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Regardless of who wins the U.S. election, free trade will be under attack

Whatever the outcome of the tumultuous U.S. presidential election, it's evident that the North American free-trade agreement (NAFTA) will come under negative pressure. Republican nominee Donald Trump has asserted that NAFTA has caused the loss of many thousands of manufacturing jobs to Mexico. And concessions made to Bernie Sanders, the socialist runner-up in the Democratic primaries, have pushed Hillary Clinton to take a less-than-supportive position on free trade.

NAFTA has been under varying levels of attack for years, led by the Economic Policy Institute, a pro-union organization which in 2013 published an article by economist Jeff Faux stating: "By establishing the principle that U.S. corporations could relocate production elsewhere and sell back into the United States, NAFTA undercut the bargaining power of American workers. … The result has been 20 years of stagnant wages and the upward redistribution of income, wealth and political power."

Such rhetoric has found particularly fertile ground in high-job-loss states located close to Canada, including northern New York, Pennsylvania, West Virginia, Ohio, Indiana, Michigan and eastern Iowa. But despite the Economic Policy Institute's rhetoric, the reality is that employment and wages were in decline in those states well before NAFTA was signed in 1994.

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Read more: How a Clinton presidency would affect Canada's economy

Read more: How a Trump presidency would affect Canada's economy

Once known as the "Steel Belt" owing to its huge steel and coal industries, the region was renamed the "Rust Belt" when it couldn't compete with the burgeoning iron and steel producers in low-wage, regulation-light countries, such as China, Japan and South Korea. Once the epicentre of the American auto industry, a second economic shock came with the shutdown of many of the auto plants, plummeting Detroit and other auto-industry-dependent cities into an economic and social abyss as jobs were outsourced to lower-wage jurisdictions.

But while Trump blames NAFTA partner Mexico, the reality is that many of the Rust Belt job losses were the result of the movement of production to more efficient and competitive non-union plants in the Carolinas.

While so-called unfair competition from Mexico and to a lesser degree, Canada, is the central tenet of anti-NAFTA activist arguments, the reality is that the overall rate of U.S. manufacturing job losses owing to plant closings between 1994 and 2000 showed little deviation from the years prior to the implementation of NAFTA. Importantly, U.S. industrial production grew almost 50 per cent in the decade after NAFTA, while the previous decade saw growth of just 28 per cent.

But the coming of the new century saw that picture change markedly. Since 2000, American manufacturing jobs have declined from 17 million to 12 million. Fortunately for Canada, Mr. Trump and Mr. Sanders blame China and Mexico for undercutting American workers with cheap labour.

But there's another very big reason for manufacturing job losses that also applies here in Canada – technology. Today's robotic, automated manufacturing plants require far fewer workers. And those workers who replace them must possess much higher skill levels, for which they are more highly paid.

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On the other hand, older, low-skill workers like many in the Rust Belt have seen declining wages, if they can get a job at all, hence the anger and hopelessness that Mr. Trump has tapped into. Paradoxically, these automated plants save jobs because they are the only way of competing in a global economy. And all of Mr. Trump's and the Economic Policy Institute's anti-free-trade rhetoric won't change that.

Referring to Mr. Trump's talk as "bluster," Michigan State University economist Charles Ballard says, "Even if you did what Trump says [erect trade barriers] you wouldn't reverse the technology, which is a very big part of the picture."

This helps to explain why U.S. manufacturing output has grown by some 40 per cent since 2000 as manufacturing jobs fell by 30 per cent.

It's no wonder the economic planks in Mr. Trump's campaign are focused on manufacturing job losses, because the nation's overall job story paints a starkly different picture. Unemployment rates, which soared to almost 10 per cent in the aftermath of the 2008 financial crisis, have since fallen below 5 per cent. Wages are growing at the fastest rate since the recession.

This makes the appeal of Mr. Trump's assertions of job losses and stagnant wages difficult to fathom.

The reality is that both employment and wage levels are much more robust than they were during the past two presidential elections. It's normal for the party trying to gain power to focus on what's wrong rather than what's right. But even if he loses, the legacy of Mr. Trump's negative and untruthful campaign tactics will see free trade remain under attack long after the election.

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It will be a dangerous time for Canada, as any reduction of access to our dominant trading partner would have very serious economic implications. For Canadian businesses and government representatives who will need to engage in that debate, it's important to be armed with the facts.

Gwyn Morgan is the retired founder and CEO of Encana Corp. He has been a director of five global corporations.

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About the Author
Gwyn Morgan

Gwyn Morgan rose from his modest roots on an Alberta farm to become one of Canada’s foremost business leaders and ardent champion of the importance of Canadian-headquartered international enterprises. Gwyn has served on the board of directors of five global corporations. More

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