Computable General Equilibrium Estimates of the Gains from U.S.-Canadian Trade Liberalization

Abstract

We have constructed a computable general equilibrium model to analyze the economic effects of the bilateral tariff reductions that will be implemented in the US-Canadian Free Trade Agreement (FTA). The model includes the US, Canada, 32 other countries combined, and the rest of world. There are 22 tradable sectors and 7 nontradable sectors in each country/region. The market structures for industries in the US and Canada are classified according to the degree of competition, degree of product differentiation, and the ease with which new firms can enter a market. Our results indicate that bilateral tariff removal in the FTA will increase US imports by $6 billion and exports by $7.3 billion, based on 1976 trade. Canada's imports increase by $8.3 billion and exports by $8.5 billion. US welfare rises by $1.5 billlion, which is 0.1% of US GSP in 1976. Canada's welfare rises by $2 billion, which is 1.1% of its 1976 GDP. On a sectoral level, the results suggest that there will be increases in inter-industry as well as intra-industry trade together with changes in scale economies due to industry rationalization and derationalization in the two nations. Output and employment effects in the US appear to be relatively small while some potentially sizable changes may occur in a number of sectors in Canada.