How unstable trade hurts workers: Export shocks and job loss in Canada-U.S. trade

Uncertainty created by the pandemic and war in Ukraine has pressured governments to make their economies more self-sufficient. In both Canada and the United States, there are calls to re-shore production in an effort to bolster economic security and reduce dependence on fickle global markets. But there is a danger in turning too far inward. Disrupting trade relations in the region can produce even more instability in the market – and hurt the very workers governments are trying to protect.

A close look at the Canada-U.S. trade relationship shows the importance of predictable, stable trade. Industries exposed to frequent shocks hire fewer workers when compared to more stable areas of the economy.

Trade instability comes in multiple forms. Often, “shocks” in the market evoke images of sudden surges in cheap, foreign-made goods that threaten domestic production. However, recent years show that other types of shocks are equally harmful. For example, there may be a sudden drought of vital imports, which can lead to slower production, empty store shelves, and higher prices. There may also be shocks to exporters in the form of sharp reductions in access to foreign markets.

All of those forms of instability matter for workers because uncertainty makes doing business harder. Trade relations are long-term commitments between buyers and sellers across the global economy. Carmakers need parts from their foreign suppliers not just today, but also six months now. Likewise, the parts manufacturer relies on access to that carmaker abroad. Market disruptions, whether caused by pandemics, wars, or trade barriers, disrupt those relationships.  When a firm faces uncertainty over the future, they cannot know how many workers to hire or what to pay them.

The Canada-U.S. trade relationship – the 4th largest in the world – is no exception. Millions of jobs in both countries depend on healthy bilateral relations. This is especially true of Canada, where about one in seven private sector employees works in a traded industry, such as fabricated metals or machinery manufacturing. Those jobs, totaling just over 2 million, depend heavily on trade with the U.S., who accounts for two-thirds of Canada’s total global trade, and who consumes roughly 75 percent of Canada’s exports.[i]

For Canadian firms, growth in exports to the U.S. correlates with job creation. The 10 industries enjoying the fastest export growth added just over 50,000 jobs over the last decade.[ii] On the other hand, the 10 industries with the slowest growth lost 20,000 positions. While numerous factors influence employment levels, an increase in exports is a useful signal that an industry is performing well.

While export expansions are generally good news, export shocks are not. The 10 industries exposed to the most frequent shocks saw total employment fall by 5 percent since the start of 2011.[iii] That is a total loss of 34,000 jobs, including heavy losses in paper, textiles, and primary metals manufacturing. Importantly, those losses are not simply a sign that an industry was struggling anyway. To the contrary, almost all of those 10 industries suffering shocks saw their total exports to the U.S. increase, at least modestly, since 2011. However, instability in the market meant that gains were less predictable.

Contrast that with industries enjoying greater stability. Total employment in industries experiencing below average shocks grew 11 percent, the equivalent of 140,000 jobs. Figure 1 depicts the wide gap in employment growth between the 10 most- and least-stable industries.

The COVID-19 pandemic is a particularly harsh illustration of how shocks hurt. Canada-U.S. trade shrank in almost every industry in the spring of 2020 as global markets stalled.[iv] However, not every segment of the market was affected equally. Sharper drops in trade correlated with sharp drops in employment as policy restrictions – though necessary – caused significant slowdowns in production and distribution. The result was that employment in the 10 industries seeing the sharpest decline in exports contracted almost twice as much (20 percent) as the 10 industries least affected by the pandemic (11 percent).

Of course, the pandemic is unique because of its magnitude. Not every disruption is so severe. Nor is every industry equally vulnerable. For example, raw materials and commodities are less stable by their very nature because they exhibit greater price volatility than most manufactured goods. Unstable prices hurt developing countries disproportionately because smaller economies tend to rely more heavily on trade in those industries.

Canada and the U.S., by contrast, have more diversified trade portfolios and they are less vulnerable to shocks in anyparticular industry. Yet, the interwoven nature of Canada-U.S. trade means that shocks to one product or industry often have downstream consequences for other areas of the marketplace. Unsurprisingly, imports of motor vehicle parts (NAICS 3363) are a strong predictor of motor vehicle (NAICS 3361) exports. And fabricated metals, electronics, and machinery imports are all closely related to car exports as well. That means shocks in any of those industries are not contained to a few firms but can easily spill over to other portions of the economy. 

Taken together, the breadth and depth of the Canada-U.S. trade relationship does not guarantee stability. Shocks occur regularly in the marketplace, and those shocks have a direct impact on workers. This has a number of implications for trade policy in North America and abroad.

First, the conversation about trade needs to focus more on promoting stability. Recent years prove that unstable markets fuel economic insecurity and political grievance. Yet, much of the debate over trade policy in North America focuses on arguments about whether liberalization crowds out domestic employment. Trade has, in general, been good for jobs in both Canada and the United States. Trade shocks, on the other hand, undermine worker welfare. At a time when governments are increasingly concerned with worker-centric, “inclusive” trade, the discussion must center on stability.

Second, the policy solution cannot be to simply turn inward. It turns out that pandemics and wars are not the leading cause of trade shocks. Instead, most trade instability derives from policy instability. New trade barriers disrupt the marketplace by diverting trade and encouraging retaliation. The result is an unfortunate irony – the policies governments often use to protect industries from shocks can generate even more instability. In so doing, ad hoc, unilateral protectionism can expose many more workers to costly disruptions.

Third, sustaining mutually beneficial trade means commitment to a workable, rules-based system. Canada and the U.S. have long-standing disagreements in high-profile industries like dairy and softwood lumber. More recently, Trump-era steel tariffs and worries over government procurement rules added tension to the relationship. Existing trade rules have clearly not solved all of these problems, but agreeing to policies that avoid creating additional instability is important for workers today – and in the future.

[i] Despite increasing attention paid to China, Canadian firms sent 20 times more exports to the U.S. than they sent across the Pacific. Overall, half of Canada’s industries were net exporters to the U.S. over the last 5 years.

[ii] The same thing holds for import growth. The 10 industries seeing largest influx of U.S.-made goods added three times as many positions as portions of the economy with slower growth.

[iii] Export shocks are measured as whether the month-on-month changes are outside the 12-month rolling standard deviation. Only negative shocks are counted – i.e., where there was an abnormal drop off in exports to the United States.

[iv] Measured as the change in seasonally adjusted trade from January 2020 to April 2020, which was the nadir in Canada-U.S. trade.