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wiiw Seminar in
International Economics |
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Trade Liberalization and Heterogeneous Firm Models: An
Evaluation Using the Canada-US Free Trade Agreement
Alejandro Cunat (with Holger Breinlich), University
of Vienna
3 May 2010, 4 p.m. |
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| 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. |
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