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The effect of trade liberalization on firm-level profits:an event-study approach

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  • Breinlich, Holger

Abstract

I use an event study approach to present novel evidence on the impact of trade liberalization on firmlevel profits. Using the uncertainty surrounding the negotiation and ratification process of the Canada- United States Free Trade Agreement of 1989 (CUSFTA), I estimate the impact of different types of tariff reductions on the abnormal returns of Canadian manufacturing firms. I find that Canadian import tariff reductions lead to lower, and reductions in Canadian intermediate input tariffs to higher abnormal returns. The impact of U.S. tariff reductions is less clear and depends on the size of the affected firms. I also calculate the total profit increase implied by my estimates. Overall, CUSFTA increased per-period profits by around 1.2%. This was mainly driven by intermediate input tariff reductions which more than offset the negative effect of Canadian import tariff reductions.

Suggested Citation

  • Breinlich, Holger, 2016. "The effect of trade liberalization on firm-level profits:an event-study approach," LSE Research Online Documents on Economics 66412, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:66412
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    Cited by:

    1. Crowley, Meredith A. & Meng, Ning & Song, Huasheng, 2019. "Policy shocks and stock market returns: Evidence from Chinese solar panels," Journal of the Japanese and International Economies, Elsevier, vol. 51(C), pages 148-169.
    2. Hoedoafia, Mabel Akosua, 2019. "Trade Liberalization and Firm Profitability: Insights from Ghana's Manufacturing Sector," MPRA Paper 97133, University Library of Munich, Germany.

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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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