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Increasing import competition from low-wage countries over the last decade has provided challenges to the manufacturing sector in Canada. This paper investigates the adaptation that Canadian manufacturing plants have made in their product portfolios. It investigates differences in the rate at which products have been dropped as import competition has increased, and how the boundaries of the firm have changed in response to this competition.

It first asks whether import competition has been found in particular products and particular plants. It then asks whether there is a particular pattern in the exit rates of commodities that suggest that firms have adapted by dropping peripheral or unrelated commodities, and whether this is associated with improvements in performance.

The paper addresses a number of questions.

(1) Do plants facing an increase in low-wage import competition move away from it by divesting products?

The elasticity estimates that are derived indicate that a 10% increase in the initial level of competition a commodity faced in 1988 from low-wages countries increases the exit rate of a commodity by 1.6%, and a 10% change in import competition over the estimating period (1988 to 1996) further increases the exit rate by 0.5%.

The responses differ across types of plants. In particular, larger plants are significantly less likely to divest any type of commodities, while plants with a larger number of commodities produced during the beginning of the period had a higher likelihood of product divestitures. High-productivity plants are less likely to drop commodities.

(2) Does the increase in the low-wage import competition have a stronger effect on the exit of relatively standardized products?

The results show that import competition has a much stronger effect on the exit of homogeneous products than on the exit of differentiated products.

(3) Does the effect of imports differ for core and peripheral products? Does a rise in low-wage import competition force firms to become more specialized in producing core outputs?

Low-wage import competition has no significant effect on the dynamics of core commodities. The lack of effect on core commodities indicates that low-wage import competition is re-shaping commodity composition through inducing changes in peripheral commodities produced by multi-commodity plants.

(4) Does the effect on peripheral commodities depend on technological complementarities between the production of the core and peripheral products? In particular, is it the case that peripheral commodities sharing strong technological complementarities with a core product are less affected by competition from low-wage countries?

Peripheral commodities that faced high import competition from low-wage countries in 1988 were more likely to be divested, and the effect was particularly high for undifferentiated commodities. An increase in the import competition increases exit rates of technologically unrelated commodities, while it somewhat reduces exit rates for technologically related peripheral commodities.

A 10% increase in import competition from low-wage countries increases exit rates among vertically integrated commodities by 3.1% and has no statistically significant effect on non-vertically linked peripheral commodities. The effect of low-wage import competition on the exit of vertically linked commodities is much stronger for homogeneous commodities and those relatively technologically unrelated commodities.

(5) Does an increase in low-wage import competition induce firms to change the focus of their production?

Plants that experienced a high level of low-wage import competition in 1988 were more likely to increase the output share of the core commodity and reduce the output share of unrelated peripheral commodities. Increases in low-wage import competition further contributed to the fall in the output share of unrelated peripheral commodities. These findings support the hypothesis that exposure to low-wage import competition contributes to restructuring within Canadian manufacturing plants, which leads to concentration on core-product lines.

(6) Does the productivity of plants that restructure and focus on core activities increase at a higher rate than does that of those plants that do not make this adjustment?

Plants that have restructured over the period by focusing more on their core commodities generally had higher rates of productivity increases.

Our earlier work (Baldwin, Beckstead and Caves 2002; Baldwin, Caves and Gu 2005;Baldwin and Gu 2008) has demonstrated that Canadian manufacturing plants have responded to trade liberalization with the United States and Mexico by reducing the diversity of their product lines and by increasing their length of production runs. The present study extends this analysis to consider how adaptation is occurring to new developments emerging in the form of competition from low-wage countries. It, too, finds that specialization is being engendered—but this time it is occurring in smaller, lower productivity plants. Smaller plants with sub-optimal productivity performance are more likely to focus on core products. Larger multi-product firms also adapt by dropping peripheral, more standardized products that have less technological complementarity to their core-product offering.

View the publication Adapting to Import Competition: Effects of Low-wage Trade on Commodity Mix in Canadian Manufacturing Plants in PDF format.