North American integration and plant closures in Ontario
INTRODUCTION One expected adjustment from increased North American integration was that there would be rationalization in Canada’s manufacturing industries. Proponents of the Canada-US Free Trade Agreement (CUSTA) argued that plant closings were part of a rationalization process that would yield large benefits to Canada as the manufacturing industry would become more competitive and would operate on a larger scale. The notion that Canada stood to gain significantly through rationalization was an extension of the success that was gained through the 1965 Auto Pact and was formalized in a model by Cox and Harris (1985). The notion was accepted by the MacDonald Commission and became the intellectual foundation of the proponents’ case for free trade with the United States. Opponents of CUSTA agreed that plants would close, but these would be branch plants operating in Canada that would pull out in the wake of CUSTA and destroy thousands of jobs. However, the impact of CUSTA on plant closings in Canada has not been carefully examined and data on plant closings are not available from Statistics Canada. At this point, we do not know if CUSTA resulted in rationalization. There is some empirical evidence that firms in small-scale Canadian industries realized losses with the advent of CUSTA. Brander (1991) and Thompson (1994) independently examined the stock market price reactions to events that increased the probability that CUSTA would succeed. They found that firms operating in industries with small-scale production experienced losses. More recently Head and Ries (1999) provide some direct evidence that rationalization occurred in Canadian manufacturing industries after 1988. Between 1988 and 1994 the number of plants decreased by 21 percent while output per plant increased by 34 percent.1 However, Head and Ries find that this rationalization is explained by a change in the structure of the Canadian manufacturing sector and an overvalued Canadian dollar. Moreover, they find that Canadian tariff reductions did lead to fewer plants as predicted, but also led to a reduction – rather than an increase – in plant scale. What role did CUSTA and NAFTA play in the Ontario plant closures? This is a difficult question to answer because other factors clearly affected business decisions in Canada during the period. 23