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Changing Trade Barriers and Canadian Firms: Survival and Exit After the Canada-U.S. Free Trade Agreement

  • Baggs, Jennifer
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    This paper considers the implications of changing trade barriers on the survival of Canadian manufacturing firms. A segmented market Cournot model was developed to describe the effects of trade liberalization for heterogeneous firms operating in diverse industries. The predictions of this model are tested empirically using firm-level data for both public and private corporations and tariff rates for both Canada and the United States. Our findings suggest that Canadian tariff reductions decreased the probability of the survival of Canadian firms while declines in American tariffs increased the probability. Combining these two effects, firms in two-thirds of Canadian manufacturing industries saw their probability of survival increase as a result of the tariff reductions mandated by the Canada-U.S. Free Trade Agreement. However, the sensitivity of individual firms to tariff changes was mitigated by the characteristics of those firms. In particular, productivity and leverage played substantial roles in determining a firm's vulnerability to failure as a result of trade liberalization.

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    File URL: http://www5.statcan.gc.ca/olc-cel/olc.action?ObjId=11F0019M2004205&ObjType=46&lang=en&limit=0
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    Paper provided by Statistics Canada, Analytical Studies Branch in its series Analytical Studies Branch Research Paper Series with number 2004205e.

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    Date of creation: 28 Apr 2004
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    Handle: RePEc:stc:stcp3e:2004205e
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    Web page: http://www.statcan.gc.ca

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    1. Zvi Griliches & Jacques Mairesse, 1985. "R&D and Productivity Growth: Comparing Japanese and U.S. Manufacturing Firms," NBER Working Papers 1778, National Bureau of Economic Research, Inc.
    2. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
    3. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Andrew B. Bernard & J. Bradford Jensen, 2001. "Who Dies? International Trade, Market Structure, and Industrial Restructuring," NBER Working Papers 8327, National Bureau of Economic Research, Inc.
    5. Head, Keith & Ries, John, 1999. "Rationalization effects of tariff reductions," Journal of International Economics, Elsevier, vol. 47(2), pages 295-320, April.
    6. John R. Baldwin & Wulong Gu, 2006. "Plant turnover and productivity growth in Canadian manufacturing," Industrial and Corporate Change, Oxford University Press, vol. 15(3), pages 417-465, June.
    7. Luigi Zingales, 1998. "Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry," Journal of Finance, American Finance Association, vol. 53(3), pages 905-938, 06.
    8. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
    9. David Cox & Richard Harris, 1983. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Working Papers 523, Queen's University, Department of Economics.
    10. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    11. Daniel Trefler, 2001. "The Long and Short of the Canada-U.S. Free Trade Agreement," NBER Working Papers 8293, National Bureau of Economic Research, Inc.
    12. Whewell, Lori & Gu, Wulong & Sawchuk, Gary, 2003. "The Effect of Tariff Reductions on Firm Size and Firm Turnover in Canadian Manufacturing," Economic Analysis (EA) Research Paper Series 2003014e, Statistics Canada, Analytical Studies Branch.
    13. Anita M. McGahan & Michael E. Porter, 1999. "The Persistence of Shocks to Profitability," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 143-153, February.
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