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Canada - Korea

Preliminary Assessment of the Economic Impacts of a Canada-Korea FTA

Table of Contents

EXECUTIVE SUMMARY

The Canada-Korea Free Trade Agreement (CKFTA) negotiations were launched on July 15, 2005. A free trade agreement (FTA) between Canada and Korea has the potential to enhance not only Canada’s important bilateral economic relationship with Korea, but also to strengthen Canada’s presence in the dynamic Northeast Asia region. An FTA with Korea is expected to generate economic benefits across the Canadian economy.

This document analyzes the possible economic impacts of the proposed CKFTA. The eco-nomic impacts of tariff elimination are assessed based on simulations using a computable general equilibrium (CGE) model known as the Global Trade Analysis Project (GTAP) and version 6 of its database. Five alternative scenarios are simulated based on a range of as-sumptions concerning the supply-side response of the economy to expanded trade with Korea, including a central scenario incorporating the assumptions best suited for Canada and Korea respectively. The impact of non-tariff elements of a CKFTA, including impacts on bilateral investment flows and services trade, are taken into account only qualitatively. The main findings are as follows:

Assuming full elimination of tariffs for industrial and agricultural products, Canada’s to-tal merchandise exports to Korea in the central scenario would increase by 56%. Based on the level of Canadian exports to Korea in 2005 of $2.8 billion¹, this would represent an export gain of about $1.6 billion.
Canada’s merchandise imports from Korea would increase by 19%. Based on the 2005 figure of $5.4 billion, this would represent an import increase of about $1 billion.
The value of Canada’s gross domestic product (GDP) would increase, although the esti-mated extent varies considerably based on alternative assumptions about the economy’s response to expanded trade with Korea. In percentage terms, the alternative simulations place the gain at between 0.064% and 0.268%; in the central scenario, the gain is 0.114%. Compared to the size of Canada’s GDP in 2005 ($1,369 billion), the corresponding GDP gain ranges between $0.88 billion and $3.6 billion across the five scenarios, with the cen-tral scenario estimate at $1.6 billion. The corresponding estimates for Korean GDP gains, compared to the size of Korea’s economy in 2005, range between $0.23 billion (0.024%) and $6.6 billion (0.691%) across the five scenarios, with the central scenario estimate at $0.66 billion (0.07%).
The simulations suggest that Canadian households would derive an economic welfare benefit, scaled to the size of Canada’s economy in 2005, between $266 million under the most restrictive supply-side-response assumptions and $3.5 billion under the least restric-tive assumptions; the central scenario estimate is $1.1 billion. The simulations suggest that Korean households would experience a small decrease in economic welfare under the most restrictive assumptions, but would gain benefits that would exceed Canada’s in the least restrictive scenario.

The CGE simulations likely understate the potential economic gains since they reflect only the impact of tariff elimination on merchandise trade; the CKFTA negotiations, however, are ad-dressing a wide range of issues, including trade in goods, rules of origin, customs procedures, trade facilitation, non-tariff measures, cross-border trade in services, financial services, tempo-rary entry, investment, government procurement, competition, intellectual property, e-commerce, dispute settlement and institutional provisions. In addition, Canada is pursuing en-vironmental and labour cooperation agreements in parallel with the free trade negotiations. At the same time, Canada’s trade gains in areas of Korean sensitivity and Korean trade gains in areas of Canadian sensitivity may be constrained in timing or ultimate extent by special pro-visions that are not known prior to the conclusion of the agreement.

Provisions dealing with non-tariff measures may also affect the estimated impacts in individ-ual sectors. Given these considerations, together with the fact that the impacts are small rela-tive to the size of the Canadian economy and quite sensitive to the specific assumptions made concerning the economy’s response to increased trade, the current simulations represent too blunt a tool to provide reliable estimates of the sectoral impacts of the CKFTA. To assess sectoral impacts, specific studies are required, such as the detailed assessment of the Cana-dian automotive market commissioned by Foreign Affairs and International Trade Canada².

PRELIMINARY ASSESSMENT OF THE ECONOMIC IMPACTS OF A CANADA-KOREA FTA

Introduction

This document analyses the potential economic impacts of a free trade agreement between Canada and Korea. The analysis mainly considers the impact of tariff elimination on merchan-dise trade. The study briefly considers the impacts of liberalization and facilitation of trade in services and investment, in qualitative terms. However, for reasons discussed below, quanti-fication of these impacts was not possible for the purposes of this preliminary report.

Analytic approach

The main tool used for the analysis is the Global Trade Analysis Project (GTAP) computable general equilibrium (CGE) model, version 6.0³. This model, which is publicly available, runs on a data set that integrates data on bilateral trade flows, trade protection and domestic support together with national input-output tables that describe the sale and purchase relationships be-tween producers and consumers within each economy. This allows the model to generate esti-mates of the impact of trade policy changes, such as preferential tariff elimination under free trade agreements (FTAs), on trade flows, the level of national economic output (gross domestic product), employment and economic welfare.

CGE simulations alone cannot, however, adequately take into account the breadth of changes resulting from modern FTAs. For example, negotiations between Canada and Korea are being pursued on a wide range of issues, including trade in goods, rules of origin, customs procedures, trade facilitation, non-tariff measures, cross-border trade in services, financial services, tempo-rary entry, investment, government procurement, competition, intellectual property, e commerce, dispute settlement and institutional provisions. In addition, Canada is pursuing environmental and labour cooperation agreements in parallel with the free trade negotiations⁴.

In addition to direct economic impacts in the areas of services trade and bilateral investment flows, these additional features of FTAs should have an impact on trade in goods, over and above that resulting from tariff elimination. For example, trade facilitation reduces non-tariff costs of market access. Similarly, given complementarities between investment and services trade on the one hand and goods trade on the other, measures to liberalize investment and services trade should induce a stronger response of goods trade to an FTA than tariff consid-erations alone would indicate. As well, FTAs have been suggested to have galvanizing ef-fects on business behaviour; that is, in the context of sunk costs of market entry, the political commitment and the non-tariff facilitative aspects of an FTA can provide extra inducement to business to commit the resources to take advantage of the new market opportunities. On this basis, the estimated increase in bilateral merchandise trade is likely to underestimate the increase.

Several further cautionary notes are required concerning the interpretation of the reported economic impacts. These are set out below.

Caveat: Interpretation of the results

The results of the simulations are best understood as estimates of the potential economic im-pacts of a CKFTA, not as forecasts of the actual results. This reflects the following consid-erations.

First, FTAs typically include provisions to address impacts in sensitive sectors. Thus, with re-spect to the CKFTA, Canada’s trade gains in areas of Korean sensitivity and Korean trade gains in areas of Canadian sensitivity may be constrained in timing or ultimate extent by special provi-sions that are not known prior to the conclusion of the agreement.

Second, CGE model simulations compare the structure of a given economy at a given point in time, as it was and as it would have been if the simulated policy change were in place with all economic adjustments in response to that policy change already completed. Typically, FTA provisions are phased in to facilitate adjustment; the adjustment path of the economy is not, however, explicitly addressed in this study.

Third, while there is no explicit time dimension in these simulations, the price elasticities that drive the response to tariff changes are based on long-run changes. In other words, the as-sumed changes would take some time to be reflected in the economy. At the same time, the myriad developments that might influence actual outcomes during the implementation and adjustment period cannot be taken into account; these include importantly technological changes and reorganization of global production patterns that alter the industrial landscape, and trade policy changes such as preferential agreements with third parties involving either Canada or Korea⁵.

Caveat: Sensitivity of the results to model specifications and assumptions

Economic models, to be tractable, necessarily compress an enormous amount of information on the economy into a relatively small number of equations and estimated parameters that rep-resent the stylized behaviour of consumers and producers. By the same token, the results of model simulations can be heavily influenced by the model structure, parameter estimates, the level of aggregation of the data and assumptions made by the modeller as to how to run the simulations (most important, as discussed below, are the assumptions concerning “closure” of the model).

Choice of Model

The GTAP 6.0 model used for the CKFTA simulations was chosen because it permits the greatest possible sectoral and regional disaggregations. This level of disaggregation is impor-tant to reduce aggregation bias in estimating trade impacts but comes at the expense of a number of limiting features: the model is static and assumes perfect competition as well as constant returns to scale in all sectors. The GTAP family of models also includes a dynamic model; unfortunately this model does not include Canada as a separate entity, and hence can-not be used for this study. The GTAP family of models also includes a version with imper-fect competition, which is a more appropriate modelling framework for the non-agricultural sectors; however, this model only permits simulations based on three sectors, agriculture, in-dustrial goods, and services. Simulations using the static, perfectly competitive model likely understate the gains in output and economic welfare for a given amount of trade expansion compared to simulations using the dynamic and/or imperfectly competitive versions, all else being equal.

Level of Disaggregation

The simulations were conducted on a fully disaggregated sectoral basis (57 sectors, of which 43 are merchandise). Due to computer capacity constraints, the full level of regional disag-gregation (92 countries and/or composite regions) could not be used. For convenience, the simulations were conducted with the global economy disaggregated into 15 regions:

Canada and Korea;
the major industrialized economies: the United States, the European Union and Japan;
within the Western Hemisphere: Mexico, Mercosur, the Caribbean Community and Common Market (Caricom), and the Andean Community;
within Asia-Pacific: China, India, Singapore and Australia;
in Africa: the South African Customs Union (SACU); and
the rest of the world (ROW).

Model Structure

The main technical features of the GTAP 6.0 model are as follows:

On the production side, the model features nested constant elasticity of substitution (CES) production functions. Land, labour (skilled and unskilled), and capital substi-tute for one another in a value-added aggregate in the first nest, and composite inter-mediate inputs substitute for value-added at the next nest. Labour and capital are as-sumed to be fully employed, mobile across all uses within a country and immobile in-ternationally. On the demand side, there is a regional representative household whose expenditure is governed by an aggregate utility function. This aggregate utility func-tion is of a Cobb-Douglas form allocating expenditures across private consumption, government spending, and savings. Private household demand is represented by a Constant Difference of Elasticities (CDE) functional form, which has the virtue of capturing the non-homothetic nature of private household demands (i.e., demand structure changes with increased income, reflecting the fact that consumption of par-ticular types of goods such as luxury goods increases more with higher income than does consumption of other goods such as staple food products).
Bilateral international trade flows are modelled based on the Armington hypothesis that goods and services are differentiated by region of origin and are imperfect substi-tutes. The standard GTAP 6.0 parameter set was used; the key Armington parameters (the elasticities of substitution between products according to country of origin) have recently been updated based on new econometric research. These elasticities are on average lower than those used in some other models such as the World Bank’s Link-age model; the estimated trade and welfare impacts reported here are thus relatively conservative⁶.

Closure

In performing simulations, the modeller must make some choices with regard to which vari-ables in the model are to be exogenous (i.e., fixed at predetermined values specified by the modeller) and which are to be endogenous (i.e., the values for which are solved by the model). Alternative choices represent alternative “closures” of the model. The choice of closure influ-ences the results significantly.

Under the GTAP model’s default microeconomic closure, the factor endowments (i.e. the total supply of labour, both skilled and unskilled, as well as of capital and land) are fixed; factor prices (i.e. wages and return to capital and land) adjust to restore full employment of the factors of production in the post-shock equilibrium⁷. Under alternative microeconomic closures that are sometimes used, the return to capital or to labour can be fixed and the sup-ply of capital and/or labour then adjusts to restore equilibrium⁸.

Each of the above closure rules makes an extreme assumption about the supply of labour and/or capital: it is either perfectly elastic or perfectly inelastic. The reality is likely to be somewhere in between.

The GTAP model can be simulated to approximate intermediate values of the elasticity of sup-ply of capital and/or labour. The modeller’s assumptions for these parameters, based on em-pirical evidence drawn from outside the model, then determine how the gains from an FTA are obtained. For example, for labour, the more inelastic is labour supply, the greater the extent to which gains are achieved in the form of wage increases; conversely, the more elastic is labour supply, the greater the extent to which gains are achieved in the form of additional jobs. Simi-larly, for the economy as a whole, the gains reflect either improved prices or increased out-put—or some combination of the two—depending on the assumptions about supply-side elas-ticities established in the chosen closure. Given the sensitivity of the results to the specific as-sumption made, we report the results of simulations for five alternative closure rules:

labour and capital supply fixed (the standard or default closure);
labour supply flexible, capital supply fixed;
labour supply fixed, capital supply flexible;
both labour and capital supply flexible; and
the central scenario, which as described immediately below reflects judgments as to the most appropriate assumptions for Canada and Korea respectively, coupled with the de-fault closure for all other countries or regions:
- With regard to the long-run supply of labour, the economic literature supports a positive but not infinite supply elasticity--i.e., somewhere between the two extreme assumptions for labour market closures. On the basis of recent empirical evidence, we adopt a labour market closure for Canada and Korea based on fixing the elastic-ity of labour supply at approximately one⁹.
- With regard to the long-run supply of capital, for Canada, a small open economy that has relatively untrammelled access to capital, the most plausible assumption for capital supply is that it is relatively elastic; this corresponds closely to the steady state closure rule for capital. For Korea, which has in recent memory experienced a major international liquidity crisis and which does not yet have the same degree of institutional development as Canada, we expect the capital supply schedule to be upward sloping; we arbitrarily set the capital supply elasticity at approximately one. From the perspective of the results, this is a conservative assumption since the eco-nomic gains for Korea rise steeply with higher capital supply responses¹⁰.

The second aspect of closure is macroeconomic closure. Two approaches are available here: the standard approach with the GTAP model, which is used in the present simulations, is to allow the current account to adjust to the trade shock, with passive accommodation by interna-tional investment flows. The change in the current account implies a change in domestic in-vestment. In the GTAP model, the change in investment is reflected in the profile of final de-mand, which in turn affects the profile of production and trade but does not feed through into the productive capacity of industries/regions. The alternative macroeconomic closure is to fix the current account, implicitly assuming no international capital mobility; this is a much less realistic assumption for Canada and this option is accordingly eschewed¹¹.

Caveat: Data issues

There are several issues concerning the underlying database for the GTAP simulations.

The base year for the GTAP 6.0 data is 2001; in other words, the model depicts the global economy as it was in 2001, including the size of trade flows, the level of protection and sup-port for trade in the various economies, as well as the size and composition of GDP and other economic variables for each country/region.

The base year for the input-output tables in the GTAP 6.0 data base, however, varies from country to country; for Korea the reference year is 2000 but for Canada it is 1990?in other words, the internal linkages in the Canadian economy as mapped out in the GTAP 6.0 data base reflect the Canadian economy’s internal linkages as of 1990, prior to its adjustment to the Canada-U.S. FTA and the NAFTA, the Uruguay Round, China’s accession to the World Trade Organization (WTO), and other changes in the domestic and global economic envi-ronment since 1990.

Given the rapidity of economic change in recent years, several steps are taken in the present analysis to make it as up-to-date as possible:

The measures of trade protection in the GTAP 6.0 database are updated to include the completion of implementation of the Uruguay Round tariff cuts, China’s accession commitments to the WTO and the expiry of the WTO Agreement on Textiles and Clothing (ATC)¹².
The model simulations are otherwise performed with the 2001 base year data in the GTAP 6.0 database (in which values are expressed in 2001 U.S. dollar terms), we also present key data (Canada’s imports from and exports to Korea, as well as Cana-dian GDP and consumer welfare estimates) adjusted for scale and composition to re-flect the Canadian economy as it was in 2005, and expressed in 2005 Canadian dol-lars. This is done simply by applying percentage changes generated in the GTAP model to the corresponding 2005 data. This serves to at least partly take into account the implications of the growth of, and structural shifts within, the economy between 2001 and 2005. In the case of Canada’s imports from and exports to Korea, this addi-tional step takes into account some particularly important changes in the product composition of bilateral trade between 2001 and 2005. However, this falls short of a consistent updating of the data to reflect the economy in 2005; the 2005-based esti-mates are thus indicative only.
Foreign Affairs and International Trade Canada (DFAIT) is arranging for the updating of the Canadian input-output data in the GTAP database. The present preliminary analysis is, however, based on the 1990 input-output structure; an update to this report will reflect more up-to-date input-output data, when those become available. The out-dated input-output data reduce the level of confidence in the estimated sectoral output changes in the present simulations, since these changes combine the direct impact on sectors of own-tariff changes (e.g., the impact on the steel sector of changes in the tariff on steel) with the indirect impact of changes in production in other sectors induced by the FTA (e.g. steel sector output changes in response to a change in auto production in-duced by tariff changes on autos), based on the input-output structure as represented in the model. Moreover, the sectoral output numbers reflect the structure of trade in 2001. For these reasons, we do not report detailed sectoral output results since these could be quite misleading, given the significant changes in Canada’s economic structure since 1990 and trade since 2001.

BACKGROUND ON THE CANADIAN AND KOREAN ECONOMIES

Table 1 sets out summary information on the Canadian and Korean economies.

Table 1: Canada and Korea: Summary Statistics, 2005

	Korea	Canada
Income
GDP at market prices (C$ billions)	$955	$1,369
Gross National Income at purchasing power parity (US$ billions)	$1,055	$1,040
Population (2005, millions)	47.82	32.27
Per-capita GDP at market prices (C$)	$19,972	$42,423
Per-capita GNI at purchasing power parity (US$41,950)	$21,850	$32,220
Trade and Investment
Exports of goods and services as share of GDP	42.5%	37.8%
Imports of goods and services as share of GDP	40.0%	34.1%
Two-way trade in goods and services as share of GDP	82.5%	71.9%
Outward direct investment as share of GDP (2004)	4.7%	35.0%
Inward direct investment as share of GDP (2004)	12.9%	29.5%
Economic Structure: shares of total output*
Primary (agriculture, forestry, fishery & mining)	3.7%	7.2%
Secondary (manufacturing, construction & utilities)	40.0%	25.1%
Tertiary (services)	56.3%	67.7%

Source: GDP and population figures are from the International Monetary Fund (IMF), International Financial Statis-tics; purchasing power parity data are from the World Bank, World Development Report 2007, Table 1; the Canada-Korea exchange rate used to convert Korean won data into Canadian dollars is from the Bank of Canada website; trade and industrial structure data and inward and outward investment are from Korea National Statistical Office and Statistics Canada respectively.

*Shares of GDP at factor cost. For Korea, industrial structure is as of 2005; for Canada as of 2002 based on current dollar GDP shares.

Korea ranked 11th globally in terms of gross domestic product (GDP) in 2005 with an econ-omy measured at market exchange rates about 70% the size of 9th-ranked Canada’s. Meas-ured in terms of gross national income (GNI) at purchasing power parity exchange rates, Ko-rea’s economy was slightly larger than Canada’s in 2005. Korea’s population in 2005 was almost 50% larger than Canada’s, resulting in substantially lower levels of per-capita income when compared at purchasing power parity exchange rates, and even more so when com-pared at market exchange rates.

Like Canada, Korea is a highly open economy, with two-way trade in goods and services equivalent to 82.5% of GDP in 2005 (versus 71.9% for Canada). In 2005, Korea ranked 12th in the world in two-way merchandise trade of $660.3 billion. However, Korea is much less open in terms of two-way investment than it is in trade: the stock of inward foreign direct investment (FDI) in Korea in 2004 amounted to $114 billion or 12.9% of Korea’s GDP; the stock of outward investment totalled only $42 billion or 4.7% of Korea’s GDP.

Over time, Korea’s industrial structure has come to increasingly resemble the structure of the advanced economies. Compared to Canada, Korea’s primary and services sector are smaller, while manufacturing and other industry accounts for a greater share of output than in Canada.

Korea’s macroeconomic performance and prospects

Korea’s economic growth has slowed from the torrid pace of 8.3% maintained from 1963 through 1996, which served to elevate Korea from an impoverished agrarian economy to OECD membership status in 1996. Since then, a period that includes the steep recession at the time of the Asian Economic and Financial Crisis, Korea has averaged 4.2% real growth; however, in the context of the global upswing from the global recession of 2001, Korea has maintained an average growth rate of 4.7%. Current IMF projections suggest that Korea will maintain a 4.7% pace in 2006-2007 on average¹³.

Source: Historical data from the IMF, International Financial Statistics; 2006-2007 projections from the IMF, World Economic Outlook, September 2006. Trend line is a polynomial trend fitted with Excel.

The short- and medium-term prospects for the Korean economy are broadly positive. Infla-tion has been moderate (3.3% average CPI growth over 2001-2005 with “core inflation” at 2.2% in mid-2006) and unemployment has been low (average of 3.7% over 2001-2005 and 3.5% in mid-2006). The external accounts have been in steady surplus since the Asian crisis (including a trade surplus equivalent to 2.5% of GDP in 2005). External debt is moderate (about 25% of GDP in 2005) and fully covered by foreign exchange reserves, which reached US$228.2 billion in September 2006.

Korea’s economic policy posture is essentially neutral. Korea was expected to achieve a modest budget surplus of about 1% of GDP in 2006¹⁴. Korean short-term interest rates rose to the 4% to 5% range in 2006, reflecting some tightening of policy since 2005; however, the yield curve has remained moderately upward sloping.

Bilateral Canada-Korea Economic Relations

In 2005, Korea was Canada’s seventh-largest merchandise trading partner. From Korea’s perspective, Canada was its 21st-largest trading partner. Two-way merchandise trade is sub-stantial, with Korea in the surplus position by about $2.2 billion, going by import statistics to measure the bilateral flows¹⁵.

Table 2: Canada-Korea Merchandise Trade, 2005, C$ Millions

Korean Statistics
Exports to Canada	4,171
Imports from Canada	3,147
Two-way trade	7,318
Balance (Korean perspective)	1,024
Canadian Statistics
Exports to Korea	2,806
Imports from Korea	5,374
Two-way trade	8,181
Balance (Canadian perspective)	-2,568
Import-Import Comparison
Korean Imports from Canada	3,147
Canadian Imports from Korea	5,374
Two-way trade	8,522
Balance (Canadian perspective)	-2,227

Source: World Trade Atlas

Following the Asian Economic and Financial Crisis, which resulted in a steep depreciation of the won against the Canadian dollar, Canada’s merchandise exports to Korea fell off sharply and remained low for several years. Since 2003, however, they have rebounded strongly. In 2005, Canadian exports were 54% higher than the low point in 1998, although they still have to regain the peak of 1997 (Figure 2).

Source: Statistics Canada

In terms of market share, Canada has witnessed a decline in its share of Korean imports from the 2% range in the mid-1990s to the 1% range (Figure 3).

Canada-Korea cross-border services trade has grown in recent years but remains small and flows have been rather volatile from year to year (see Table 3). Of particular note, it is diffi-cult to discern a sustained dynamic expansion in the area of commercial services, the main area for potential gain from a services component in the CKFTA and an area in which trade has been growing very rapidly worldwide in the age of outsourcing, notwithstanding the lack of progress in the multilateral negotiations on trade in services.

Table 3. Canada-Korea Cross-border Trade in Services, 1996-2004, C$ millions

	1996	1997	1998	1999	2000	2001	2002	2003	2004
Total Services Receipts (Canadian exports)	479	506	400	456	568	681	643	607	706
Travel	195	204	109	146	238	284	269	251	273
Commercial services	180	190	190	182	149	198	192	183	171
Transportation (incl. gov’t services)	105	113	100	127	181	199	182	173	262
Total Services Payments (Canadian imports)	257	249	166	176	303	229	216	296	350
Travel	60	60	15	27	28	27	31	66	60
Commercial services	71	74	66	47	140	77	60	125	106
Transportation (incl. gov’t services)	126	115	85	101	135	125	125	105	184

Source: Statistics Canada

Overall, Canada has thus experienced an erosion of its share of the Korean market since the mid-1990s Given Korea’s program of free trade negotiations (see footnote 3), Canada’s pres-ence in this dynamic East Asian economy is at risk of further marginalization.

While the bilateral investment relationship has been expanding, it remains modest. The stock of Canadian direct investment in Korea was $779 million in 2005, while the stock of Korean direct investment in Canada was $364 million.

1. All monetary figures are in Canadian dollars unless otherwise noted.

2. Johannes Van Biesebroeck, “The Canadian Automotive Market,” May 20, 2006

3. For a full description of the model, see Hertel, T. W. (1997). Global Trade Analysis: Modeling and Ap-plications, Cambridge: Cambridge University Press.

4. See DFAIT, Canada-Korea – Free Trade Agreement Negotiations .

5. For example, since July 2005, Korea has concluded agreements with Singapore, the European Free Trade Association (EFTA) and the Association of Southeast Asian Nations (ASEAN); has concluded negotiations with the United States; and has trade negotiations under way with, among others, the European Union. Canada, meanwhile, is also negotiating free trade with the Central American Four (CA4), EFTA, and Singapore and exploring free trade with the Andean Community, CARICOM, and the Dominican Republic .

6. The comparative static version of the Linkage model produced income gains for industrialized countries under multilateral trade liberalization that were one third larger using the trade elasticities in the Linkage model compared to those in the GTAP 6.0 dataset. See Dominique van der Mensbrugghe, “Estimating the Benefits of Trade Reform: Why Numbers Change,” Chapter 4 in Trade, Doha, and Development: A Window into the Issues (World Bank ); at p. 71.

7. This is sometimes described as reflecting a medium-term time horizon in which labour supply is relatively “sticky.”

8. The closure rule in which the rate of return to capital is fixed is sometimes described as reflecting longer-run “steady-state” growth conditions, For an example of the implications of fixing the return to capital and al-lowing investment to adjust, see John P. Gilbert, “GTAP Model Analysis: Simulating the Effect of a Korea-U.S. FTA Using Computable General Equilibrium Techniques”. Gilbert reports net economic welfare gains for Korea that are 2.7 times larger, and for the U.S. that are 2.4 times larger, with this closure compared to standard closure. For an example of the use of the labour market closure rule under which the wage rate is fixed, see Joseph F. Francois and Laura M. Baughman, “U.S.-Canadian Trade and U.S. State-Level Production and Employment,” in John M. Curtis and Dan Ciuriak (eds.) Trade Policy Research 2004 (Ottawa: DFAIT, 2004).

9. For a discussion of the elasticity of supply of labour see John C. Ham and Kevin Reilly, “Using Micro Data to Estimate the Intertemporal Substitution Elasticity for Labor Supply in an Implicit Contract Model ,” July 2006. This study finds statistically significant in-ter-temporal labour supply elasticities of 0.9 with the Panel Study of Income Dynamics (PSID) data set and 1.0 with the Consumer Expenditure Survey (CES) data set.

10. This is a well-established result with the GTAP model. See Joseph F. Francois, Bradley J. McDonald and H?kan Norström, “Liberalization and Capital Accumulation in the GTAP Model,” GTAP Technical Paper No. 7, July 1996.

11. See Gilbert (op. cit.) for a comparison of the impact of using alternative macroeconomic closures in the context of modelling the U.S.-Korea FTA. The fixed current account simulations substantially reduce the eco-nomic welfare gains for Korea (to 3/5 the level of the simulation with flexible current account) and marginally (by 5%) for the United States.

12. The methodology for updating the protection data is that developed for the World Bank. For a descrip-tion see Dominique van der Mensbrugghe, “Estimating the Benefits of Trade Reform: Why Numbers Change,” in World Bank, Trade, Doha, and Development: A Window into the Issues; at p. 61.