Working Paper: CEPR ID: DP7668
Authors: Holger Breinlich; Alejandro Cuat
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.
Keywords: heterogeneous firm models; model evaluation; trade liberalization
JEL Codes: F12; F14; F17; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Canadian import tariffs (F14) | Canadian aggregate productivity (O49) |
| US tariff reductions (F13) | Canadian aggregate productivity (O49) |
| Canadian tariff cuts (F13) | Imports from the US (F14) |
| US tariff concessions (F13) | Canadian exports (F10) |
| US tariff reductions (F13) | Canadian exports (F10) |