Summary
The CGE model estimates that the CETA will lead to overall gains in welfare, real GDP, total exports and real wages in both Canada and the EU over the long-term. While these gains are expected under the four scenarios modelled in the economic assessment, the gains are expected to be higher under an agreement that offers the highest degree of tariff and services liberalisation. Third countries are estimated to experience minor degrees of welfare loss as a result of the Agreement, though the overall impact on these countries is insignificant.
INDICATOR: Welfare
In the GTAP model, welfare is measured by Equivalent Variations (EVs).13 Table 3 suggests that trade liberalisation under the CETA will lead to welfare gains in the EU and Canada over the long-term. As can be seen, the greatest gains will be achieved under an agreement that provides the greatest amount of liberalisation (Scenario D).
Table 3: Equivalent Variation (Million US$ at 2004 prices)
Scenario A Scenario B Scenario C Scenario D
EU 27 1,964.22 2,676.47 2,687.12 3,400.98
Canada 1,796.87 2,437.59 2,291.10 2,931.87
12 Introductory notes: Included in this section are specific estimates from the CGE model outlining expected changes in both Canada and the EU in terms of welfare, GDP, exports and wages. These results are influenced by the model’s assumptions regarding services and tariff liberalisation. Specifically, the four scenarios estimated within the modelling simulations are:
Scenario A: 95% reduction in tariffs and less ambitious cuts in trade costs of services (taking the cuts used in the 2008 Joint Study and multiplying them by a factor of 0.6)
Scenario B: 95% reduction in tariffs and ambitious cuts in trade costs of services (taking the cuts used in the 2008 Joint Study)
Scenario C: 100% reduction in tariffs and cuts in trade costs of services as employed in the 2008 Joint Study multiplied by a factor of 0.6 (i.e. less ambitious liberalisation of services)
Scenario D: 100% reduction in tariffs and cuts in trade costs of services as employed in the 2008 Joint Study (i.e. less ambitious liberalisation of services).
Results from the CGE model should be interpreted as reflecting the impact of the CETA itself on these indicators and does not necessarily imply overall changes, which could be further affected by exogenous factors. All estimated impacts are to be understood as occurring over the long-term (e.g. in 10+ years) after final implementation of an Agreement. As data limitations made it impossible to incorporate investment effects into the CGE model, the results take into account the impact of trade liberalisation only and do account for the impact from investment liberalisation.
More information on the CGE model, its assumptions and the scenarios employed can be found in Annex 1.
13 Equivalent variation (EV) is a measure of how much more money a consumer would pay before a price increase to avert the price increase.
41 The decomposition of the welfare effects (as presented in Figures 1 and 2) further suggests that under less ambitious liberalisation of services, the rise in welfare for EU and Canada is more greatly attributed to the cut in tariffs on goods. However, under the more ambitious cuts in services, the gains from services trade liberalisation are larger than the gains from tariff cuts. At the same time, however, this does not take into account potential welfare gains that may arise through investment liberalisation, which could lead to greater trade through foreign affiliates and increases in output through enhanced productivity.
Figure 1: Decomposition of welfare effects for EU (Equivalent Variation in Million US$ at 2004 prices)
Figure 2: Decomposition of welfare effects for Canada (Equivalent Variation in Million US$ at 2004 prices)
42 Table 4 suggests that under the four scenarios modelled, there will be welfare losses for all third countries except Mexico and China (under certain scenarios). The magnitude of welfare losses increases under the scenarios with more intensified services liberalisation. In terms of value, the United States suffers from the largest welfare losses. Table 5 shows estimates of the percentage share of EV in terms of GDP (for scenarios C and D). Despite the fact that the value of welfare losses for LDCs, the countries with which the EU shares preferential trade agreements (EUPTA) and the countries of African, Pacific and Caribbean (excluding LDCs) would be smaller than estimated for the U.S. and rest of world (RoW), these groups of countries will be more greatly impacted as their volume of welfare losses in terms of percent share in GDP are as high as for USA or higher than that for RoW. The impact on China is negligible. However, as the magnitude of these losses is in the range of 0.0 and 0.01 percent of GDP, the CETA would not have a significant impact on third countries.
Table 4: Equivalent Variation (Million US$ at 2004 prices)
Scenario A Scenario B Scenario C Scenario D
USA -798.65 -978.18 -848.28 -1,028.28
Mexico -26.12 -17.43 3.03 11.8
China -60.69 -62.96 1.14 -1.1
EUPTA -68.33 -96.83 -87.61 -116.12
LDCs -14.57 -16.24 -11.39 -13.06
ACPexLDC -36.96 -50.31 -21.78 -35.12
ROW -266.58 -350.61 -109.57 -193.37
Table 5: Equivalent Variation as % of GDP
Scenario C Scenario D
USA -0.01 -0.01
Mexico 0.00 0.00
China 0.00 0.00
EUPTA -0.01 -0.01
LDCs -0.01 -0.01
ACPexLDC 0.00 -0.01
ROW 0.00 0.00
INDICATOR: GDP
Under the four scenarios, both the EU and Canada are expected to experience a rise in real GDP. The higher gain is found to be achieved under the most ambitious scenario (Scenario D), again suggesting greater liberalisation will provide the greatest benefit to both sides.
Table 6: Percentage change in Real GDP
Scenario A Scenario B Scenario C Scenario D
EU 27 0.02 0.02 0.02 0.03
Canada 0.18 0.25 0.29 0.36
43 Under these four scenarios, third countries such as the U.S., Mexico, China and the rest of the world would not experience a fall in real GDP. However, under the most ambitious scenario (Scenario D) the countries with which the EU shares preferential trade agreements (EUPTA), LDCs and the countries of the APC would experience a minor decline in real GDP. Again, the magnitude of the impacts for third countries is in the range of 0.0 and 0.01 percent and thus insignificant.
Table 7: Percentage change in Real GDP
Scenario A Scenario B Scenario C Scenario D
USA 0 0 0 0
Mexico 0 0 0 0
China 0 0 0 0
EUPTA -0.01 -0.01 0 -0.01
LDCs -0.01 -0.01 -0.01 -0.01
ACPexLDC -0.01 -0.01 0 -0.01
ROW 0 0 0 0
INDICATOR: Total exports
Both the EU and Canada are expected to experience a rise in total exports. For the EU, the rise in exports ranges between 0.05% and 0.07%, whereas for Canada it ranges between 0.54% and 1.56%. Total exports would be expected to increase with greater levels of services liberalisation and tariff cuts. In terms of tariffs, the rise in exports observed when liberalising the sensitive products in the agriculture and PAPs sector implies that significantly reducing tariffs on these products would likely have a pronounced impact on trade in both regions.
While it would be expected that bilateral exports will increase in most sectors, the reallocation of resources towards expanding sectors may nevertheless imply reduced overall exports (i.e. decreases of exports to third countries) in some sectors over the long-term. It should be noted that as services liberalisation appears to stimulate an increase in exports, these results are probably underestimated as they do not account for exports that occur via sales of foreign affiliates (mode 3 trade), which serve an important role in bilateral trade in services between Canada and the EU.
Table 8: Percentage change in Total Exports
Scenario A Scenario B Scenario C Scenario D
EU 27 0.05 0.06 0.06 0.07
Canada 0.54 0.63 1.47 1.56
INDICATOR: Balance of trade
Both Canada and the EU are expected to experience improvements in their overall balance of trade over the long-term. As shown in Figure 3, the EU will generate its greatest improvements through services liberalisation, with removal of tariffs on sensitive sectors estimated to worsen its balance of trade in goods. Given that this does not take into account exports that occur via mode 3 (sales by foreign affiliates), the gains for its services sector may be underrepresented. Conversely, Canada would be
44 expected to generate its greatest improvements through the full removal of tariffs, though it should see positive improvements to its balance of trade in services as well (Figure 4). Specifically, these results highlight the potential impact from removing tariffs on beef and pork in the EU, which would enhance gains to the balance of trade in Canada while worsening the balance of trade in the EU. (See relevant sectoral analysis for more discussion).
Figure 3: Change in the EU’s balance of trade (Million US$ at 2004 prices)
Figure 4: Change in Canada’s balance of trade (Million US$ at 2004 prices)
45 INDICATOR: Wages
In EU, the real wage rates of unskilled and skilled labour are expected to exhibit small increases in magnitudes over the long-term under all four scenarios. For the EU, the largest rise in the wage rates is observed under the most ambitious scenario (Scenario D). However, under this scenario, the wage rate of skilled labour rises more than that of unskilled labour. Conversely, Canadian wages are estimated to exhibit the highest increases under an ambitious liberalisation of services but where dairy and ‘other food products’ are not liberalised (Scenario B).14
For Canada, the rises in wages for both skilled and unskilled labour are much higher than those is EU across all scenarios. However, the wage rate of unskilled labour rises more than that of skilled labour.
Table 9: impact on wages for skilled (s) and unskilled labour (u)
Scenario A Scenario B Scenario C Scenario D
U S U S U S U S
EU 27 0.03 0.03 0.03 0.04 0.06 0.05 0.06 0.07
Canada 0.45 0.42 0.57 0.55 0.4 0.37 0.52 0.49
14 An explanation for this could be that such a scenario would imply continued protections for Canada’s dairy farmers, which would help to support wages for those in the sector. Alternatively, the most liberalised scenario (Scenario D), could lead to lower costs of capital which could be creating greater substitution of labour for capital, placing downward pressure on wages.
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