The Canada-U.S. Auto Pact of 1965: An Experiment in Selective Trade Liberalization
In this paper we analyse the Canada-U.S. Auto Pact, a selective
trade liberalization agreement which created a duty-free North American
market for the major U.S. multinational automobile producers, but
continued to protect them from offshore producers. The new international
trade/I.O. literature predicts that, given the probable unexploited
economics of scale and specialization in the tariff-protected small
Canadian economy prior to 1965, rationalization leading to large
efficiency gains in Canadian production vis a vis U.S. production would
occur in a free trade environment. We estimate that the Auto Pact did
not induce a substantial improvement in Canadian relative production
efficiency. The missing ingredient seems to have been the
competition-increasing effects of free trade in an oligopolistic setting
that is emphasized by the new trade/I.O. literature. The Auto Pact did
not increase the number of rivals in the oligopolistic Canadian industry
since the major players in the industry had production facilities on both
sides of the Canada-U.S. border before 1965, and no significant new entry
into Canada occurred.
In the 1962-64 period, Canadian automotive production was 27% less
efficient than U.S. production. By 1970-72 this deficiency had been
reduced to 19%, but was not further reduced by the end of the 1970's. Of
the 8 percentage points reduction in the Canadian disadvantage, we
attribute only 3 percentage points to the rationalization process induced
specifically by the Auto Pact.
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