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The Canada-U.S. Auto Pact of 1965: An Experiment in Selective Trade Liberalization

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  • Melvyn Fuss
  • Leonard Waverman

Abstract

In this paper we analyse the Canada-U.S. Auto Pact, a selective trade liberalization agreement which created a duty-free North American market for the major U.S. multinational automobile producers, but continued to protect them from offshore producers. The new international trade/I.O. literature predicts that, given the probable unexploited economics of scale and specialization in the tariff-protected small Canadian economy prior to 1965, rationalization leading to large efficiency gains in Canadian production vis a vis U.S. production would occur in a free trade environment. We estimate that the Auto Pact did not induce a substantial improvement in Canadian relative production efficiency. The missing ingredient seems to have been the competition-increasing effects of free trade in an oligopolistic setting that is emphasized by the new trade/I.O. literature. The Auto Pact did not increase the number of rivals in the oligopolistic Canadian industry since the major players in the industry had production facilities on both sides of the Canada-U.S. border before 1965, and no significant new entry into Canada occurred. In the 1962-64 period, Canadian automotive production was 27% less efficient than U.S. production. By 1970-72 this deficiency had been reduced to 19%, but was not further reduced by the end of the 1970's. Of the 8 percentage points reduction in the Canadian disadvantage, we attribute only 3 percentage points to the rationalization process induced specifically by the Auto Pact.

Suggested Citation

  • Melvyn Fuss & Leonard Waverman, 1986. "The Canada-U.S. Auto Pact of 1965: An Experiment in Selective Trade Liberalization," NBER Working Papers 1953, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1953
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    1. McFadden, Daniel, 1978. "Cost, Revenue, and Profit Functions," Histoy of Economic Thought Chapters,in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1 McMaster University Archive for the History of Economic Thought.
    2. Melvyn A. Fuss & Leonard Waverman, 1986. "The Extent and Sources of Cost and Efficiency Differences Between U.S. and Japanese Automobile Producers," NBER Working Papers 1849, National Bureau of Economic Research, Inc.
    3. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
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    5. Cox, David & Harris, Richard, 1985. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 115-145, February.
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    7. Michael Denny & M. Fuss & C. Everson & L. Waverman, 1981. "Estimating the Effects of Diffusion of Technological Innovations in Telecommunications: The Production Structure of Bell Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 14(1), pages 24-43, February.
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    12. Robidoux, B. & Lester, J., 1988. "Econometric Estimates Of Scale Economies In Canadian Manufacturing," Working Papers-Department of Finance Canada 1988-4, Department of Finance Canada.
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    Cited by:

    1. Loris Rubini, 2015. "Productivity and Trade Liberalizations in Canada," Economics Bulletin, AccessEcon, vol. 35(2), pages 1404-1422.
    2. Loris Rubini, 2014. "Productivity in Canada During the Auto Pact and the Free Trade Agreement," Documentos de Trabajo 455, Instituto de Economia. Pontificia Universidad Católica de Chile..

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