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

We examine the quantitative predictions of heterogeneous firm in the context of the Canada - US Free Trade Agreement (CUSFTA) of 1989. We compute predicted increases in trade flows and measured productivity and compare them to the post-CUSFTA increases observed in the data. Most models predict increases in measured productivity that are too low by an order of magnitude relative to predicted increases in trade flows. A multi-product firm extension that allows for within-firm productivity increases has the potential to reconcile model predictions with the data.