During the debate that led up to the implementation of a bilateral free trade agreement between Canada and the U.S. on January 1, 1989, much was made of economists' claims that both nations could expect significant welfare improvements as a result of the removal of tariffs on traded goods. The welfare gains were expected to flow from average cost savings associated with the exploitation of scale economies. In this paper we show that it was overly optimistic to predict substantive reductions in average costs in the response to any increases in the scale of production among Canadian or American manufacturing firms. Therefore, ex ante we should have expected trade liberalization between Canada and the U.S. to have had only muted scale, average cost, and welfare effects.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
1002.
Find related papers by JEL classification: N12 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - U.S.; Canada: 1913- N62 - Economic History - - Manufacturing and Construction - - - U.S.; Canada: 1913- L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics
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