Economic impact assessments of free trade agreements (EIAs)

Economic impact assessments (EIAs) are a tool used to assess the potential economic impacts of free trade agreements (FTAs) entered into by Canada and its trading partners. Economic impact assessments provide both quantitative and qualitative assessments of measures included in Canada’s FTAs.

The quantitative section is informed by a dynamic computable general equilibrium (CGE) model of global trade. This model follows the structure of the Global Trade Analysis Project (GTAP) model developed and supported by Purdue University. The model assesses the potential impact of a trade agreement by examining the interaction among different sectors as a result of trade liberalization, capturing the economy-wide effect of the agreement on the Canadian economy.

The qualitative section of the report provides an assessment of measures that are not possible to quantify for lack of analytical tools or lack of available data. These assessments are undertaken by subject matter experts in consultation with other government departments.

Quantitative effects on trade and the economy

The database used by the model contains all bilateral trade flows, trade protection and domestic support as of a given benchmark year. Updates are made to the database to include new bilateral/regional FTAs that have been concluded and implemented since the benchmark year, as well as certain unilateral liberalization initiatives undertaken by partner countries. To ensure a better representation of the policy environment as it is today, tariff data between Canada and concerned parties are updated to the latest year.

The CGE model projects the economic activities in Canada and the rest of the world into a reference year in the future. The model is run twice – once to establish a baseline simulation, and a second time to implement the trade policy changes. The difference between the two simulations isolates the effect of the agreement on the economy, measured by changes in many variables including Gross Domestic Product and bilateral trade flows such as imports and exports.

As a note of caution, the modelling results should be considered in the context of both the advantages and limitations of the model being used. The CGE model can reflect only the expansion of trade in products already traded in a given bilateral trading relationship; it cannot predict the creation of trade in new product areas. This limitation is particularly important when the existing trading relationship is fairly narrow. As a result, the quantitative assessment can be expected to underestimate the gains from liberalization.

Quantitative effects on labour, gender and youth

Traditional economic models of global trade do not allow for detailed analysis of trade policy on different labour occupations, gender, or youth. Given the importance of better understanding the effects of trade policy on Canadians, the Office of the Chief Economist at Global Affairs Canada has integrated Canadian labour force data from Statistics Canada into the CGE model of global trade to allow for a more detailed analysis on labour, gender and youth. This allows for a quantitative analysis at the sector level, including changes in employment by occupation by gender and by age. As a result, it is possible to see the transition dynamics as workers and previously unemployed persons move into industries that are expected to benefit from the trade agreement.

Link between economic impact assessments and other assessments

Estimates from economic impact assessments also feed into other assessments used by the Government of Canada in trade policy analysis, such as the environmental assessment and gender-based analysis (GBA+).

There are two types of economic impact assessments conducted – initial assessments and final assessments. Initial economic impact assessments are undertaken to inform negotiations and the quantitative estimates feed into the initial environmental assessment and the initial GBA+. Final economic impact assessments are conducted after the conclusion of negotiations and aim to quantify the economic benefits of the agreement. This analysis takes into account the final negotiated outcomes and feeds into the final environmental assessment and the final GBA+. The final economic impact assessment is also required to be tabled at Parliament with the implementing legislation for concluded FTAs.