Dynamist Blog

Competition's Fruits

Before the U.S.-Canada Free Trade Agreement in 1989, one in four Canadian industries--from dressmakers to breweries--were protected by tariffs. What happened when they faced untaxed competition from south of the border? My new NYT column looks at a pathbreaking empirical study, using both industry and plant-level data. The article, by Dan Trefler of University of Toronto, is well-known in Canada, where, as econ papers tend to do, it has been kicking around for years in working paper form. But its lessons are remarkable. Even in an advanced economy with sound macro policy, simply cutting tariffs can lead to huge productivity gains.

Here's the beginning:

Economists argue for free trade. They have two centuries of theory and experience to back them up. And they have recent empirical studies of how the liberalization of trade has increased productivity in less-developed countries like Chile and India. Lowering trade barriers, they maintain, not only cuts costs for consumers but aids economic growth and makes the general public better off.

Even so, free trade is a tough sell. "The truth of the matter is that we have one heck of a time explaining these benefits to the larger public, a public gripped by free trade fatigue," the economist Daniel Trefler wrote in an article last fall in The American Economic Review.

One problem, he argued, is that there is not enough research on how free trade affects industrialized countries like the United States and Canada. Another is that research tends to concentrate on either long-term benefits or on short-term costs, instead of looking at both.

"We talk a lot about the benefits of free trade agreements, but when it comes to academics studying it, we know next to nothing in terms of hard-core facts about what happens when two rich countries liberalize trade," Professor Trefler, of the Rotman School of Management at the University of Toronto, said in an interview.

His article, "The Long and Short of the Canada-U.S. Free Trade Agreement," uses detailed data on both Canadian industries and individual companies to address these gaps. (The paper is on his Web site at http://www.economics.utoronto.ca/trefler/) The study looks at the effect of tariff reductions, the simplest kind of liberalization.

Tariffs are usually not considered that significant in developed countries, where many major industries compete without such protection. But, Professor Trefler said, "they're not significant except where they matter."

Read the rest here. Unfortunately, to illustrate the article, the photo staff chose an industry to which this story doesn't apply. Automobiles were tariff-free before the Free Trade Agreement. In fact, one reason the productivity boost is so remarkable is that some major industries were already tariff-free. (I suggested something with beer, but I guess they didn't have a good photo.)

If you're at all inclined to wade through econometrics--or, for that matter, to just skip to the bottom line--I recommend downloading the Trefler paper. The non-mathematical parts are unusually well written for an academic piece. A personality actually comes through the prose, even making an occasional self-deprecating joke.

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