Trade Liberalization and Productivity Dynamics: Evidence from Canada

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by Alla Lileeva

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This paper investigates the productivity effects of the Canada–United States Free Trade Agreement (FTA) on Canadian manufacturing. It finds that Canadian tariff cuts increased exit rates among moderately productive non-exporting plants. This led to the reallocation of market share toward highly productive plants, which helps explain why aggregate productivity gains were observed when Canadian tariffs were reduced. The paper also finds that all of the within-plant productivity gains resulting from the U.S. tariff cuts involved exporters and, especially, new entrants into the export market. It demonstrates that any lack of output responses and labour-shedding as a consequence of the FTA were experienced by Canadian plants who were non-exporters, while exporters captured the gains from the FTA.

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