Economic Impact of the United States withdrawal from Trans-Pacific Partnership on Canada: A Computable General Equilibrium Based Analysis

Abstract

Canada has recently concluded negotiations on Trans-Pacific Partnership (TPP) with 11 major Pacific Rim countries. The TPP would have a potential economic impact on its member countries (including Canada). In spite of the United States (U.S.) withdrawal from the TPP region, one may expect the agreement to still have an impact on the Canadian economy through changing trade dynamics with currently closed and large trading partners, such as Japan. In this study, we built a Computable General Equilibrium (CGE) model based on the Global Trade Analysis Project (GTAP) model and database to assess the economic impact of the U.S. withdrawal from TPP agreement on the Canadian economy. Our model included 13 regions, 15 sectors, and three factors of production. Three scenarios were simulated to capture the economic impact of the U.S. withdrawal from TPP on Canada: (i) Baseline scenario, where we developed a growth projection model to simulate the economic and trade growth in 2030 without the TPP. (ii) In the second scenario, TPP12 scenario, we assumed that the TPP would be fully implemented by 2030. (iii) In the third scenario, TPP11, we assumed that U.S. had withdrawn from the TPP and the other 11 country members (including Canada) do business in spite of it. The study showed that both TPP12 and TPP11 will generate long-term economic gains for Canada. If the TPP is fully implemented in the absence of the U.S. (Scenario TPP11), the impact on Canada will be similar to TPP12 scenario, although it will generate major trade diversion from the U.S. toward other TPP member countries. Total Canadian imports and exports are projected to decrease by 0.26 (1.6 billion USD) and 0.35 (2.7 billion USD) percent, respectively. This net change is a combination of trade creation with TPP11 region and Rest of World (RoW) and diversion of trade flows from the U.S.