Auto Sector Impacts of a Canada-Japan Free Trade Agreement: A Market-Segment-Based Evaluation

Abstract

With the recent completion of a second Joint Study regarding a Canada-Japan Free Trade Agreement, and Canada’s entry into the Trans-Pacific Partnership negotiations, which may eventually include Japan, the implications of trade liberalization with Asian economies gains renewed interest, in particular the implications for Canada’s auto sector, which has been a stumbling block in previous negotiations. This paper considers the implications of auto sector liberalization between Canada and Japan. The impacts are modest for three main reasons: the export-orientation of Canada’s auto sector, the fact that auto manufacturers price strategically, often practicing “pricing to market” (PTM) and so do not automatically pass on tariff cuts to consumers, and the impact of tariff cuts at the border is muted by the large share of domestic transport and distribution costs in the final consumer price. Taking into account the segmented nature of the auto sector tends to amplify rather than reduce the scale of the effects on the Canadian industry, suggesting that there is some degree of aggregation bias in analyses that treat the sector in aggregated terms. Income effects from the overall CJFTA would be expected to be channelled in part into increased auto purchases, providing a sizeable offset to the direct negative trade effects. Based on previous estimates of income gains from a CJFTA, this would reduce the negative impacts on Canadian production by half.

Keywords: Canada, Japan, trade liberalization, auto sector

JEL Classification: F13, F14