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A general equilibrium analysis of Canada’s national policy

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  • Alexander, Patrick D.
  • Keay, Ian

Abstract

In this paper, we study the impact of Canada’s adoption of protectionist trade policy in 1879 on Canadian welfare. Under the National Policy, the Canadian average weighted tariff increased from 14% to 21%. The conventional view is that this was a distortionary policy that negatively affected Canadian welfare. We argue that this view is incomplete because it ignores general equilibrium effects. Using a multi-industry general equilibrium model with differentiated goods, we show that tariffs’ impact on welfare can potentially be positive, even for small open economies, due to their impact on domestic terms of trade and government revenues. We apply these theoretical insights in a reassessment of the static impact that the National Policy had on Canadian welfare in 1879, using newly compiled granular trade and production data, and newly estimated historically contemporaneous import demand elasticities. Our results suggest that, although a multilateral move to free trade would have resulted in the best welfare outcome for Canadians, the National Policy’s tariff increases actually improved Canadian welfare by approximately 0.15% of GDP in 1879 – an amount equivalent to approximately $2.3 billion 2016 USD.

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  • Alexander, Patrick D. & Keay, Ian, 2018. "A general equilibrium analysis of Canada’s national policy," Explorations in Economic History, Elsevier, vol. 68(C), pages 1-15.
  • Handle: RePEc:eee:exehis:v:68:y:2018:i:c:p:1-15
    DOI: 10.1016/j.eeh.2017.11.002
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    Cited by:

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    2. Patrick Alexander & Ian Keay, 2018. "Responding to the First Era of Globalization: Canadian Trade Policy, 1870–1913," Staff Working Papers 18-42, Bank of Canada.
    3. Taylor Jaworski & Ian Keay, 2020. "Openness to Trade and the Spread of Industrialization: Evidence from Canada during the First Era of Globalization," NBER Working Papers 27716, National Bureau of Economic Research, Inc.
    4. Nathaniel Lane, 2020. "The New Empirics of Industrial Policy," Journal of Industry, Competition and Trade, Springer, vol. 20(2), pages 209-234, June.
    5. Jaworski, Taylor & Keay, Ian, 2022. "Globalization and the spread of industrialization in Canada, 1871–1891," Explorations in Economic History, Elsevier, vol. 86(C).

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