| Summary: | The intent of this study is to adjust the measure of effective protection across national
industries by accounting for industry-specific pricing regimes and thereby more accurately
estimate the direct and indirect resource allocation effects resulting from changes in tariffs
and other protective instruments. The inquiry is cast in a partial equilibrium framework
designed in part to evaluate and compare the measurement of effective protection as
dependent upon the underlying pricing assumptions. Trade models traditionally model price
formation with the Ricardian assumption that suppliers will price to the limit of the
domestic price plus the tariff on their competing imports. Econometric evidence, however,
suggests that prices in certain imperfectly competitive markets are more a mixed function
of both the competing import price and the level of domestic costs in these industries.
The empirical dimension of the study is an input-output construction that measures
effective protection according to these two types of pricing assumptions, and examines the
changes in protection that are implicit in the implementation of the 1988 Canada-U.S. Trade
Agreement (CUSTA) and as it chiefly affects the Canadian food producing and processing
sectors. The food processing sector is of particular interest because of the presence of
various degrees of imperfectly competitive behaviour among these industries and because,
in contrast to most other manufacturing activities, this sector is an important user of
commodities that are quite heavily protected. The Canadian economy is aggregated here
into one consisting of 31 industries that feature 29 of these as comprising the food industry.
Allowing for mixed pricing suggests that the standard law-of-one-price assumption
significantly overestimates effective protection in those processing and manufacturing sectors
where imperfect competition is an important consideration. Not to account for mixed pricing
in trade liberalization models may therefore seriously overestimate the calculation of gains
to trade for these industries. The results also suggest that the CUSTA continues to protect
primary agriculture while maintaining pressure on added value in the processing sector.
Moving to free trade would likely result in some gains to the processing sector but value
added in primary agriculture would be under pressure to contract by as much as 20 per cent
over the whole sector.
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