PREFERENTIAL TRADE AGREEMENT: CANADA'S PAST EXPERIENCE WITH CHILE

1. PREFERENTIAL TRADE AGREEMENT: CANADA'S PAST EXPERIENCE WITH CHILE Nisha Malhotra Andrey Stoyanov University of British Columbia We would like to thank Canadian Agricultural Trade Policy Research Network (CATPRN) for funding this project CATPRN is funded by Agriculture and Agri-Food Canada but the views expressed in this paper are those of the authors and should not be attributed to the funding agency.

2. Objective To Analyze the impacts of Canada-Chile Free Trade Agreement (CCFTA) on bilateral trade of agricultural commodities, with specific aim of determining whether the agreement resulted in trade creation or trade diversion.

3. CCFTA - Highlights • CCFTA was signed in Santiago on December 5 1996 and came into force on July 5, 1997 • It immediately eliminated 75% of bilateral tariffs, with the rest of the tariffs being gradually phased out. • The agreement largely follows the NAFTA example, - contains parallel provisions on investment protection, and on labor and environmental standards.

4. Agriculture - Highlights • Provides the immediate or gradual elimination of tariffs for most products. • tariffs for durum wheat, which represents 35 per cent of Canadian exports to Chile, eliminated immediately. • Exception: beef, sugar and Milling wheat – tariffs meant to be phased out in 15 to 17 years • Exception: For dairy, poultry and egg products Canada maintains its over-quota tariffs and Chile retains its simple tariffs • Detail: See Agriculture and Agri-food Canada website: http://www.agr.gc.ca/misb/itpd/english/trade\_agr/ccfta.htm

5. Current FTA’s for the Two Countries • Canada currently has free trade agreements in place with the following countries: • Chile - 1997 • Costa Rica - 2002 • Israel - 1997 • United States - 1989 • United States and Mexico (NAFTA) -1994 • Chile currently has free trade agreements in place with the following countries: • Mexico 1999 • United States 2004 • EU 2003 • China 2005 • EFTA 2004 • Korea 2004 • Costa Rica – 2002 • Central America - 1999

8. Table 1: Trade Patterns in Agriculture: Comparing Chile with other Latin American Countries (,000 Canadian Dollars)

9. Canadian Imports • Canadian imports from Chile have been increasing since the FTA was signed. • Imports grew by 86% between 1996 and 2004 and doubled by 2005 • Chilean market share of Canadian imports has also been growing over the past 11 years, • up by 33% from 15% in 1996

10. Table 2: Trade Patterns in Agriculture: Comparing Chile with other Latin American Countries (,000 Canadian Dollars)(need to compare Chilean Imports from Canada with other countries it imports from)

11. Canadian Exports  • The total value of Canadian exports to Chile decreased by 60% until 2004 and by almost 66% by 2006, • from around $165 million to just over $55 million • dramatic decreases in Canadian exports to Chile post 1996 were recorded with respect to exports of cereals, from around $150 million to less than $34 million. • cereals account for over 90% in total Canadian agricultural exports to Chile, with the proportion decreasing to just over 60% in 2006. • Many other product categories have been areas of growth for Canadian exporters • such as oil seeds, medicinal plants (HS12), preparations of cereals, bread and pastry (HS19) and products of the milling industry (HS11) could not compensate for the overall decline. • Canadian exports uniformly declined with respect to most Latin American partners, while the growth with the rest of the world was strong.

12. Characteristics of the Study • It covers bilateral industry-level trade data between Chile and 150 other countries including Canada. The data is collected at 6-digit Harmonized System (HS6) industry classification. • The analysis uses data for agricultural industries (HS1-HS24) and covers 714 commodity categories for the period from 1988 to 2005. • Uses Gravity Model: • Carries out regressions both using a dummy for the CCFTA as well as using tariff data • Log Values and growth

13. Literature • Viner (1950) distinguished between trade creation and trade diversion effects of preferential trade liberalization • Empirical research analyzing trade effects of PTAs using the gravity model. • Cernat (2001) considered many PTAs (TC & TD) • Frankel and Wei (1993, 1995) – EU (15% TC) • Tumbarello (2006) and Hirantha (2004) -SAPTA (net TC) • Bayoumi and Eichengreen (1995) ; Frankel, Stein and Wei (1995); Freund (2000) • Gravity Model in AG: • Furtan and van Melle (2004) estimate the border effects of trade in agricultural products between Canada and its NAFTA partners. • Vollrath and co-authors (2006) adopt a gravity approach when they analyze trade in processed and staple agri-food products • Prentice et al (1998) - study focusing on Canadian pork exports to the US market,

14. Data Sources • Trade data for this study comes from the Statistics Canada database. • It covers bilateral industry-level trade data between Chile and 150 other countries including Canada. The data is collected at 6-digit Harmonized System (HS6) industry classification. • The analysis uses data for agricultural industries (HS1-HS24) and covers 714 commodity categories for the period from 1988 to 2005. • The data on country-level macroeconomic variables \ such as GDP, exchange rate, interest rate and price levels, is taken from the • International Financial Statistics datadase maintained by the International Monetary Fund. • Geographical variables have been obtained from the World Bank COMTRADE database. • Agriculture land holdings etc. from WDI

15. Gravity Model

16. ESTIMATION • Panel Data - Fixed Effects model To account for heterogeneity in commodity groups, such as different response due to expected reductions in tariff rates and unobservable individual characteristics. • Year Effects – account for global business cycles, effects of multilateral trade liberalization, oil shocks, etc. • Stata/SAS

17. Interpretation • Coefficient Beta 2 measures the trade effect of the Canada-Chile FTA on the (log) level of Canadian exports to and imports from Chile. • Positive and significant value indicates trade-creating effect of the FTA for Canadian agricultural sector

18. Canadian Imports

19. Canadian Exports

20. Results • the coefficient Beta 2=.32 implies that exports of the average Chilean agricultural sector to Canada increased by 37% as a result of the agreement. Adding other country-specific controls to the estimation equation reduces the effect that can be attributed to the trade agreement down to 25%. • The coefficient Beta 2 is always highly insignificant, meaning that Canadian exports to Chile was not affected by trade agreement. This result is robust to the inclusion of other controls

21. Comparison

22. Results • CCFTA improved comparative advantage of Chilean agriculture manufacturing relative to European, East Asian, and, to some extent South American countries. • At the same time, Chile gain no comparative advantage in trade over countries with lower income level and African countries. • Results are consistent with the hypothesis that preferential trade agreement crowds out the least productive competing importers, which are presumable concentrated in high income countries with specialization in manufacturing goods.

23. ECONOMETRIC ANALYSIS

25. Conclusions • Agricultural imports have been responsive to tariff rate reductions / CCFTA • Canadian Imports from Chile has significantly increased • Canadian Exports to Chile has not responded positively • Canada - Chile trade agreement has been trade creating

26. Implications • The extent to which these results may be applicable to other agreements, such as CAFTA/DR, is limited since each case must be empirically verified.

27. Why didn’t the FTA with Chile create more export opportunities for Canada? • Stronger Loonie – account for by ER • Downturn of the Chilean economy, in 1999 • Argentine currency crisis • Broad extension of trade privileges by Chile to other countries (US, EU, Mexico) may have diluted to a certain extent the advantages that Canadian exporters were meant to enjoy on the Chilean market

28. Quotes and Thoughts • In the absence of the agreement ? • “Spokesperson [of the Canadian Wheat Board] Maureen Fitzhenry says that Canada need only look at countries where it doesn’t have agreements to grasp the CCFTA’s contributions. "Brazil signed a free trade agreement with the U.S. in the late 1980s, and we’re almost right out of that market right now. [Not having a FTA] can kill you," she says.” • “the board credits the agreement for Canada’s continued lock on the Chilean durham wheat market “ • “Berg Chilling Systems- company based in Toronto, ……. Though the company announced more than $500,000 worth of agreements with Chilean fish processors in 1998, Berg president Don Bergren says that today his exports to Chile "hardly register." And then there’s Newfoundland “ http://www.bilaterals.org/article.php3?id_article=5981