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An Empty Promise: Average Cost Savings and Scale Economies among Canadian and American Manufacturers, 1910‐1988

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  • Ian Keay

Abstract

During the debate that led up to the implementation of a bilateral free‐trade agreement between Canada and the United States on January 1, 1989, much was made of economists' claims that both nations could expect significant welfare improvements as a result of the removal of tariffs on traded goods. The welfare gains were expected to flow from average cost savings associated with the exploitation of scale economies. In this article, I show that it was overly optimistic to predict substantive, permanent average cost convergence as a result of adjustments in the scale of production among Canadian or American manufacturing firms. I conclude that the formation of reasonable expectations regarding the effects of trade‐induced output adjustments should consider global‐ and local scale economies and should employ data that are not dominated by a single cycle of macroeconomic volatility.

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  • Ian Keay, 2003. "An Empty Promise: Average Cost Savings and Scale Economies among Canadian and American Manufacturers, 1910‐1988," Southern Economic Journal, John Wiley & Sons, vol. 70(2), pages 374-388, October.
    • Handle: RePEc:wly:soecon:v:70:y:2003:i:2:p:374-388
    DOI: 10.1002/j.2325-8012.2003.tb00576.x
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