covered in Part 3 of this series.

There are also other cases where Canada’s provincial and local regulations have been challenged by foreign investors.

In the case of Newfoundland and Labrador, Premier Kathy Dunderdale upheld provincial regulation that mandated a portion of  Exxon Mobil’s R&D budget to be spent within the province to benefit the local populace.

As a result of this regulation, Exxon Mobil filed an arbitration case against the province of Newfoundland in 2010.

The case was closed on June 4, 2012, when a  NAFTA panel voted 2-1 in favour of Exxon Mobil claiming that the Newfoundland regulation contravened NAFTA regulations.

Premier Dunderdale will be forced to reimburse Exxon Mobil upwards of $100 million in damages for regulations that were designed for the benefit the Newfoundland people.

At the end of the day, it doesn’t matter if it the Premier’s decision is legal under provincial law, because it is illegal under NAFTA.


Thus far, we present a variety of social costs that the above mentioned trade deals incur on the Canadian population.

These social costs perpetuate the decline of Canadian’s standard of living through;

1. Fiscal Austerity Cuts to Social Programs
2. Decline in Unionization Rates
3. Growth of Income Inequality
4. Degradation of provincial & local regulation

The next article analyzes the cost of the free trade deals on Canada’s renewable and non-renewable resources.


How Free Trade Costs Canada it’s Sovereignty – Pt 1

Fundamentals of the International Trading System – Pt 2

Binding Clauses and the Hidden Cost of Free Trade – Pt 3

Canada and US Debate Over Trade Disputes on Free Trade Agreements – Pt 4



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