4. Did the CCFTA Increase Bilateral Trade between Canada and Chile?

4.1 Interpreting Bilateral Trade Flows

If a free trade agreement is working as intended, it should be encouraging greater trade between the two countries involved. This should be the first and most fundamental question to be addressed before embarking on any welfare analysis of trade agreements. However, direct comparison of trade performance before and after an FTA does not constitute a meaningful comparison, as most countries in the world today are all experiencing positive trade growth except during periods of economic recession. To determine whether an FTA is trade-enhancing, one needs to show whether it generates more trade than would have been the case without the agreement.

One way to establish this counter-factual scenario is to consider trade with countries without preferential arrangements over the same period. Countries chosen for such a comparison should share similar economic characteristic as the FTA partner country in terms of sizes of GDP and income levels, geographic locations, and other national economic characteristics.

Figure 4 and Table 4 below enable comparisons of the value of trade growth between Canada and Chile, and between Canada and other leading South American countries with which Canada did not have FTAs. Since the implementation of the CCFTA in 1997, the value of Canadian merchandise exports to Chile more than doubled, increasing from $392 million in 1997 to $819 million in 2011. Over the past 15 years, Canadian merchandise exports to Chile expanded at a rate of 5.4 percent per year, outperforming exports to other major South American countries, such as Argentina and Brazil, with which Canada did not have preferential trade arrangements. Over the same period, Canadian merchandise exports to the whole Latin American region grew by only 1.7 percent. As a result of this exceptional growth, Chile emerged as the third-most important destination for Canadian merchandise exports in the Latin American region after Mexico and Brazil in 2011; whereas in 1997, Chile ranked as only the seventh-most important destination for Canadian merchandise exports to the region.

Figure 4: Value of Canada's Merchandise Trade with Chile, $ Million

See the following figure 4 text alternative for description.

Figure 4 Text Alternative
Year19951996199719981999200020012002200320042005200620072008200920102011
Exports387.5415.5392.4339.0360.4444.4369.1282.7324.0359.6417.3473.0768.7724.0644.4587.5818.8
Imports278.9342.2325.9360.1421.6555.3640.7670.5886.31308.51663.11853.21686.41794.11730.81872.31910.7

Source: Statistics Canada

Table 4: Value of Canada's Trade with Major Latin American Countries 1997-2011, $ Million

ExportsImports
19972011Growth (%)19972011Growth (%)
Argentina4094951.42332,35918.0
Brazil1,6932,8413.81,3203,8808.0
Chile3928195.43261,91113.5
Colombia4737613.53148006.9
Peru3125163.71354,40328.3
Venezuela953607-3.2972739-1.9
Mexico1,2775,47611.07,02224,5739.4
Latin America & the Caribbean6,7908,6351.712,06018,5253.1
World298,069447,5012.9272,946445,9923.6

Note: Growth rate is compound annual growth rate.

Source: Statistics Canada

Growth of Canadian merchandise imports from Chile since CCFTA implementation was even more impressive. The value of total Canadian merchandise imports from Chile grew six fold to reach $1.9 billion in 2011 from only $326 million in 1997. This is equivalent to annual growth of 13.5 percent, compared to the annual average growth rate of 3.1 percent for the whole Latin American region over the same period. Only Peru and Argentina surpassed Chile's performance under this measure. However, in the case of Peru and Argentina, the surge in Canadian imports was almost exclusively driven by one particular product category - precious metals. The highly skewed nature of Canada's imports from these countries highlights the need for more advanced econometric techniques to control for country-specific and sector-specific factors, and to better isolate the effect of the trade agreement.

Another approach to detecting the actual influence of the CCFTA is to compare trade flows between the sectors that are substantially liberalized and the sectors that are less liberalized (mostly because levels of protections in those sectors were not significant prior to the agreement). If trade flows are sensitive to tariff cuts, then trade flows in the sectors that experience substantial tariff reductions should grow faster than trade flows in sectors with modest tariff reductions. This is exactly what is depicted in Figures 5 and 6< below which show the growth of Canadian imports from Chile and Canadian exports to Chile by the extent of tariff reductions. In these two figures, bilateral trade between Canada and Chile is divided into several categories according to the extent of tariff reductions. The first category is for the products that were duty free prior to the implementation of the CCFTA. The second category is for the products that were not liberalized and experienced no tariff changes. The third, fourth and fifth categories are for the products that had tariff reductions of 0.1 percentage points to 5 percentage points, 5.1 percentage points to 10 percentage points and 10.1 percentage points or more, respectively.

Figure 5 shows that the value of Canadian merchandise imports from Chile in the substantially liberalized sectors grew considerably faster than the modestly liberalized sectors between 1996 and 2011. The value of imports in the sectors that had tariff cuts of more than 10 percentage points grew by 1,190 percent, as compared to only 224 percent for the sectors with tariff reductions of 5.1 to 10 percentage points. The value of imports from sectors with less than five percentage points tariff reduction decreased by 36 percent during the same period. Not surprisingly, the value of Canadian merchandise imports from Chile in the sectors that were duty-free prior to liberalization also registered strong growth (750 percent) over the same period.

Figure 5: Growth in Value of Canada's Imports from Chile by CCFTA Tariff Reductions (%), 1996-2011

See the following figure 5 text alternative for description.

Figure 5 Text Alternative
Canada Imports from Chile
T-catGrowth19962011
Duty Free750%218,507,6981,857,407,423
No Change0%00
0.1% - 5.0%-36%13,783,8208,788,495
5.1% - 10.0%224%17,438,05456,582,545
10.1% or more1190%958,99412,369,623

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculations

A similar pattern but in a less significant order of magnitude can be seen in the value of Chile's imports from Canada. Between 1996 and 2011, the value of Chilean imports from Canada in the sectors that had tariff reductions of more than 10 percentage points grew by 189 percent. In contrast, there was essentially no growth in value of imports in the sectors with tariff reductions of less than 10 percentage points. As in the case with Canada's imports from Chile, the value of Chilean imports from Canada in the sectors that were already duty-free prior to liberalization also registered strong growth (more than 500 percent; see Figure 6).

Figure 6: Growth in Value of Canada's Exports to Chile by CCFTA Tariff Reductions (%), 1996-2011

See the following figure 6 text alternative for description.

Figure 6 Text Alternative
Chile Imports from Canada
T-catgrowth19962011
Duty Free536%12,549,62179,772,219
No Change0%00
0.1% - 5.0%0%00
5.1% - 10.0%-9%98,732,61189,971,494
10.1% or more189%166,146,274480,211,522

Source: COMTRADE Database, World Integrated Trade Solutions and author's own calculations

The data comparison to detect the effect of the CCFTA could take a step further by comparing the changes in bilateral trade flows between Canada and Chile with trade between Canada, or Chile, and other non-FTA partner countries by the extent of tariff reductions under the CCFTA. If trade flows are sensitive to tariff cuts, the comparison should show that the value of trade in the sectors that experienced substantial tariff reductions grew not only faster than in the sectors with modest tariff reductions, but also faster than trade with other non-FTA partner Latin American countries in the same sectors.

Table 5 reports the growth in the value of Canadian imports by the extent of tariff reductions under the CCFTA across major Latin American countries. In the "duty free" category, the sectors that were "free" prior to the implementation of the CCFTA, it is no surprise to see that the value of Canadian imports from all Latin American countries including Chile grew between 1996 and 2011. In the sectors with "no changes in tariffs", no growth in the value of imports was detected either from Chile or from Mexico – the two countries with which Canada had FTAs more than a decade ago. No clear trends emerge in the categories with moderate tariff reductions (from 0.1 to 10 percentage points). The value of Canadian imports from Chile for the products with tariff reductions of 5.1 to 10 percentage points grew by 224.5 percent between 1996 and 2011, while over the same period, the value of Canadian imports for the same category of products from Argentina – a country without an FTA with Canada grew 759.0 percent. However, in the category of products with substantial tariff reductions (more than 10 percentage points), the value of Canadian imports from Chile grew by 1189.9 percent, well exceeding the value for other Latin American countries.

Table 5: Growth in Value of Canada's Trade with Latin America by CCFTA Tariff Reductions, (%), 1996-2011

Category of Tariff Reductions under the CCFTACountryGrowth in Imports
Duty FreeChile748.9
Argentina3,567.8
Brazil438.1
Colombia235.4
Mexico431.8
Peru6,972.3
Venezuela733.5
No Tariff ChangesChile0.0
Argentina94.0
Brazil-21.2
Colombia388.5
Mexico0.0
Peru0.0
Venezuela-98.2
0.1 – percentage pointsChile-36.2
Argentina324.4
Brazil265.3
Colombia511.2
Mexico491.1
Peru46.5
Venezuela-36.6
5.1 – 10 percentage pointsChile224.5
Argentina759.0
Brazil489.3
Colombia115.4
Mexico536.1
Peru937.8
Venezuela208.4
10.1 percentage points or moreChile1,189.9
Argentina231.7
Brazil474.9
Colombia6.6
Mexico328.1
Peru496.8
Venezuela-95.3

Note: Due to missing tariff data 1996-1999, growths in Canadian exports to Colombia are calculated using 2000 as base year.

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculation

A similar trend can be seen in Canada's exports to Chile or Chile's imports from Canada when compared to the countries with which Chile did not have FTAs. However, choices for reference countries are constrained because of Chile's wide range of FTA partners. The only countries relevant to this context and sharing similar economic characteristics as Canada are the U.S. and Australia before they signed their FTAs with Chile in 2003 and 2009 respectively. Table 6 presents growth in the value of Chile's imports from Canada and Australia between 1996 and 2008 and from Canada and the U.S. between 1996 and 2003 by the extent of tariff reductions under the CCFTA.

Chile's economy experienced a significant downturn in the late 1990s and early 2000s, brought on by the Asian financial crisis starting in 1997, and remained sluggish until 2003. The value of Chile's imports from the world declined sharply between 1996 and 2003. During this period, the values of its total merchandise imports from Canada were down by 18.5 percent and from the U.S. a hefty 32.7 percent. Across all five categories of products categorized by extent of tariff reductions under the CCFTA, four categories reported more significant declines in import values from the U.S. than from Canada. The products with tariff reductions of more than 10 percentage points experienced the most significant drops in the value of imports from the U.S., while over the same period the value of imports from Canada grew. The data pattern presented in Table 6 suggests strongly that the CCFTA helped mitigate Canada's export losses in the Chilean market during the economic downturn in Chile. In other words, without the CCFTA effect, Canada's export losses might have been similar to what the U.S. experienced in the Chilean market.

Comparison between Canada and Australia presents an entirely different picture. From 1996 to 2008, Chile had increased its imports from Australia in two of the categories of products while the value of imports from Canada only increased in the products with tariff reductions of more than 10 percentage points. However, this can be explained by the fact that even though Canada and Australia share many similar economic characteristics – for example, both are major exporters of commodities – the compositions of their exports are very different. Australia's exports to Chile were mainly concentrated in two categories of products: coal and coal products as well as bovine meat, while Canada's exports to Chile were more diversified ranging from coal, wheat, mineral products, and oil seeds to machinery and equipment. This makes a direct comparison difficult. For instance, in the category of products with tariff reductions of more than 10 percentage points, the value of Chile's imports from Canada increased by106.5 percent, but Australia did not export the same products as Canada in this category.

Table 6: Growth in Value of Chile's Imports from Canada, Australia and the U.S. by CCFTA Tariff Reductions, 1996-2003 and 1996-2008

Categories of tariff Reductions under the CCFTAGrowth in Value of Chile Imports from Canada and Australia (%, 1996-2008)Growth in Value of Chile Imports from Canada and U.S. (%, 1996-2003)
Duty FreeCanada0.0Canada0.0
Australia6,413.5USA-70.6
No Tariff ChangeCanada0.0Canada0.0
Australia0.0USA-10.7
0.1 – 5 percentage pointsCanada0.0Canada0.0
Australia102.7USA-32.5
5.1 – 10 percentage pointsCanada-41.9Canada-89.7
Australia0.00USA0.0
10.1 percentage points or moreCanada106.5Canada6.6
Australia0.0USA-84.7

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculation

At the sector level, growth in the value of Canada's exports to Chile was concentrated in two categories of products: products with tariff reductions of more than 10 percentage points and products that already had duty free access to the Chilean market prior to implementation of the CCFTA. Between 1996 and 2011, the value of Canadian exports of duty free products to Chile grew four fold to reach $252 million in 2011 with a net increase of $198 million, while the value of exports of products with tariff reductions of more than 10 percentage points more than doubled with a net increase of $248.6 million. Sectors that had marked increase in export values were broad-based and included ores, machinery and equipment, mineral fuels and oils, iron and steel products, plastics, animal fats and vegetable oils, chemical products, pharmaceutical products, precision and medical equipment, and tools of base metal.

Table 7: Top 10 Increases in Value of Canadian Exports to Chile by Product Category and CCFTA Tariff Reductions, 1996 and 2011, $

Duty Free
HS02Description19962011Change
26Ores, slag and ash094,886,15594,886,155
27Mineral fuels and oils56,93526,656,96326,600,029
84Nuclear reactors, boilers and machinery7,073,22732,325,54125,252,314
36Explosives015,010,13115,010,131
30Pharmaceutical products793,4989,228,2878,434,789
15Animal fats and vegetable oils8,7326,397,2246,388,493
85Electrical machinery and equipment4,537,3669,804,2155,266,849
25Mineral salts9,068,00612,003,8742,935,868
40Rubber and articles2,023,1264,650,8022,627,676
73Articles of iron or steel5,556,8177,224,2041,667,387
Total 54,493,234252,133,422197,640,188
Tariff Reductions of 5.1 to 10 Percentage Points
HS02Description19962011Change
15Animal fats and vegetable oils116,59326,047,30425,930,710
84Nuclear reactors, boilers and machinery386,5363,253,2692,866,734
87Vehicles403,6691,944,7161,541,047
04Dairy produce512,4511,679,9421,167,491
29Organic chemicals0476,106476,106
94Furniture and bedding147,224590,585443,361
19Preparations of cereal or flour40,948224,677183,729
03Fish0137,012137,012
27Mineral fuels and oils275,819397,470121,651
23Food residues and wastes63,862176,296112,433
Total 134,619,46989,029,561-45,589,908
Tariff Reduction of 10.1 Percentage Points or More
HS02Description19962011Change
84Nuclear reactors, boilers and machinery48,035,957120,019,13771,983,180
27Mineral fuels and oils24,382,10185,321,94460,939,843
72Iron and steel1,321,05136,181,68234,860,631
39Plastics and articles6,672,04538,692,54332,020,498
28Inorganic chemicals1,926,77318,759,49916,832,726
82Tools of base metal1,605,06318,076,92016,471,858
90Precision or medical instruments6,102,81318,086,81811,984,006
02Meat1,261,4268,635,2537,373,827
07Edible vegetables5,293,72011,762,5756,468,855
95Toys718,4125,489,6144,771,202
Total226,536,329475,184,074248,647,746

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculations

The value of Canada's imports from Chile grew most in the category of products that were already duty free prior to implementation of the CCFTA. The total value of imports of this category surged dramatically from $298.5 million in 1996 to $1.8 billion in 2011, largely because of increased imports of precious stones and metals, copper and edible fruits. Precious stones and metals accounted for roughly 50 percent of total values of Canadian duty free imports from Chile. If precious stones and metals are excluded, the value of duty free imports from Chile still amounted to $969.6 million, more than triple the level for 1996.

The value of Canada's imports from Chile for the products with tariff reductions of 5.1 to 10 percentage points more than doubled between 1996 and 2011, but that of products with tariff reductions of more than 10 percentage points grew more than nine fold over the 1996 level, largely due to the increased imports of edible fruits and nuts.

Table 8: Top 10 Increases in Value of Canadian Imports from Chile by Product Category and CCFTA Tariff Reductions, 1996 and 2011, $

Duty Free
HS02Description19962011Change
71Precious stones and metals301,049869,192,476868,891,428
08Edible fruits and nuts121,076,507311,995,276190,918,768
74Copper and articles847,596142,676,493141,828,896
03Fish10,291,362101,537,00491,245,642
22Beverages22,434,42492,387,95269,953,529
44Wood2,057,97563,705,29661,647,321
12Oil seeds449,92225,238,46724,788,545
28Inorganic chemicals7,232,10231,443,24524,211,144
29Organic chemicals101,92520,986,20720,884,282
02Meat015,471,55715,471,557
Total 298,482,1441,838,831,3161,540,349,172
Tariff Reduction of 0.1 to 5 Percentage Points
HS02Description19962011Change
39Plastics and articles10,8081,005,380994,572
20Preparations of vegetables25,295129,225103,930
82Tools of base metal020,51420,514
19Preparations of cereal or flour1,4476,1084,662
62Articles of non-knitted apparel01,9881,988
61Articles of knitted apparel0189189
42Articles of leather0109109
91Clocks and watches055
30Pharmaceutical products044
Total 18,793,8978,696,486-10,097,411
Tariff Reductions of 5.1 to 10 Percentage Points
HS02Description19962011Change
08Edible fruits and nuts2,608,77324,507,54921,898,777
20Preparations of vegetables19,467,24730,686,07211,218,826
06Live trees and plants21,551140,005118,454
52Cotton05,1985,198
60Knitted fabric04,2074,207
62Articles of non-knitted apparel02,2562,256
15Animal fats and vegetable oils02,2192,219
64Footwear0259259
19Preparations of cereal or flour0216216
Total 23,776,35555,990,16932,213,814
Tariff Reductions of 10.1 Percentage Points or More
HS02Description19962011Change
08Edible fruits and nuts255,90910,789,20410,533,295
07Edible vegetables24,0791,125,7231,101,644
15Animal fats and vegetable oils0160,759160,759
56Wadding and felt06,4566,456
58Special woven fabrics05,6095,609
63Other textile articles02,5762,576
55Man-made fibres56,89958,0631,164
52Cotton01,3191,319
11Mill products0662662
Total 1,307,56512,240,12210,932,558

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculations.

In summary, the data analysis presented above demonstrates that tariff reductions under the CCFTA did have a strong enhancing effect on bilateral trade between Canada and Chile. The effect was more pronounced for trade flows from Chile to Canada than for trade flows from Canada to Chile. Nevertheless, for both directions of trade, most growth took place in two categories of products: those that were duty free prior to the implementation of the CCFTA and those that experienced tariff reductions of more than 10 percentage points. There was little growth in trade values in non-liberalized category, potentially because protections in these sectors remain prohibitive. The strong growth in the values of Canadian imports from Chile was clouded by the rising trade in gold between the two countries amid the rising demand and soaring prices; both of which had little to do with the trade agreement. However, the trade-enhancing effect of the agreement was still prominent even if the imports of precious stones and metals are excluded from the growth calculation. To better isolate the CCFTA effect, more sophisticated econometric techniques will be employed below to control for country-specific and sector-specific factors.

4.2 Preference Creation and Erosion under the CCFTA

The previous section demonstrates that the CCFTA had a positive trade-enhancing effect on the bilateral trade between Canada and Chile by providing simple data comparisons without using the sophisticated econometric analysis to control for other factors that also influence trade flows. Nevertheless, as it is demonstrated below, erosion of Canadian preferences in Chile did occur when Chile's agreements with third parties were subsequently implemented.

From Chile's perspective, since the implementation of the CCFTA in 1997, Chile's preference gains in the Canadian market have been noticeably evident. Since 1997 Canada has not signed any significant trade agreements with other major Central and South American countries, which gave Chile an opportunity to hold on its preferences in the Canadian market. Chile's share in Canada's total merchandise imports from the world increased steadily from 0.12 percent in 1997 to 0.43 percent in 2011. If the increase in Canadian imports from Chile is put in a context of Canada's total imports from Central and South American countries, Chile's advantages look even more pronounced. Chile's share in total Canadian merchandise imports from Central and South America (excluding Mexico) increased from seven percent in 1997 to 15.7 percent in 2004 before it slipped to 10.8 percent in 2011 (see Figure 7).Footnote 10

Figure 7: Chile's Share of Canada's Total Imports (%)

See the following figure 7 text alternative for description.

Figure 7 Text Alternative
Year199719981999200020012002200320042005200620072008200920102011
Share of Chile in Canada's imports from Latin American (excluding Mexico), Left Scale7.00%7.30%8.50%9.40%10.20%10.20%13.50%15.70%14.60%15.10%13.40%14.40%13.90%12.20%10.80%
Share of Chile in Canada's imports from the world, Right Scale0.10%0.10%0.10%0.20%0.20%0.20%0.30%0.40%0.40%0.50%0.40%0.40%0.50%0.50%0.40%

Source: Statistics Canada and author's own calculations

From Canada's perspective, between 1997 and the early 2000s in the absence of preferential trade agreements between Chile and other trading partners, Canada saw its market share in Chile's total imports from the world increase from 2.4 percent in 1997 to 3.2 percent in 2000. However, as subsequent free trade agreements between Chile and other trading partners came into effect - in particular, Chile's FTA with the European Union in 2003, with the U.S. and Korea in 2004, and with China in 2006 - Canada's preferential advantages waned. By 2011, Canada's share of Chile's total imports from the world came down to only 1.6 percent (see Figure 8).

Figure 8: Canada's Shares of Chile's Total Imports (%)

See the following figure 8 text alternative for description.

Figure 8 Text Alternative
Year199719981999200020012002200320042005200620072008200920102011
Share of Canada in Chile's imports from the world2.4%2.9%2.8%3.0%2.6%2.0%2.0%1.6%1.4%1.4%2.3%1.7%1.9%1.3%1.3%
Share of Canada in Chile's imports from the world (excluding China)2.4%3.0%3.0%3.2%2.8%2.2%2.1%1.7%1.5%1.5%2.6%1.9%2.2%1.6%1.6%

Source: Statistics Canada and author's own calculations

The erosion of Canada's CCFTA preferences in the Chilean market could be best illustrated by comparing the common products (under the same Harmonized Tariff Schedule codes, HS) imported by Chile from both Canada and the U.S. over the examined period. Figure 9 shows the shares of common products from Canada and the U.S. in Chile's total imports from 1995 to 2011. As can be seen, Canada's shares rose from 1996 onward until around 2000, while the shares of U.S. products moved in an opposite direction. The declines in the market shares for both countries from 2000 onward to 2003 mostly reflected the macroeconomic influences rather than actual preference changes as they moved in synch. However, when the U.S.-Chile FTA came into effect in 2004, the preferential advantages switched to the U.S. The U.S. recouped all of the losses from earlier years to reach a record high of 32 percent of Chile's total imports in 2011, while Canada's shares for the same products came down from the peak of three percent in 2000 to around two percent in 2011. The sharp spike observed in Canada's share of these common products in Chilean imports in 2007-8 was caused by a temporary surge in Chile's imports in machinery, base metals and chemicals. Afterwards, Canada's share deteriorated significantly relative to the U.S.

Figure 9: Total Imports of All Common Goods to Chile from Canada and the U.S. (%)

See the following figure 9 text alternative for description.
Figure 9 Text Alternative
yearCanadaU.S.
19951.89503419.60757
19962.39752120.94147
19972.62643622.2313
19982.91286820.74174
19993.06180820.383
20003.09869119.2728
20012.44042317.97795
20021.87917415.75937
20031.72225313.62353
20041.97949617.71987
20051.70851921.92372
20062.18383724.66438
20073.5226223.67945
20082.85113429.07246
20092.69136324.14837
20102.11675124.85091
20112.02280056731.751853476

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculations

A similar but more distinct pattern can be seen by removing the common duty free products from Figure 9 leaving only the common liberalized products under both trade agreements. This is because an increase in imports of duty free products might not be considered as the direct result of tariff reductions. When the duty free goods are removed from the figure, it can be seen most obviously that the temporary spike in imports from Canada in 2007 was removed, leaving a clearer pattern than Figure 8. If a ratio of 1 to 10 is used as a gauge stick (as Canada's economy is about one-tenth the size of the U.S. economy), one can see that for the common liberalized products under the CCFTA and before 2003, Canada's shares in Chile's total imports were well above the one-tenth mark; indicative of improved market access at the expense of the same U.S. products. The turning point was 2004 when Chile's imports from the U.S. surged significantly following the onset of the U.S.-Chile FTA. Since then, the U.S. recouped all of the losses of previous years relative to Canada; while Canada's relative advantages in the Chilean market started to diminish and returned to the normal 1:10 ratio relative to the U.S. in the following years.

Figure 10: Imports of Liberalized Common Goods to Chile from Canada and the U.S. (%)

See the following figure 10 text alternative for description.
Figure 10 Text Alternative
yearCanadaU.S.
19951.920891207618.4981803247
19962.532063505419.3231502751
19972.609955289820.9272429567
19982.994118433118.9252155006
19993.0561021618.3786830743
20003.282264753617.6974432076
20012.482809462816.3079902396
20021.82034471313.2691353855
20031.648443106511.1400662341
20041.77365291814.2230281997
20051.491373816315.2668001248
20061.807160108317.9390390706
20071.570335586315.6761888627
20081.77210616216.4959241265
20092.009270361415.6694602862
20101.61528234117.2714437079
20111.828089281419.0262089941

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculations

4.3 Gains in New Trade

The data analysis presented above supports the view that the CCFTA had a significant trade-enhancing effect on bilateral trade between Canada and Chile; but at the same time, Canada's preference advantages in Chile had been diminishing since 2003 as the subsequent trade agreements between Chile and third countries ebbed Canada's existing CCFTA preferences. However, the analysis based on aggregated data might conceal the changes in product mixes such as entries of new products, new markets, and new firms, which represented an important part of business responses to trade liberalization. In recent years, the trade literature has argued strongly that failure to account for the gains in new trade could significantly underestimate the potential gains from trade liberalization. Reductions in trade costs through preferential trade arrangements lead to both the expansion of existing trade flows and the creation of new trade in products that previously were not traded bilaterally. To unearth any gains buried in the aggregate data analysis, this section decomposes bilateral trade between Canada and Chile based on contributions from existing products that were traded prior to the agreement and new products that were traded only after the CCFTA implementation. The data presentation here compares only the trade performance of existing and new products for the two referenced points: 1996, the year prior to the agreement and 2011, 15 years after the agreement. More sophisticated measurements of gains will be presented in the following section.

Table 9 shows the number of products that Canada imported from Chile in 1996 and 2011 classified by existing and new products with cross-reference to the extent of tariff reductions.Footnote 11 Since the implementation of the CCFTA, Canada had imported a larger number of products from Chile in all categories of tariff reductions. The number of products at the HS08 level that Canada imported from Chile nearly tripled from 454 products in 1996 to 1,210 products in 2011. Only 288 products that were imported prior to the agreement continued to be imported in 2011, but there was a net increase of 922 new products added to the existing portfolio of imported products from Chile. The majority of these new products came from two categories: duty free products (a total of 743) and products with tariff reductions of more than 10 percentage points (a total of 103). The net increases in the numbers of new products in the other two categories were not very significant.

Table 9: Number of Products Imported from Chile by CCFTA Tariff Reductions, 1996 and 2011

Extent of Tariff ReductionNumber of Products in 1996Number of Products in 2011
Existing ProductsNew ProductsTotal
Duty Free377243743986
0.1-5 percentage points23144458
5.1-10 percentage points26213253
10.1 percentage points or more2810103113
Total4542889221,210

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculation

In terms of the value of new and existing products imported from Chile, Table 10 shows that 76 percent of the net increase in the value of imports came from the new products that were not imported prior to the trade deal, while the existing products that continued to be imported in 2011 were responsible for the remaining 24 percent. For all new imports, the majority of the increases came from the duty free category, that is, they were duty free even prior to the CCFTA implementation. For the products that had tariff reductions of more than 10 percentage points, as shown in Table 9, the increase in the number of new products was significant, but the net increase in the value of imports for each new product was limited; which means that the values of imports were thinly spread over a broader range of newly liberalized products.

Table 10: Values of Imports from Chile by CCFTA Tariff Reductions, 1996 and 2011, $

Extent of Tariff ReductionsExports in 1996Exports in 2011
Existing ProductsNew ProductsTotal
Duty Free298,482,144652,631,8351,186,199,4811,838,831,316
0.1-5 percentage points18,793,8977,466,8811,229,6058,696,486
5.1-10 percentage points23,776,35551,345,5104,644,65955,990,169
10.1 percentage points or more1,307,56511,598,035642,08812,240,123
Total342,359,961723,042,2611,192,715,8331,915,758,094

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculation

The situation was somewhat different for Canada's exports to Chile. The number of products that Canada exported to Chile more than doubled to reach 1,759 products in 2011from 848 products in 1996. There were 581 products exported in 1996 that continued to be active in the Chilean market in 2011, while 1,178 new products were added to the list of Canadian exports to Chile over the period. The majority of these new products (973 products) came from the category with tariff reductions of more than 10 percentage points.

Table 11: Number of Products Exported to Chile by CCFTA Tariff Reductions, 1996 and 2011

Extent of Tariff ReductionNumber of Products in 1996Number of Products in 2011
Existing ProductsNew ProductsTotal
Duty Free14199167266
0.1-5 percentage points0000
5.1-10 percentage points41293867
10.1 percentage points or more6664539731,426
Total8485811,1781,759

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculation

In terms of the value of new and existing products exported to Chile, about 90 percent of the net increase in the value of exports to Chile came from the new products that were not exported in 1996, while the net increase in the values of exports for the existing products was very limited, responsible for only the remaining 10 percent. As shown in Table 12, the tariff reductions under the CCFTA had strongly fostered new exports to Chile. New products associated with tariff reductions of more than 10 percentage points accounted for nearly 50 percent of the total net increase in the value of new exports. While the share of new products that were duty-free prior to the trade agreement in total new exports was not as significant as in the case of Canada's imports from Chile, they were still responsible for 43 percent in the total value of new exports to Chile.

Table 12: Values of Exports to Chile by CCFTA Tariff Reductions, 1996 and 2011, $

Extent of Tariff ReductionsExports in 1996Exports in 2011
Existing ProductsNew ProductsTotal
Duty Free54,493,23496,782,541155,350,882252,133,423
0.1-5 percentage points0000
5.1-10 percentage points134,619,46960,009,53129,020,03089,029,561
10.1 percentage points or more226,536,328299,781,068175,403,006475,184,074
Total415,649,031456,573,140359,773,918816,347,058

Source: COMTRADE database, World Integrated Trade Solutions and author's own calculation

The disaggregated data analysis presented above argues well that trade cost reductions matter: the CCFTA was effective in expanding both the scope of products and the volume of trade for existing products in both directions of trade between Canada and Chile. Its effect on the scope of products or new products had been especially dominating compared to its effect on the volume of trade for the existing products, and such an effect seemed particularly pronounced with respect to Canada's exports to Chile. Furthermore, the effect of CCFTA went well beyond tariff reductions, as a substantial portion of new exports came from duty-free products, not from the liberalized sectors. This fact is consistent with the observation that a trade agreement is more than just tariff reductions. The increase in a large number of new products in the duty-free category should be credited as a result of services and investment liberalization, which could have had a significant effect on trade in goods, the "announcement effect": – the conclusion of an agreement acts like a "wake-up" call to the private sector, drawing attention to the new possibilities and greater certainty about market access.

Although the subsequent trade agreements signed between Chile and third parties had perturbed Canada's preferential advantages in the Chilean market, their eroding effect seemed to be concentrated in limiting the expansion of Canadian exports of existing products to Chile. They had little inhibiting effect on the increase of new Canadian exports to Chile. These are the important observations uncovered by the disaggregated data analysis and will be explored further based on more advanced techniques in the following section.

Footnotes

Footnote 10

The decline in Chile's share since 2004 was not policy induced; it was largely due to the surges in Canada's imports of precious metals from Peru and Argentina.

Return to footnote 10 referrer

Footnote 11

All HS product codes had been concorded over the years into one single nomenclature for direct comparison.

Return to footnote 11 referrer