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Trade Liberalization and Heterogeneous Firm Models: An Evaluation Using the Canada - US Free Trade Agreement

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  • Holger Breinlich
  • Alejandro Cuñat

Abstract

We examine the qualitative and quantitative predictions of a heterogeneous firm model à la Melitz (2003) in the context of the Canada - US Free Trade Agreement (CUSFTA) of 1989. We calibrate our model to the pre-trade liberalization stage, simulate the trade liberalization, and compute the resulting growth rates of Canadian industry productivity, exports and imports. We compare them with Trefler's (2004) estimates of the effects of CUSFTA. Our results show that our model performs well in replicating the qualitative aspects of Trefler's results. In particular, we correctly predict that US tariff cuts have smaller productivity enhancing effects than Canadian tariff reductions due to the entry of less efficient exporters. Quantitatively, the model tends to underpredict the impact of CUSFTA on growth rates of productivity, but overpredicts the increase in Canadian exports and imports. We discuss how liberalization-induced changes in the firm-level productivity distribution can reconcile the model with the evidence.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0975.

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Date of creation: May 2010
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Handle: RePEc:cep:cepdps:dp0975

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Heterogeneous firm models; trade liberalization; CUSFTA; empirical evaluation;

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References

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  1. Ghironi, Fabio & Melitz, Marc J, 2004. "International Trade and Macroeconomic Dynamics with Heteroegenous Firms," CEPR Discussion Papers 4595, C.E.P.R. Discussion Papers.
  2. M. Del Gatto & G. Mion & GIP. Ottaviano, 2007. "Trade Integration, Firm Selection and the Costs of Non-Europe," Working Paper CRENoS 200703, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  3. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  4. Ottaviano, Gianmarco & Melitz, Marc, 2008. "Market Size, Trade, and Productivity," Scholarly Articles 3229096, Harvard University Department of Economics.
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  6. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  7. Holger Breinlich, 2006. "Trade Liberalization and Industrial Restructuring through Mergers and Acquisitions," Economics Discussion Papers 619, University of Essex, Department of Economics.
  8. Timothy J. Kehoe, 2003. "An evaluation of the performance of applied general equilibrium models of the impact of NAFTA," Staff Report 320, Federal Reserve Bank of Minneapolis.
  9. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2008. "An Anatomy of International Trade: Evidence from French Firms," NBER Working Papers 14610, National Bureau of Economic Research, Inc.
  10. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521319867.
  11. Christian Broda & Joshua Greenfield & David Weinstein, 2006. "From Groundnuts to Globalization: A Structural Estimate of Trade and Growth," NBER Working Papers 12512, National Bureau of Economic Research, Inc.
  12. Miklos Koren & Roc Armenter, 2009. "Economies of Scale and the Size of Exporters," 2009 Meeting Papers 1269, Society for Economic Dynamics.
  13. Baldwin, John R. & Harchaoui, Tarek, 2002. "Productivity Growth in Canada," Productivity Growth in Canada, Statistics Canada, Economic Analysis, number stcb6e, December.
  14. Volker Nocke & Stephen Yeaple, 2006. "Globalization and Endogenous Firm Scope," PIER Working Paper Archive 06-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  15. Luca David Opromolla & Alfonso Irarrazabal, 2005. "Trade Reforms in a Global Competition Model: the Case of Chile," International Trade 0508007, EconWPA.
  16. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
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Cited by:
  1. Ferguson, Shon & Forslid, Rikard, 2014. "Sizing Up the Impact of Embassies on Exports," CEPR Discussion Papers 9879, C.E.P.R. Discussion Papers.

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