ECONOMIC IMPACTS OF A POSSIBLE CANADA-U.S. CUSTOMS UNION: SIMULATION RESULTS FROM A DYNAMIC CGE MODEL

In this paper we analyze the implication of a possible Canada-U.S. customs union on trade flows, real output and investment both at the aggregate and industry levels in Canada, using a multi-sector, multi-region dynamic computable general equilibrium model. The model is calibrated to the GTAP Database (version 5, 1997). Our scenario for a possible Customs Union with the U.S. assumes the harmonization of Canadian and U.S. tariffs against the non-NAFTA countries (common external tariffs) as well as the elimination of the Rules- of- Origin provisions of the NAFTA. Our simulation results suggest that the overall economic gain to Canada from a Customs Union between Canada and the U.S. could be as much as 1% of GDP. Canada’s trade could expand by almost 20 %. American trade will also increases significantly, but at a slower pace than that of Canada. Much of the increase in trade flows and GDP are the result of the elimination of the Rules-of-Origin provisions. All Canadian industries, except food and beverages, gain from a Canada-U.S. Customs Union. The big beneficiaries are transportation equipment, electronics, and machinery and equipment. Services and resource-based industries gain the least. Key words: Customs union, Dynamic general equilibrium, Rules-of-origin. JEL classification No: C61, C68