Preliminary Assessment of the Economic Impacts of a Canada-Korea Free Trade Agreement

Abstract

This document assesses the economic impacts of a free trade agreement between Canada and Korea, using the Global Trade Analysis Project (GTAP) CGE model and version 6 of its database (base year 2001). Five alternative scenarios are simulated based on a range of assumptions concerning the supply-side responses of the two economies to expanded bilateral trade. We find that choice of closure assumptions heavily influences the scale (and even the sign) of the welfare impacts and the breakdown of the economic impacts between output and terms of trade. The default closure within the GTAP modelling framework of fixed labour and capital supply, which is equivalent to assuming zero supply elasticities for factor inputs, results in terms of trade gains dominating output gains, an outcome that in our view is unlikely for small, open economies like Canada and Korea. Our central scenario incorporates the assumptions which in our view are best suited for Canada and Korea respectively; this yields larger economic gains for both countries, with a more reasonable breakdown between output and terms of trade impacts.

Keywords: free trade agreement, FTA, Canada, Korea, CGE model, closure

JEL Classification: F14, F15, F17