Back in the days when tariffs were high, tallying the benefits of free trade was a relatively easy task.
Drop duties on wheat or auto parts to zero from 25 per cent, and the winners and losers are obvious.
Not so with the Trans-Pacific Partnership.
Tariffs on goods are already pretty low between Canada and most of the other 11 countries involved in the TPP. So the most significant potential gains come from tackling tougher-to-quantify non-tariff barriers, as well as trade in services and investment. These include regulations, competition policy, investment rules and intellectual property protections.
The economic payback could also be much smaller than most people realize – negligible, even.
One of the most widely cited TPP studies, by economists at the Washington-based Peterson Institute for International Economics, projects a 0.5-per-cent bump in Canadian economic output by 2025. That’s a $10-billion-a-year boost.
But even this relatively modest gain may be exaggerated because the study assumes much freer trade than what negotiators are likely to settle on.
Recent research by Dan Ciuriak, former deputy chief economist at Foreign Affairs, Trade and Development Canada, attempts to predict more realistic outcomes, including a longer phase-out of tariffs and less than “full” free trade in key sectors, such as agriculture.
And the net gain? The TPP would add a mere 0.1 per cent to gross domestic product, or $2.7-billion, by 2035 for Canada, versus an estimate of 0.45 per cent if trade was fully liberalized, according to a recent working paper by Mr. Ciuriak and Jingliang Xiao. That’s barely a hiccup in a $2-trillion economy.
Their “best guess” is that countries continue to protect their “sensitive” sectors, particularly in agriculture. For example, the paper assumes Canada gives additional duty-free access for imported dairy products, but doesn’t dismantle the protectionist tariff wall that shields dairy, chicken and egg producers.
The major trade gains come from higher exports of Canadian pork, beef and business services.
On the other hand, plug in unrealistic assumptions, and the same models will spit out faulty numbers and overhyped benefits.
Ottawa has not released any estimates of the benefits of the TPP, although officials insist the government is constantly doing economic modelling. Nor has it publicly updated its projections of the gains from the free-trade agreements with Europe and South Korea, based on the now-completed accords, as the European Union routinely does.
“It’s wise that government do analysis of policies before going ahead with them,” Mr. Ciuriak argued. “To march ahead without any quantitative analysis is, I think, foolish.”
Mr. Ciuriak and colleagues Mr. Xiao and Ali Dadkhah have also taken a much closer look at the Canada-South Korea free-trade deal, which took effect in January. They analyzed a wide range of non-tariff barriers, gave them a score based on how much they inhibit trade, and then matched these to the actual text of the agreement.
The results show that in most sectors, there is “no material liberalization,” according to a working paper by the three economists for the C.D. Howe Institute. The only significant non-tariff concessions by either side were in the area of banking.
This more precise methodology cuts the potential gains from the trade deal by roughly 25 per cent.
“It’s less of a deal than you think,” Mr. Ciuriak said.
A similar economic modelling exercise with a final TPP agreement would likely produce diminished benefits, he said.
In the real world, however, Canada can’t afford not to be in the TPP, even if it won’t mean winning the trade lottery.
The cost of exclusion from the TPP club could dwarf the measurable benefits of membership. Canada would lose the competitive advantage it now enjoys in the U.S. market due to the North American free-trade agreement. Exporters of products such as beef would cede ground in the massive Japanese market against their U.S. and Australian rivals. And Canada would be on the outside looking in at what the deal’s architects hope will be a new template for global trade rules.
But Canada needs to go into these deals armed with reliable data on what its economy will look like on the other side.
Good policy depends on good data.Report Typo/Error