Changing trade barriers and Canadian firms: survival and exit after
the Canada-U.S. Free Trade Agreement
by Jennifer Baggs
Business and Labour Market Analysis Division
Analytical Studies Branch research paper series, No. 205
Context
Trade barriers in North America declined substantially since the late
1980's. Bilateral tariff reductions have uncertain effects on
domestic firms. On one hand, tariff reductions effective increase competition
by exposing domestic firms to foreign competitors in the domestic market.
This decline in protection threatens to reduce the market share of domestic
firms less efficient than their foreign competitor.
However, declining tariffs also provide domestic firms with access
to foreign markets without the cost disadvantages imposed by high tariffs.
Access to this larger market may be advantageous for domestic firms
able to compete with foreign producers. The net effect of falling tariffs
on domestic firms may depend on both the characteristics of the individual
firm and the industry in which it operates.
Objectives
This paper considers the implications of changing trade barriers for
the survival of Canadian manufacturing firms.
Findings
Our findings suggest that Canadian tariff reductions are associated
with a decrease in the probability of survival for Canadian firms while
declines in American tariffs increased that probability.
The sensitivity of individual firms to tariff changes was mitigated
by the characteristics of those firms. In particular, productivity and
leverage had substantial roles in determining the vulnerability of a
firm to failure as a result of trade liberalization.
Data sources: Longitudinal Employment Analysis Program,
Corporate Tax Statistical Universe File.
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