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Published online by Cambridge University Press: 07 November 2014
One of the most important developments in the world economy since 1945 has been the emergence of strong and rapidly growing economies in Western Europe. This expansion has been accompanied by the formation of two free-trade blocs, with growing prospects for an association between them. Canadian reactions to these changes have ranged from apprehension and pessimism, on the one hand, to considerable optimism on the other and in the course of the discussion a number of suggestions have been advanced for modifying Canada's commercial policy. It has been suggested, for example, that because of these and other developments we should increase protection to domestic industry; another suggestion that has been advanced in several forms is that we should ourselves consider promoting some regional free-trade association.
These reactions and policy suggestions necessarily involve assumptions about the future of Canadian trade, particularly with Western Europe. In most discussions these assumptions remain implicit and unclear. The purpose of this paper is to identify and to assess some of these assumptions, recognizing fully all the hazards, difficulties and qualifications that inevitably attend forecasting exercises in economics. Specifically, I try to shed some light on the following two questions: (1) Given likely increases in Western Europe's national income over the next ten years, by how much is Europe's demand likely to increase for industrial materials that are important Canadian exports? (2) How great a barrier to Canadian exports, and how costly for Canada, are likely to be the tariff arrangements that EEC and EFTA propose to establish over the next decade?
The initial version of this paper was read at the annual meeting of the Canadian Political Science Association hela at Montreal in June, 1961. The paper was written while I was a member of the Institute for Economic Research, Queen's University, during the summer of 1961. I am most grateful to the Institute and its members for their assistance and particularly to Professor H. G. Johnson who contributed greatly to the analysis of the cost of the European tariff changes.
1 The definition includes the following SITC categories: section 2 (crude materials) except groups 211, 212, 221, 291, 292 (various animal and vegetable products), and 261 to 267 (textile fibres); groups 631, 632, 641, 642 (wood and paper products); groups 671, 681, 686, 689 (metal products); and 511, 512, 599 (certain chemical products). The objective is to exclude not only agricultural products, secondary manufactures, and fuels, but also many chemical and semi-fabricated products that might normally be considered industrial materials. Canadian exports of these latter categories to Europe, however, have been insignificant in size and there appears little prospect of change in this situation. It is felt that inclusion of these products would seriously distort some of the comparisons made and that it is preferable to concentrate on categories of products which Canada has demonstrated some ability to sell in Europe.
2 Statistics used in this section have been derived from the following sources: UNO, Commodity Trade Statistics, Statistical Papers, Series D, 01–Dec, 1951 to 1959 (import figures have been used)Google Scholar; DBS, Trade of Canada and Review of Foreign Trade, various issues.
3 Comparisons in value terms are of course influenced by changes in relative prices. Compared with 1951, the terms of trade in 1959 had generally moved in favour of secondary manufactures and against raw and semi-manufactured goods. For statistical reasons it is difficult to provide exact comparisons of growth rates in volume terms.
4 Kirschen, E. S. and associates, The Structure of the European Economy in 1953 (Paris: OEEC, 1958).Google Scholar Since the input-output matrix referred to 1953, it was necessary to use 1953 as the base year for all estimates.
5 This rate is somewhat greater than the growth in GNP from 1953 to 1959 (4.3 per cent), but it is the rate one obtains by projecting the individual components of demand-consumption, investment, government, exports and imports–at their 1953–59 rates and adding up these components to obtain GNP in 1970. National income data for these and other calculations have been taken from OEEC, General Statistics, 07, 1960, vii Google Scholar, and are based on 1954 prices and 1954 exchange rates.
6 Towards a New Energy Pattern in Europe (Paris: OEEC, 1960), Annex 2.Google Scholar
7 The Economist Intelligence Unit in The Commonwealth and Europe, 62, forecasts an annual rate of increase of 2.8 per cent in Europe's GNP from 1955 to 1970. This rate is widely regarded as probably low. Dewhurst, J. F. et al. in Europe's Needs and Resources: Trends and Prospects in Eighteen Countries (New York, 1961) estimate (p. 122)Google Scholar that the average annual increase in Western Europe's GNP from 1955 to 1970 will be “very close” to 3 per cent.
8 E.g., Caves, Richard E., “Europe's Unification and Canada's Trade,” this Journal, XXV, no. 3, 08, 1959, 253 Google Scholar; Scitovsky, T., Economic Theory and Western European Integration (Stanford, 1958), 67 Google Scholar; Johnson, H. G., “The Gain From Freer Trade With Europe: An Estimate,” Manchester School of Economic and Social Studies, XXVI, no. 3, 09, 1958, 247–55CrossRefGoogle Scholar; Mishan, E. J., “The Economic Case Against Britain Joining the Common Market,” Listener, LXVI, 09 14, 1961, 372.Google Scholar
9 E.g., for sector 12 (engineering goods) an estimate was made of the final demand arising from exports, gross fixed capital formation, stocks, private consumption and public consumption. Similar estimates were made for all sectors. Many simplifying assumptions necessarily underlie the analysis. These include not only all the well-known assumptions of the input-output technique and the simplifications required to prepare an inter-industry table for Western Europe as a whole, but also the rather heroic assumptions made about final demand in 1970 in each of the twenty-seven industrial sectors.
10 To show the figures on a 1959 base, the rates of increase used in computing the final demand sector for D 1 were applied (compounded annually for six years) to the 1953-base figures to derive estimates for 1959.
11 See for example, UNO, World Economic Survey, 1955 (New York, 1956), 36–9Google Scholar; Saunders, C. T., “Consumption of Raw Materials in the United Kingdom, 1850–1950,” Journal of Royal Statistical Society, CXV, series A (General), pt. III, 332–5Google Scholar; Salter, W. E. G., Productivity and Technical Change (Cambridge, 1960)Google Scholar; Scott, M. Fg., A Study of the Behaviour of United Kingdom Imports, a forthcoming book to be published under the auspices of the National Institute for Economic & Social Research, chap. viii.Google Scholar For some interesting examples of “materials saving” see ECE, Long-Term Trends and Problems of the European Steel Industry (Geneva: UNO, 1959), chap, iv, especially 104 ff.Google Scholar
12 Behaviour of United Kingdom Imports. I have assumed the following relation between “materials saving” and increases in output:
13 Two aspects of market structure are particularly interesting in this context, (a) How will integration affect non-tariff impediments to trade because of special subsidy, tax, and investment privileges for European and territorial producers and, in the private sphere, because of the strong trend towards more highly integrated businesses, many producers having international affiliations in Europe, Africa, and North America? (b) To what extent are certain materials markets controlled by international pricing and market sharing arrangements, thereby frustrating underlying market forces to some extent and rendering tariffs inconsequential?
14 A major difficulty always confronting tariff analysis is how to measure the average height of a tariff. Some system of weights is obviously required, particularly when there are relatively few items as here, since some rates bear on a much larger sector of trade than others. About the only feasible basis for weighting is the value of trade. But the value of trade is itself influenced by the level of tariffs; thus, for example, a prohibitive tariff receives no weight at all. Consequently, when one uses the value of trade as the basis for weighting rates, the height of the tariff tends to be understated.
15 Before leaving this topic it must be acknowledged that all of the foregoing measures of tariffs and tariff changes are based on the actual pattern of Canada's exports in the past. Consequently, these figures ignore the possibility of exports in categories where there now are none as well as potential shifts in the relative importance of categories where we now do export to Europe. Although these dynamic aspects should not be lost sight of, they are largely a matter for speculation and cannot be satisfactorily incorporated into a statistical analysis of tariff changes. Moreover, it is highly doubtful that the relatively modest European tariffs imposed on materials imports in the past have so seriously distorted Canada's pattern of trade that it does not closely reflect our comparative cost position excluding tariffs; nor is there any compelling reason to believe that significant changes in this comparative cost position are likely to occur in the future.
16 This assumes that the elasticity of demand for Canadian materials imports with respect to price is about the same in each of the Six. If these elasticities differ significantly one would need to know not only the size of the tariff changes but also the demand elasticity for each country to assess the effect of the tariff changes on trade. No satisfactory evidence exists on the size of these elasticities. Should the elasticities of high-tariff countries exceed those of low-tariff countries, a common tariff equal to a weighted average of national tariffs would result in an expansion of exports, compared to pre-integration; ana vice versa.
17 To simplify matters, the existence of other external producers is ignored throughout the analysis. Also disregarded, except where explicitly mentioned, is the point that Europe's tariff changes are being implemented gradually over a number of years rather than abruptly in one step.
18 Behaviour of United Kingdom Imports, chap. viii.
19 Following the ideas developed in a recent paper by ProfessorJohnson, H. G., “The Cost of Protection and the Scientific Tariff,” Journal of Political Economy, lxviii, no. 4, 08, 1960, 327 ff.CrossRefGoogle Scholar
20 It is noteworthy that the Keynesian multiplier does not apply to the producers' surplus foregone because all resources are assumed mobile, including those that catered to the demands arising from this surplus.
21 This involves a transfer from Canadian producers to Canadian consumers. To the extent that Canadian consumers obtain a substitution gain because of the lower price, the cost estimate here is further overstated.
22 A fourth possible pricing assumption is that the United Kingdom accepts the present EEC tariff schedule, adjusted for quotas, and that the EEC, UK, and other EFTA countries are separate markets with fully effective price discrimination for each market. On this basis the cost figure comparable to those shown in Table VI is about $25 millions.