U.S.-Canada Trade Liberalization and MNC Production Location

Susan Feinberg · Michael P. Keane

68 citations0/0 files storedThe Review of Economics and Statistics

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Global trade and economics International Business and FDI Canadian Policy and Governance

Abstract

Using confidential firm-level panel data from the Bureau of Economic Analysis, we examine how the bilateral trade flows of U.S. multinational corporations (MNCs) and their Canadian affiliates responded to U.S.-Canadian tariff reductions from 1983 to 1992. We find that Canadian affiliate sales to the United States are negatively correlated with Canadian tariffs, but U.S. parent sales to Canadian affiliates have little association with Canadian tariffs. These results contradict the notion that Canadian tariff reductions would lead to a ‘hollowing out’ of Canadian manufacturing. We also find substantial heterogeneity in MNC responses to tariff changes within narrowly defined manufacturing industries. Overall, bilateral trade liberalization is trade-creating, as U.S. MNCs integrated their North American production such that Canadian affiliates increased sales to the United States and reduced domestic sales.

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References

1979EXPLAINING CHANGING PATTERNS OF INTERNATIONAL PRODUCTION: IN DEFENCE OF THE ECLECTIC THEORY 1984Do Markets Differ Much 1981Inside the Multinationals: The Economics of Internal Markets 1991Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making 1988The locational determinants of direct investments among industrialized countries 1973The Balance of Payments 1985Trade Liberalization and Industrial Organization: Some Estimates for Canada 1993An Empirical Assessment of the Factor Proportions Explanation of Multi-National Sales

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