The Canada-U.S. Auto Pact of 1965: an Experiment in Selective Trade Liberalization
55 Pages Posted: 5 Jul 2004 Last revised: 5 May 2021
Date Written: June 1986
In this paper we analyse the Canada-U.S. Auto Pact, a selectivetrade liberalization agreement which created a duty-free North Americanmarket for the major U.S. multinational automobile producers, butcontinued to protect them from offshore producers. The new internationaltrade/I.O. literature predicts that, given the probable unexploitedeconomics of scale and specialization in the tariff-protected smallCanadian economy prior to 1965, rationalization leading to largeefficiency gains in Canadian production vis a vis U.S. production wouldoccur in a free trade environment. We estimate that the Auto Pact didnot induce a substantial improvement in Canadian relative productionefficiency. The missing ingredient seems to have been thecompetition-increasing effects of free trade in an oligopolistic settingthat is emphasized by the new trade/I.O. literature. The Auto Pact didnot increase the number of rivals in the oligopolistic Canadian industrysince the major players in the industry had production facilities on bothsides of the Canada-U.S. border before 1965, and no significant new entryinto Canada occurred.In the 1962-64 period, Canadian automotive production was 27% lessefficient than U.S. production. By 1970-72 this deficiency had beenreduced to 19%, but was not further reduced by the end of the 1970's. Ofthe 8 percentage points reduction in the Canadian disadvantage, weattribute only 3 percentage points to the rationalization process inducedspecifically by the Auto Pact.
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