Impact of free trade on firm size and turnover in Canadian manufacturing

Tariff reductions under the Canada-U.S. free trade agreement increased Canadian productivity through the exit of less efficient firms, according to a new report that examines the impact of the trade deal on plant turnover.

The trade deal committed the two countries to eliminate all manufacturing tariffs over a 10-year period beginning in 1989.

The report found conclusive evidence that tariff reductions under free trade exposed firms to increased global competition, which drove out less efficient firms.

Recent research on the manufacturing sector has shown that the companies that went out of business tended to be less productive than those that survived. As a result, it can be inferred that the tariff cuts related to free trade increased the loss of the least-productive firms. This has increased overall growth in productivity.

Prior to its implementation, the free trade agreement was primarily expected to improve Canadian productivity by increasing the size of firms. However, the report found no evidence that the tariff cuts led to an increase in average firm size in manufacturing in Canada.

The economic analysis research paper The effect of tariff reductions on firm size and firm turnover in Canadian manufacturing (11F0027MIE2003014, free) is now available on Statistics Canada's website (). From the Our Products and Services page, under Browse our Internet publications, choose Free, then National Accounts.

Also available on Statistics Canada's website is information on related papers on international trade (/english/studies/eaupdate/trade.htm).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Wulong Gu (613-951-0754), Micro-economic Analysis Division.