An EU-Canada bilateral trade agreement: A DefraTAP application

The first round of negotiations held in Ottawa on the 19th October, 2009, heraldedthe opening of bilateral trade talks intent on reaching a Canadian-European Union(EU27) free trade area (FTA) agreement. A second round of negotiations were staged inBrussels in January, whilst further rounds are scheduled for 2010, with the longer termaim of ratifying an agreement within 24-30 months. Although stumbling blocs will beencountered, the divergent political interests of each region are compatible. In Canada, aFTA with its second largest trading partner offers a viable alternative to its currentoverdependence on the US. Similarly, the EU27 sees an opportunity to regain acompetitive foothold in the North American market.This paper re-examines the long run trade led gains from a Canada-EU27 FTA.Unlike previous studies, our assessment also accounts for the HS6 level sensitiveproduct declarations submitted by both parties in the first round. We examine the extentto which these proposals afford protection to key strategic sectors and impact on tradeled growth and real incomes. All estimates are compared with a realistic contemporarybaseline scenario. The results suggest that non tariff barrier (NTB) reductions dominatereal income gains, whilst sensitive product exceptions, principally affecting wheat,dairy, wearing apparel and leather sectors, reduce Canadian and EU27 real income gainsby 20% and 24%, respectively. Trade diversion impacts are relatively marked for theUS and EFTA, whilst China escapes largely unscathed due to the pattern of its tradespecialisation.