An EU-Canada bilateral trade agreement: A DefraTAP application

The first round of negotiations held in Ottawa on the 19th October, 2009, heralded the 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 in Brussels in January, whilst further rounds are scheduled for 2010, with the longer term aim of ratifying an agreement within 24-30 months. Although stumbling blocs will be encountered, the divergent political interests of each region are compatible. In Canada, a FTA with its second largest trading partner offers a viable alternative to its current overdependence on the US. Similarly, the EU27 sees an opportunity to regain a competitive 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 sensitive product declarations submitted by both parties in the first round. We examine the extent to which these proposals afford protection to key strategic sectors and impact on trade led growth and real incomes. All estimates are compared with a realistic contemporary baseline scenario. The results suggest that non tariff barrier (NTB) reductions dominate real income gains, whilst sensitive product exceptions, principally affecting wheat, dairy, wearing apparel and leather sectors, reduce Canadian and EU27 real income gains by 20% and 24%, respectively. Trade diversion impacts are relatively marked for the US and EFTA, whilst China escapes largely unscathed due to the pattern of its trade specialisation.