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Tariffs, Trade and Productivity: A Quantitative Evaluation of Heterogeneous Firm Models

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  • Holger Breinlich
  • Alejandro Cuñat

Abstract

We examine the quantitative predictions of heterogeneous firm models à la Melitz (2003) in the context of the Canada - US Free Trade Agreement (CUSFTA) of 1989. We compute predicted increases in trade flows and measured productivity across a range of standard models and compare them to the post-CUSFTA increases observed in the data. Our results point to a fundamental problem which most models we analyse face: predicted increases in measured productivity are too low by an order of magnitude relative to predicted increases in trade flows. Thus, most models are inherently incapable of simultaneously matching trade and productivity reactions to freer trade, raising doubts about the accuracy of the quantitative predictions of a large number of work-horse models in the literature. Using a multi-product firm extension of our baseline model as an example, we show that allowing for within-firm productivity increases has the potential to reconcile model predictions with the data.

Suggested Citation

  • Holger Breinlich & Alejandro Cuñat, 2013. "Tariffs, Trade and Productivity: A Quantitative Evaluation of Heterogeneous Firm Models," CeFiG Working Papers 20, Center for Firms in the Global Economy, revised 10 Jul 2013.
  • Handle: RePEc:cfg:cfigwp:20
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    Cited by:

    1. Marco Bee & Stefano Schiavo, 2018. "Powerless: gains from trade when firm productivity is not Pareto distributed," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 15-45, February.
    2. Hsieh, Chang-Tai & Li, Nicholas & Ossa, Ralph & Yang, Mu-Jeung, 2020. "Accounting for the new gains from trade liberalization," Journal of International Economics, Elsevier, vol. 127(C).
    3. Breinlich, Holger, 2014. "Heterogeneous firm-level responses to trade liberalization: A test using stock price reactions," Journal of International Economics, Elsevier, vol. 93(2), pages 270-285.

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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