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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.

Suggested Citation

  • Holger Breinlich & Alejandro Cuñat, 2010. "Trade Liberalization and Heterogeneous Firm Models: An Evaluation Using the Canada - US Free Trade Agreement," CEP Discussion Papers dp0975, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0975
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Ferguson, Shon & Forslid, Rikard, 2014. "Sizing Up the Impact of Embassies on Exports," Working Paper Series 1012, Research Institute of Industrial Economics.
    2. Allub, Lian, 2015. "Asymmetric effects of trade and FDI: South America versus Europe," Economics Working Papers MWP2015/16, European University Institute.

    More about this item

    Keywords

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

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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