The Canada-U.S. Auto Pact of 1965: An Experiment in Selective Trade Liberalization

Melvyn Fuss, Leonard Waverman

NBER Working Paper No. 1953
Issued in June 1986
NBER Program(s):Productivity, Innovation, and Entrepreneurship

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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Document Object Identifier (DOI): 10.3386/w1953

Published: "The Canada-U.S. Auto Pact of 1965." In Costs and Productivity in Automobile Production, ed. by Melvyn Fuss and Leonard Waverman, pp. 172-208. New York: Cambridge University Press, February 1992.

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