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The Impact of Trade on Plant Scale, Production-Run Length and Diversification

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  • Baldwin, John R. Gu, Wulong

Abstract

This paper examines the effect of trade liberalization on plant scale, production-run length and product diversification. We first develop a model of trade in differentiated products with multi-product plants. We then present empirical evidence using a large panel of Canadian manufacturing plants and their experience with the 1989 Canada-U.S. Free Trade Agreement (FTA). The model predicts that the bilateral tariff reduction reduces the product diversification of exporting plants, increases the production-run length and has an ambiguous effect on the size of those plants. It also reduces the product diversification and size of non-exporting plants, and has no effect on the production-run length of those plants. The empirical evidence on non-exporting plants provides broad support for the model. The evidence on exporting plants shows that exporters reduce product diversification, and increase production-run length and plant size, but those changes do not appear to be related to tariff cuts. Once in the export markets, plants respond to forces other than tariff cuts. Further tariff cuts have less effect on those plants.

Suggested Citation

  • Baldwin, John R. Gu, Wulong, 2006. "The Impact of Trade on Plant Scale, Production-Run Length and Diversification," Economic Analysis (EA) Research Paper Series 2006038e, Statistics Canada, Analytical Studies Branch.
    • Handle: RePEc:stc:stcp5e:2006038e
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    References listed on IDEAS

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    1. Baldwin,John R. & Gorecki,Paul With contributions by-Name:Caves,Richard E. With contributions by-Name:Dunne,Tim With contributions by-Name:Haltiwanger,John, 1998. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, number 9780521633574, January.
      • Baldwin,John R. & Gorecki,Paul With contributions by-Name:Caves,Richard E. With contributions by-Name:Dunne,Tim With contributions by-Name:Haltiwanger,John, 1995. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, number 9780521465618, January.
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    4. Ottaviano, Gianmarco & Thisse, Jacques-François, 1999. "Monopolistic Competition, Multiproduct Firms and Optimum Product Diversity," CEPR Discussion Papers 2151, C.E.P.R. Discussion Papers.
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    8. Baldwin, John R. Harchaoui, Tarek, 2002. "Productivity Growth in Canada," Productivity Growth in Canada, Statistics Canada, Economic Analysis Division, number stcb6e.
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    Full references (including those not matched with items on IDEAS)

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    Keywords

    Manufacturing; International trade; Business performance and ownership; Merchandise exports; Business adaptation and adjustment; Trade patterns;
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