The Regional Consequences of the Canadian Tariff Structure: Discussion

Abstract

In this paper Hazledine makes an important contribution in developing a unified analytical framework to estimate the regional effects of a customs union on production, shipments, and employment in a multisectoral model. We find all too few attempts at empirical, multisectoral, general equilibrium analysis of the effects of changes in trade policy in the literature.' Hazledine's study makes a significant addition to this small but important literature. One particularly interesting and innovative aspect of Hazledine's framework is his treatment of the entry and exit of firms and workers from each sector in response to changes in trade policy. The adjustment costs associated with firms being expelled from a sector represent one of the greatest sources of inertia inhibiting changes in trade policy. Agriculture Canada is certainly interested in the effects of possible changes in the structure of the Canadian customs union on the number of farms and employment in each region's agriculture. Hazledine's treatment of capital stock adjustment in response to changes in trade policy is extremely simplified. I have some doubts concerning the ability of his entry-exit elasticities to capture the very complex investment-disinvestment processes which lie behind them. Moreover, the opportunity cost and malleability of the existing capital stock varies considerably from sector to sector. Nevertheless, Hazledine's simplification provides an acceptable first approximation which does get at the capital stock adjustment process more than previous studies. In addition, Hazledine makes an interesting innovation by drawing upon his industrial organization background in introducing domestic markup elasticities into a model for trade policy analysis. Now, I turn to several quibbles which I would like to raise with respect to Hazledine's paper. First, there is no income term in the demand equation specification. Demand for each good is specified as a function of only three prices, but not real income. However, real income changes do result from changes in trade policy, such as those treated in this paper. I have some severe reservations about ignoring this important feedback effect. Second, is there any evidence of differences in the export, import, and domestic consumption price elasticities among the regions of Canada for each product? They are assumed the same here in all regions. Also, the values of the elasticities used here (Canadian industry parameters in table 2) suggest the use of most plausible values for each sector. Citation of the sources of these values would add credibility to the results. In addition, some comments on the quality of the estimates of the capacity and employment elasticities would also help the reader in assessing the empirical results of the analysis. Third, I have some severe doubts concerning the uniform treatment of changes in costs and employment across all sectorsparticularly in treating agriculture and industry in the same manner. Are costs of production in both industrial and agricultural sectors measured here in the same manner? At one