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CEP Discussion Paper
Trade Liberalization and Heterogeneous Firm Models: An Evaluation Using the Canada - US Free Trade Agreement
Holger Breinlich and Alejandro Cuñat May 2010
Paper No' CEPDP0975:
Full Paper (pdf)

JEL Classification: F12; F13; F15

Tags: heterogeneous firm models; trade liberalization; cusfta; empirical evaluation

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.

This paper has been published as:
Tariffs, Trade and Productivity: A Quantitative Evaluation of Heterogeneous Firm Models’, Holger Breinlich and Alejandro Cuñat, The Economic Journal, Volume 126, Issue 595, September 2016