Prospects of a Canada-US Customs Union: a Computable General Equilibrium Assessment

A number of respected analysts and economic commentators in Canada have recently been calling for deeper economic integration with the USA. Most proponents of deepening economic integration favour the European progressive approach: a customs union, to be followed by a “single market†and eventually a full economic union. Evidently, the complexity of negotiating and implementing these arrangements increase from one step to the next. In this paper, we attempt to shed quantitative light in the simplest and perhaps most attainable scenario of closer integration, that of a basic customs union between the two countries. This involves harmonization of external tariffs towards the Rest of the World coupled with elimination of remaining tariff protection in bilateral trade between the two countries. Our methodology involves the development of a Computable General Equilibrium model where the representative consumer maximizes an inter-temporal utility function. The model and related data consists of three Canadian regions, The USA and the Rest of the World and nine economic sectors. The dynamic aspect of our model allows for a better interpretation of the adjustment process as well as capital accumulation and investment response to the proposed integration reform.