Executive summary

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The paper investigates the productivity effects of the Canada–United States Free Trade Agreement (FTA) on Canadian manufacturing. Using industry data, it was earlier established that Canadian tariff concessions contributed to Canadian productivity growth through inducing changes in market shares of plants. It was also established that U.S. tariff concessions were related to improvement in productivity growth of individual plants. In this paper we use microdata and explicitly evaluate the roles of market-share reallocations ('between-plant' growth) and productivity growth at the individual plant level ('within-plant' growth) in trade-induced productivity gains. In particular, we look at entry and exit of plants, and in differential responses to trade of exporters and non-exporters.

The paper 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 in turn helps explain why aggregate productivity gains were observed when Canadian tariffs were reduced.

• All of the 'within-plant' productivity gains resulting from the U.S. tariff cuts involved exporters, and, especially, new entrants into the export market. These results additionally resolve puzzles in Trefler (2004) whose estimated output and employment responses to the FTA reflect the problem of pooling exporters (who expanded) and non-exporters (who contracted).

View the publication Trade Liberalization and Productivity Dynamics: Evidence from Canada in PDF format.