After decades of pursuing free-trade deals with other countries, Canada should embrace unilateral disarmament and declare itself a free-trade zone, concludes a new study for the Canadian Council of Chief Executives.
Removing all remaining tariffs on goods coming into Canada would generate $20-billion a year in economic gains, making the country wealthier, more productive and a magnet for foreign investment, according to the study to be released Monday.
"Unilateral tariff elimination would propel us forward toward a more productive and technologically advanced industrial base, raising Canada's overall standard of living," concluded the report by Dan Ciuriak, former deputy chief economist at the Department of Foreign Affairs and International Trade, and economist Jingliang Xiao.
The economic gains, equivalent to a percentage point of gross domestic product, are roughly five times the $4-billion a year Canada now collects from import duties.
Making Canada a free trade zone would produce greater economic gains than trade deals with Europe (0.77 per cent of GDP), South Korea (0.11 per cent of GDP) and the Trans Pacific Partnership (0.4 per cent of GDP).
The report was commissioned by the business lobby group as part of "an effort to articulate for the future of Canada's trade agenda," the council said. The opinions don't necessarily reflect the views of the council or its members, it said.
The era of reciprocal trade negotiations has peaked, and countries are increasingly acting on their own to lower barriers because it makes economic sense, said Mr. Ciuriak, now a research fellow at the C.D. Howe Institute.
Free trade agreements get all the attention. But Mr. Ciuiriak pointed out that unilateral moves by countries have had a much greater impact on trade liberalization in recent years. "Unilateral trade liberalization is actually the dominant form of liberalization," he said.
Canada, for example, moved in 2010 to abolish relatively modest tariffs on 1,541 industrial inputs to reduce compliance costs and make manufacturers more competitive.
Last year, China made the city of Shanghai a free trade zone to make it more attractive for investment – the first in mainland China. The city-states of Hong Kong and Singapore are already virtually tariff-free.
Removing taxes on imports is also good for exports, according to the council report. Doing so would lower production costs, make exports more competitive and allow companies to tap global supply chains, particularly smaller companies.
The report estimates that consumer prices would fall by more than 1 per cent, imports would grow by 3.4 per cent, and exports would increase 2.7 per cent. Geographically, imports from China would increase most dramatically, displacing U.S. goods. Canada's exports would grow proportionally to all of its existing trading partners.
The study points out that while Canada is a generally open economy, it has higher tariffs than several other major industrialized countries, including the United States., Britain, Germany, Sweden, Finland and the Netherlands.
One common argument for keeping those tariffs in place is that they can be used as bargaining chips to secure trade concessions in negotiations with other countries. But the study argues that this benefit is limited, in part because Canadian tariffs are already quite low.
The one exception is agriculture, where prohibitively high tariffs remain on dairy, chicken and eggs.
Mr. Ciuriak said a significant portion of the economic gains of unilateral tariff elimination would come from removing duties on these products – something that remains politically difficult, he acknowledged. "We did not select this tariff structure as a rational policy," Mr. Ciuriak said. "This is what remains after a long history of reducing tariffs. It doesn't reflect any conscious choice of how we want to structure our economy."