Tariff Reduction and Employment in Canadian Manufacturing, 1988 to 1994
by Sébastien Larochelle-Côté
Business and Labour Market Analysis Division
Analytical Studies Branch Research Paper Series, No. 258
Forthcoming in Canadian Journal of Economics
Context
At the end of the 1980s, Canada and the United States reached an agreement to phase out import tariffs over a 10-year period beginning January 1st, 1989. This tariff reduction scheme was a major centrepiece of the Canada–U.S. Free Trade Agreement (FTA), a substantial trade policy initiative. The implementation of the free trade deal was followed by a recession characterized by an important restructuring in manufacturing sector industries. However, this raises the possibility that the impact of tariff changes on employment was different across firms.
Objective(s)
This paper investigates whether the tariff changes had a different impact on the employment of firms with various productivity and leverage characteristics at the beginnings of the implementation of the tariff cuts.
Findings
The results suggest that the combined effect of domestic and U.S. tariff reductions on employment was typically small, but that losses were significantly larger for firms which were less productive. This paper also indicates that firms which were more heavily in debt downsized more in response to declining domestic tariffs, supporting the thesis that financial constrains became more binding when tariff cuts were implemented. These results suggest that firms with high productivity and low leverage were less likely than others to feel the impact of declining U.S. and domestic tariffs.
Data source(s)
Corporate tax information from "T2" tax forms, and the Longitudinal Employment Analysis Program.
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