Foreign competition and income distribution in Canada: A dynamic microsimulation CGE Model Analysis

Since Canada is a very open economy, globalisation and increased foreign competition may entail significant long-run labour market and distributional implications. Indeed, with increased foreign competition and China’s accession to the World Trade Organisation (WTO) in 2001, Canada is facing the shock of declining prices and exports of manufactured goods. The long-run distributional effects of these changes remain ambiguous. While export-oriented sectors face a competitive challenge when their export prices fall along with the prices of competing imports, consumers and firms may benefit from cheaper manufactured goods. In this paper, a dynamic microsimulation computable general equilibrium model (CGE) is developed for the Canadian economy to analyse the impact of increased foreign competition on labour markets, low-income families and income distribution. A Dynamic microsimulation computable general equilibrium model (CGE). The model is calibrated with Canadian data for 2003. Matching and balancing techniques are used to integrate the 29,846 economic families from the Survey of Labour and Income Dynamics into the general equilibrium framework. The main findings of the simulations conducted in this study are that the decline in world prices of imports and exports of the manufacturing goods induces small increases in low-income rates and inequality in the short run as well as contractions in the export-oriented manufacturing sectors. In the long run, however, it enhances capital accumulation, particularly in the primary and service sectors, increases real GDP and reduces low-income rates especially among families with two persons or more.