Assessment of: “Employment Implications of Trade Liberalization with East Asia”

Canadian Auto Workers, September 2006

Dan Ciuriak, Office of the Chief Economist, DFAIT
September, 2006

Executive Summary

The CAW-commissioned study assesses the impact on Canadian jobs of Canadian free trade agreements (FTAs) with Korea, Japan and China. However, both in design and from the perspective of technical execution, the study is unsound; its conclusions are unreliable.

The CAW study excludes agricultural trade liberalization. Since a Canada-Korea FTA without agriculture would not be viable, this study’s conclusions are not relevant to any realistic deal.

The study uses bilateral trade balance and sectoral job impacts to measure the benefits of an FTA. Bilateral trade balances are not meaningful in a context in which Canada trade with over 200 partners. Sectoral job impacts represent adjustment costs as labour and capital shift from declining to gaining sectors, not permanent losses. At the same time, the study ignores the usual measures of the benefits of trade liberalization, namely efficiency gains from increased specialization in areas of a country’s comparative advantage and consumer benefits in the form of lower prices and increased competition in the market.

In assessing the impact of FTAs on Canadian jobs, the study assumes that all import growth from FTA partners comes entirely at the expense of Canadian production and jobs. This would only be true if Canada did not import from third countries and if lower prices in the domestic market did not expand consumer purchases. These assumptions are not valid and result in gross errors, which are especially egregious in a sector such as autos where third country imports account for the lion’s share of domestic sales.

In assessing Canada’s benefits in terms of increased exports to Korea as limited to nil, the study relies on econometric analysis which is not robust and collapses under scrutiny.

The CAW study also employs an “historical analogy” approach which invites the reader to conclude that the impact of the Canada-Korea FTA on future trade flows would match the average historical pattern of export and import growth with Canada’s existing FTA partners. In this regard, the CAW study implicitly attributes to an FTA all increase in trade due to growth of the respective economies, exchange rate shifts, and commodity price shifts that might occur in the post-FTA period. This approach is not scientifically sound: the effects of an FTA should be assessed on the basis of “all else being equal”, that is, eliminating the effects on trade of other factors. Notably, it was this approach, coupled with some extreme assumptions (no Korean sensitivity to tariff cuts and exclusion of agriculture), that underpinned the headline figure of 33,000 jobs lost from a Canada-Korea FTA.

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