4 - Some Applied General Equilibrium Estimates of the Impact of a North American Free Trade Agreement on Canada

Summary

Introduction

This chapter presents applied general equilibrium estimates of the impact on Canada of the proposed North American Free Trade Agreement (NAFTA) and outlines the model and data used. These results are an extension of research previously reported in a paper written with Richard Harris [Cox and Harris (1992)].

The inclusion of Mexico in a free trade area with Canada and the United States raises a number of issues from the Canadian perspective. Among these are the following: the impact of NAFTA on the volume and pattern of trade between Canada and Mexico, the impact of increased imports from Mexico on employment patterns and factor returns, the extent to which Canadian exports to Mexico will increase, and the potential diversion of Canadian exports to the U.S. market as U.S. tariffs on Mexican imports are removed. The volume of existing Canada-Mexico trade is relatively low. It was valued at 2.5 billion dollars in 1989, or 1 percent of Canadian trade. While the agreement presumably will icrease trade, the magnitude of the effect is far from certain. At the same time, the United States is by far the largest trading partner of both Canada and Mexico, with each country sending over 65 percent of its exports to the United States. Under NAFTA, Canadian exporters will lose some of the competitive advantage they obtained vis-à-vis Mexico under the Canada-U.S. Free Trade Agreement (CAFTA).