U.S.-Canadian Business under the Free Trade Agreement: A Study in Contrasts

Abstract

The United States-Canada Free Trade Agreement (FTA), which went into effect on the first day of 1989, has already greatly reduced tariffs between the two countries and will continue to do so over the following ten years. In addition, many non-tariff barriers will be reduced, if not eliminated, and cross-border investment will be greatly liberalized. In the long run, the gains for both the U.S. and Canada as a result of freer trade should be significant, but can only be realized if companies are aware of the changed environment and are reacting to it. A survey of 4,530 firms, generally in the Great Lakes Region, was conducted in order to calibrate awareness levels of the Agreement among firms on both sides of the border and to see how they are responding to the changed environment. The response rate from Canadian firms was 15%, while only 5% of the U.S. firms responded. The major conclusion that was drawn from the survey was that while U.S. manufacturers generally see the Ff A as an opportunity, they are not very familiar with it nor are they responding to it. In contrast, Canadian manufacturers see the Agreement as both an opportunity and a threat. They have studied it much more than their U.S. counterparts and are very aware of its implications. They are taking specific action now, both in the U.S. and Canada, while their neighbors across the border are standing still, oblivious to the Canadian threat to their U.S. markets. Most of the companies (U.S. or Canadian) having specific action plans intend to implement them within one year, regardless of their tariff phase-out period. The most active firms are those that are truly Canadian (independent of parents outside of Canada). One-third of those respondents plan on increasing U.S. capacity.