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TORONTO, ONTARIO--(Marketwire - Oct. 3, 2012) - The Canada-U.S. Free Trade Agreement (FTA), and the subsequent North American Free Trade Agreement (NAFTA), have played a critical role in the development of the Canadian economy over the last quarter century, according to a new report from BMO Economics released on the 25^th anniversary of the signing of the FTA.

"Bottom Line, the FTA and NAFTA were critical in helping modernize the Canadian economy and have ultimately played a big role in transforming Canada from a relative underachiever among industrial world economies to a relative overachiever," said Doug Porter, Deputy Chief Economist, BMO Capital Markets.

"Of course, there have been a number of reforms Canada has taken over the years, but in many respects the FTA paved the way," noted Mr. Porter. "The deal sharply clarified trade and investment rules within North America, and likely helped avert serious protectionist measures from arising within the region during the steep economic downturns of the past decade. There has been a net strengthening in North American trade and foreign investment flows, and the deal helped grease the slide for Canadian inflation."

The report notes that, while total bilateral trade with the U.S. rose from just over 31 per cent of GDP prior to the FTA to a peak of 56.7 per cent in 2000, the level has since receded to just over 36 per cent. "This retreat in trade doesn't mean the FTA hasn't been a success," stated Mr. Porter. "The split personality of Canadian exports to the U.S. in the past quarter century says as much about the wild swings in the Canadian dollar and the significant adjustments in the U.S. economy as they do about the underlying strength of trade. Measured in U.S. dollar terms, export progress appears much steadier over the first 20 years of the agreement."

Beyond increasing trade, the FTA and NAFTA also aimed to strengthen and improve the environment for cross-border investment, especially foreign direct investment. "Overall, the FTA should be judged a success on this front. Foreign direct investment from the U.S. into Canada averaged just $1.7 billion annually in the six years prior to the FTA, and $4.7 billion per year in the first six years of the FTA, but then has shot up to $19.8 billion per year since 1995," said Mr. Porter. "As a share of GDP, those figures are 0.3 per cent, 0.7 per cent and then all the way up to 1.6 per cent. A little more than half of the inflows since 1995 have been in the resource and financial services sectors."

The full report can be downloaded at www.bmocm.com/economics.