Département De Science Économique Department of Economics Cahiers De Recherche & Working Papers

This paper shows that when moving from the North American Free Trade Agreement (NAFTA) to a Customs Union (CU), the general equilibrium impacts on Canadian GDP and welfare, of removing Rules of Origin (ROO), are potentially larger than the small effects resulting from the adoption of a common external tariff (CET). Therefore, proposals for a CU should not be dismissed solely on the basis that the establishment of a CET would marginally affect Canada while the negotiation process with the U.S. would be long and difficult -rules of origin liberalization matters more than a common external tariff for Canada.