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Trade Liberalization and Heterogeneous Firm Models: An Evaluation Using the Canada - US Free Trade Agreement

Breinlich, Holger and Cuñat, Alejandro (2010) Trade Liberalization and Heterogeneous Firm Models: An Evaluation Using the Canada - US Free Trade Agreement. Working Paper. Centre for Economic Performance, LSE, CEP Discussion Papers, dp0975.

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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.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Heterogeneous firm models; trade liberalization; CUSFTA; empirical evaluation
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 03 Jul 2012 12:05
Last Modified: 03 Jul 2012 12:06
URI: http://repository.essex.ac.uk/id/eprint/2720

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