Industry Canada Pans Free Trade?

Shortly before I left Canada, Canadian Business magazine contacted me for a story on productivity. It highlighted a presentation by Industry Canada economist Annette Ryan.

I was struck by slide 40 (41 of 44 in the PDF):

In an endogenous sunk cost model, opening free trade and intensifying competition leads to a divergence in innovation paths. Firms in the less productive country are unable to sustain costly innovations necessary to increase own demand, and thus retrench after an initial common escalation phase. . . .

In R&D [research and development] intensive industries, Canadian industries experienced an average net loss of 1.1% in R&D intensity after NAFTA, while US industries experienced an average net gain of 1.8% in R&D intensity.

The locking-in of Canada’s less productive and less innovative industrial structure is exactly what critics of free trade had feared, and the opposite of what free trade promoters had promised.

The same concern seems relevant as Canada contemplates a free trade deal with Europe, which enjoys an appreciable lead in R&D-intensive industries.