Canada–U.S. Free Trade Agreement: Who Really Won? The Profits, Job Losses and Economic Impact 1989
Part 1 — How a 1989 Trade Deal Changed Canada and the United States
Introduction
Few economic agreements have had a bigger influence on the relationship between Canada and the United States than the Canada–United States Free Trade Agreement.
The agreement, commonly known as CUSFTA, came into force on January 1, 1989. Its central objective was to reduce trade barriers and create greater economic integration between two neighboring economies that were already deeply connected.
More than three decades later, the agreement remains important because its effects did not stop when NAFTA replaced it in 1994.
CUSFTA helped establish the foundation for a much larger North American production and trading system.
Canadian manufacturers began operating with the U.S. market more directly in mind. American companies gained greater access to Canadian customers and suppliers. Cross-border supply chains became increasingly important. Businesses adjusted their investment strategies. Consumers gained access to a broader range of products.
But the story was never simply one of winners.
Some companies expanded.
Some companies contracted.
Some workers benefited from growing export industries.
Other workers faced layoffs or had to move into different industries.
Some communities became more prosperous because of international trade.
Others experienced the pain of industrial restructuring.
That is why the question “Did Canada win or lose from free trade?” does not have a simple yes-or-no answer.
The better question is:
How large were the economic gains, who received them, who paid the adjustment costs, and what did Canada gain or sacrifice by becoming more deeply dependent on the U.S. market?
This report examines that question from the beginning.
1. What Was the Canada–U.S. Free Trade Agreement?
The Canada–United States Free Trade Agreement was a bilateral trade agreement designed to reduce barriers between Canada and the United States.
Before the agreement, businesses trading across the border faced tariffs and other barriers that could make products more expensive and reduce the efficiency of cross-border commerce.
The agreement sought to create a more open trading environment.
For Canadian exporters, the attraction was obvious.
The United States was—and remains—an enormous nearby market.
For American companies, Canada offered another wealthy consumer market as well as access to natural resources, manufacturing suppliers and investment opportunities.
The agreement therefore had two sides.
Canada wanted better access to American customers.
The United States wanted better access to Canadian customers.
Both countries expected greater specialization and competition to produce economic benefits.
But those benefits would not necessarily be distributed evenly.
2. Why Was Free Trade So Important for Canada?
Canada’s economy has always had a strong relationship with international trade.
Its geographic position makes the United States an especially important trading partner.
The two countries share a massive land border, highly developed transportation infrastructure and closely connected industrial regions.
A Canadian company can potentially ship goods to the United States far more easily than it can reach many distant overseas markets.
That geographic advantage makes the American market exceptionally valuable.
The problem was that trade barriers could still increase the cost of doing business across the border.
A tariff effectively raises the price of an imported product.
For exporters, that can make their products less competitive.
For consumers, it can reduce choice or increase prices.
For manufacturers, tariffs on imported components can increase production costs.
Reducing these barriers could therefore improve the economics of cross-border trade.
3. The Economic Argument Behind CUSFTA
The economic case for free trade was based largely on specialization and competition.
Consider two hypothetical factories.
Factory A produces a particular product at a relatively low cost.
Factory B produces the same product at a much higher cost.
If trade barriers protect both factories from foreign competition, Factory B may survive even though it is less efficient.
Once barriers fall, consumers have more access to competing products.
Factory A may expand.
Factory B may be forced to modernize, reduce costs or leave the market.
From an economy-wide perspective, resources can move toward more productive companies.
That process can increase productivity.
But from the perspective of workers at Factory B, the adjustment can be painful.
This is one of the most important concepts for understanding the Canada–U.S. free-trade experience.
An economic policy can increase overall efficiency while creating serious losses for specific workers, companies or communities.
4. The First Big Question: Did Trade Actually Increase?
Yes.
The official Canadian data shows a dramatic increase in merchandise trade between Canada and the United States after CUSFTA and, later, NAFTA.
Canadian merchandise exports to the United States were approximately $101.6 billion in 1989.
By 2000, they had reached approximately $359.3 billion.
By 2018, they had reached approximately $438.3 billion.
Canadian merchandise imports from the United States also increased.
They rose from approximately $88.1 billion in 1989 to $229.7 billion in 2000, and reached approximately $304.7 billion in 2018.
Those figures show the enormous expansion of bilateral commerce.
However, they require an important qualification.
The entire increase cannot automatically be credited to CUSFTA alone.
NAFTA entered into force in 1994.
Technology changed.
Transportation improved.
Global supply chains expanded.
Exchange rates moved.
The economies of Canada and the United States changed.
Therefore, the growth in trade should be understood as the result of CUSFTA combined with a much broader transformation of the North American economy.
5. The 1989 Starting Point
The year 1989 is important because it provides a useful reference point.
Canadian merchandise exports to the United States were about $101.6 billion.
Imports from the United States were about $88.1 billion.
By comparing those numbers with later years, we can see how dramatically the relationship expanded.
The trade relationship did not simply become larger.
It became more deeply integrated.
Canadian companies increasingly depended on American demand.
American companies increasingly depended on Canadian suppliers.
Factories became connected through cross-border supply chains.
Raw materials, components and finished products increasingly moved between the two countries.
This was the beginning of a much more integrated continental economy.
6. The 1990s Changed Everything
The 1990s were a transformative period.
CUSFTA was followed by NAFTA in 1994.
NAFTA expanded the North American trade framework by including Mexico.
That changed the scale of the economic integration project.
Canada was no longer participating only in a bilateral Canada–U.S. trade relationship.
It became part of a broader North American production system involving three countries.
Manufacturing companies could increasingly organize production across borders.
A product could have components made in Canada, the United States and Mexico before reaching the final consumer.
This model became especially important in industries such as automobiles.
7. Canada Became More Trade-Oriented
Government of Canada analysis shows that Canada’s economy became considerably more trade-oriented and integrated into the North American economy following CUSFTA and NAFTA.
The United States accounted for around 60% of Canada’s global merchandise exports in the early 1980s.
That share reached approximately 87% in the early 2000s.
Although the U.S. share later declined, the United States still represented about 75% of Canada’s merchandise exports in 2018.
This is one of the most important statistics in the entire free-trade story.
It demonstrates both the enormous opportunity and the potential vulnerability created by integration.
8. The Profit Side of U.S. Market Access
For Canadian exporters, the U.S. market represented an extraordinary opportunity.
Canada has a relatively small domestic population compared with the United States.
A Canadian company that can sell only to Canadian customers has a smaller potential market.
A company that can sell throughout the United States has access to hundreds of millions of additional consumers and businesses.
That can create economies of scale.
The company can produce more.
It can spread fixed costs over more units.
It can justify investments in new equipment.
It can develop specialized production facilities.
It can improve logistics.
It can invest in research and development.
A larger market can therefore change the economics of an entire business.
9. The Consumer Profit
Free trade can also benefit consumers.
When trade barriers fall, consumers may gain access to more products and more suppliers.
More competition can put pressure on companies to improve quality and control prices.
Canadian consumers can gain access to American products.
American consumers can gain access to Canadian products.
Businesses can also gain access to imported components and machinery.
This is why imports should not automatically be treated as economic losses.
An imported machine can help a Canadian factory produce more efficiently.
An imported component can make a Canadian product cheaper.
An imported product can give consumers more choice.
The economic value of trade is therefore much broader than the export number alone.
10. The Business Profit
Businesses can gain from trade in several ways.
First, they gain access to larger markets.
Second, they may obtain cheaper or better intermediate inputs.
Third, they can specialize.
Fourth, they can increase production.
Fifth, they can attract investment.
Sixth, they may become more productive because of competitive pressure.
These effects can reinforce each other.
A company that expands exports can generate more revenue.
Higher revenue can support investment.
Investment can increase productivity.
Higher productivity can make the company more competitive.
Greater competitiveness can produce additional exports.
That is one potential positive cycle created by trade liberalization.
11. But What Happens to the Less Competitive Company?
The same process can work in reverse.
A company that cannot compete may lose customers.
Lower sales can reduce revenue.
Lower revenue can reduce investment.
The company may cut employment.
Eventually, it may close.
This is the part of free trade that is often most visible in local communities.
A factory closure is immediate and highly concentrated.
The benefits of lower prices or greater export opportunities may be spread across millions of consumers and thousands of companies.
That creates a political problem.
The costs can be concentrated.
The benefits can be widely distributed.
12. What Canadian Manufacturing Research Shows
Statistics Canada research provides important evidence about how Canadian manufacturing responded to trade liberalization.
Research on the productivity effects of the Canada–United States Free Trade Agreement found that Canadian tariff reductions increased exit rates among moderately productive non-exporting plants.
At the same time, market share shifted toward highly productive plants.
The research concluded that these changes helped explain aggregate productivity gains.
It also found that productivity gains associated with U.S. tariff cuts occurred among exporters, particularly new exporters.
This finding is extremely important.
It means the agreement did not affect every company in the same way.
Exporters could capture significant benefits.
Less productive non-exporters were more likely to experience contraction or exit.
That is a much more accurate description than saying simply that “free trade created jobs” or “free trade destroyed jobs.”
13. Productivity Was a Major Part of the Story
Trade liberalization can improve productivity by changing which companies grow and which companies shrink.
Statistics Canada’s research on the mechanisms behind Canadian manufacturing productivity gains estimated that market-share selection and reallocation between plants made a major contribution to productivity growth, while exporters also experienced important gains.
In simple language:
The economy became more productive partly because stronger companies gained market share.
Less productive companies lost market share.
Some companies invested and became more efficient.
Some companies entered export markets and improved their productivity.
This is the economic restructuring process at work.
14. The Job-Loss Debate
The question of jobs is probably the most politically sensitive part of the free-trade debate.
A worker does not experience “aggregate productivity.”
A worker experiences a paycheck.
If a factory closes, the worker loses income.
If a new export company expands hundreds of miles away, that does not automatically replace the lost job.
That is why national economic statistics can sometimes tell a different story from the experience of a particular community.
The country can gain economically while a specific region experiences economic hardship.
Both realities can exist simultaneously.
15. Free Trade Did Not Affect Every Worker Equally
The Canadian experience shows that workers’ exposure to international trade varies considerably by industry.
This remains true today.
Statistics Canada reported that in 2024 an estimated 1.9 million Canadian workers, equal to 9.3% of total employment, worked in industries dependent on U.S. demand for Canadian exports.
The figure demonstrates how deeply the two economies remain connected.
The exposure is particularly strong in goods-producing industries.
For example, Statistics Canada estimated that a large share of jobs in transportation equipment manufacturing depended on U.S. export demand.
This helps explain why trade policy can have such powerful regional and sectoral effects.
16. High-Quality Jobs Can Also Be Trade-Dependent
An important misconception is that trade-dependent employment is necessarily low-paid employment.
Statistics Canada found that workers in industries dependent on U.S. export demand had average hourly earnings above those in other industries in 2024.
These jobs were also more likely to be full-time and permanent.
That creates an important modern lesson.
Trade dependence can provide good jobs.
But dependence also means that changes in U.S. demand or trade policy can create significant risks for those workers.
17. The Strategic Vulnerability
Canada’s dependence on the American market became one of the most important long-term consequences of continental integration.
From an economic perspective, concentrating exports in a huge nearby market can be extremely efficient.
From a strategic perspective, however, concentration creates risk.
If U.S. demand falls, Canadian exporters can be affected.
If U.S. trade policy changes, Canadian businesses can be affected.
If tariffs are introduced, companies that depend heavily on American customers can face immediate pressure.
The relationship therefore contains a paradox.
The closer Canada becomes to the U.S. economy, the greater the economic opportunity—but also the greater the exposure to U.S. policy and economic conditions.
18. The Difference Between Trade Growth and Economic Welfare
A common mistake is to assume that more trade automatically means more economic welfare.
Trade growth is important.
But it is not the only measure.
A complete economic assessment should ask:
Did real incomes rise?
Did productivity improve?
Did investment increase?
Did workers receive higher wages?
Did consumers benefit?
Did employment expand?
Did regions become more prosperous?
Did inequality increase?
Did displaced workers successfully move into new jobs?
These questions provide a much more complete picture.
19. The Difference Between National and Local Outcomes
Imagine a Canadian town whose economy depends heavily on one factory.
If that factory loses market share after trade liberalization, the local effect can be devastating.
Workers may leave.
Local businesses may lose customers.
Property values may weaken.
Municipal tax revenue may decline.
The community may struggle for years.
At the national level, however, another industry may be expanding.
A successful exporter in Ontario or Quebec may be hiring.
An energy producer may be increasing exports.
A technology company may be growing.
The national economy can therefore experience gains while an individual community experiences losses.
This is why distribution matters.
20. Did the Agreement Create the Entire Trade Boom?
No.
That would be too simplistic.
The official Canadian assessment itself places CUSFTA within a broader historical sequence.
CUSFTA entered into force in 1989.
NAFTA followed in 1994.
Bilateral trade accelerated over the broader period.
Technology, globalization and supply-chain development also changed the structure of commerce.
Therefore, the proper conclusion is that CUSFTA was a major contributor to a much broader process of North American economic integration.
It was not the only factor.
21. The Automobile Industry Became a Symbol of Integration
Few industries demonstrate the consequences of North American trade integration better than automobiles.
A modern vehicle is not necessarily produced entirely in one country.
Parts can cross borders multiple times.
A component can be manufactured in one country, processed in another and assembled somewhere else.
Trade agreements make this type of production more practical by reducing barriers and increasing predictability.
The result is a continental supply chain.
Canada became deeply involved in this system.
The United States also benefited from access to Canadian production, components and suppliers.
Mexico later became an increasingly important part of the same North American production structure under NAFTA.
22. Services Also Became More Important
Trade is not only about physical products.
Services are another major part of the Canada–U.S. economic relationship.
Government of Canada data shows substantial growth in services trade between the two countries over the decades following the implementation of CUSFTA.
Financial services, transportation, travel, business services, technology and other professional activities all contribute to the modern cross-border relationship.
This means the legacy of free trade extends beyond factories and physical goods.
23. The Long-Term Economic Transformation
The most important consequence of CUSFTA may not be one specific tariff reduction.
It may be the transformation of how companies think about North America.
Before deeper integration, businesses could view the border as a major economic barrier.
After integration, many companies increasingly viewed Canada and the United States as parts of one connected production and consumer system.
That change in business strategy can be extremely powerful.
Investment decisions change.
Factories change.
Supply chains change.
Hiring changes.
Transportation networks change.
Corporate strategy changes.
Economic geography changes.
That is what makes trade agreements historically significant.
24. The Profit-and-Loss Balance
The evidence points toward a mixed but important conclusion.
Major potential gains included:
- Larger market access
- Greater export opportunities
- Increased competition
- Productivity improvements
- More integrated supply chains
- Greater access to imported inputs
- Increased business specialization
- Deeper investment relationships
- Greater consumer choice
Major costs included:
- Pressure on less productive firms
- Plant closures
- Employment reductions in some companies
- Regional economic disruption
- Adjustment costs for workers
- Greater dependence on U.S. demand
- Greater exposure to changes in American trade policy
The important point is that these outcomes can occur at the same time.
25. The First Verdict
So, did Canada profit from the Canada–U.S. Free Trade Agreement?
The evidence does not support a simple “yes” or “no.”
Canada clearly experienced enormous growth in bilateral trade and became much more integrated with the U.S. economy.
Manufacturing productivity research also found important gains associated with trade liberalization, particularly among exporters and through the reallocation of market share toward more productive plants.
But those gains were not free.
Some less productive companies contracted or exited.
Some workers faced employment losses.
Some communities experienced painful restructuring.
The economic gains were therefore real, but they were not equally distributed.
26. The Central Lesson for Today’s Economy
The original free-trade debate offers a lesson that remains relevant decades later.
Trade policy creates opportunities.
Domestic policy determines how effectively a country captures those opportunities and manages the costs.
If workers lose jobs because an industry restructures, trade policy alone cannot solve the problem.
Education, retraining, infrastructure, regional development and labour-market policies also matter.
A successful trade strategy therefore requires more than signing an agreement.
It requires an economic system capable of helping businesses expand and helping workers adjust.
Conclusion: CUSFTA Was Neither a Simple Victory Nor a Simple Failure
The Canada–United States Free Trade Agreement changed the economic relationship between two of the world’s most closely connected economies.
It opened the door to greater market access.
It encouraged competition.
It helped deepen supply chains.
It supported greater specialization.
It contributed to a more trade-oriented Canadian economy.
But it also accelerated economic restructuring.
Some companies became more productive and expanded into export markets.
Other companies struggled.
Some workers benefited from new opportunities.
Others faced layoffs and uncertainty.
The result was not a uniform national experience.
It was a redistribution of economic activity.
The strongest companies often gained opportunities to grow.
The weakest companies faced stronger pressure to change or leave the market.
That is why the most accurate description of CUSFTA is not simply “profit” or “loss.”
It was economic transformation.
The agreement changed where companies sold their products, where they invested, how factories operated and how workers participated in the economy.
And perhaps its greatest legacy was the creation of a North American economic relationship so deep that events on one side of the border could have immediate consequences on the other.
Canada gained extraordinary access to the world’s largest economy.
But in doing so, it also became more dependent on that economy.
That remains the central paradox of Canada–U.S. free trade:
The United States became one of Canada’s greatest economic opportunities—and one of Canada’s greatest sources of economic exposure.
Sources
Government of Canada, Global Affairs Canada, Canada–United States–Mexico Agreement: Economic Impact Assessment.
Statistics Canada, Trade Liberalization and Productivity Dynamics: Evidence from Canada.
Statistics Canada, Mechanisms through which the Canada–United States Free Trade Agreement increased Canadian manufacturing productivity.
Statistics Canada, United States tariffs and Canadian labour market trends.
Government of Canada, Canada’s State of Trade 2022: The benefits of free trade agreements.
Part 1 complete.