Eugene Beaulieu

Factor or Industry Cleavages in Trade Policy? An Empirical Analysis of the Stolper-Samuelson Theorem

If factors of production are mobile between industries, the Stolper-Samuelson Theorem predicts that cleavages over trade policy will form along factor lines. Conversely, if factors are immobile, cleavages will form along industry lines. These two hypotheses are empirically examined using micro-data from a survey conducted during the 1988 Canadian federal election - a de facto referendum on free trade. Factors of production are found to be important determinants of preferences on trade policy. However, the industry of employment also helps determine preferences on trade policy. These results are consistent with partial factor mobility.

Firm Survival, Performance, and the Exchange Rate

This paper examines the impact of exchange rate movements on firm survival and sales. We exploit detailed Canadian firm-level data from 1986 to 1997, a period in which the Canadian dollar appreciated approximately 30% in the first six years and depreciated 30% in the later six years. We find that survival and sales are negatively associated with appreciations in the Canadian dollar. The impact on survival is less pronounced for more productive firms. The magnitude of the impact of exchange rate changes on firm survival and sales was comparable to the effect of CUSFTA-mandated tariff changes.

The Canada-U.S. Free Trade Agreement And Labour Market Adjustment In Canada

Evidence suggests that the Canada-U.S. Free Trade Agreement (CUSTA) had almost no effect on earnings and had a small negative effect on manufacturing employment. Theory suggests that a change in trade policy may affect skilled and less-skilled workers differently. The labour market consequences of CUSTA tariff reductions are analysed in this paper. It is found that the tariff reductions lowered employment predominantly among less-skilled workers but did not affect the earnings of either skilled or less-skilled workers. The employment effects are due to the fact that relatively less-skill-intensive industries were more highly protected than high-skill-intensive industries prior to CUSTA.

The Stolper-Samuelson Theorem Faces Congress

The factor-industry detachment corollary of the Stolper-Samuelson theorem predicts that the economic interests of trade policy are independent of industry and depend only on the type of factor ownership. This paper examines whether congressional voting patterns on trade policy are determined by the factor endowment of the constituency or by its industrial composition. The industry model of trade policy determination is not rejected by the empirical tests while the results for the factor model are ambiguous. This provides evidence that the literature examining congressional voting patterns on broad-based trade policy should re-evaluate the maintained assumption that factors do not matter. Copyright 2002 by Blackwell Publishing Ltd.

Labour and Environmental Standards: The 'Lemons Problem' in International Trade Policy

Environmental and labour standards have become an important international trade issue. This article examines and ranks alternative trade policy responses available to an importing country with concerns over such standards. While a full import embargo may sometimes be preferable to allowing unrestricted access to unlabeled noconforming imports, a partial embargo that allows imports which demonstrably conform to the standard is always a better policy; and labeling solutions, which separate conforming and non-conforming imports, are typically better still. Consequently, full import embargoes based on non-conformity with labour or environmental standards are poor policy choices and should generally remain prohibited by WTO rules. Copyright Blackwell Publishers Ltd 2002.

Intra‐Industry Trade Liberalization: Why Skilled Workers are More Likely to Support Free Trade

This paper presents a theoretical model and empirical analysis that connects the prevalence of intra‐industry trade with increased wage inequality from trade liberalization in both skilled and unskilled labor abundant countries. The Stolper–Samuelson effect is incorporated into an intra‐industry trade liberalization (intra‐ITL) hypothesis where skilled labor opposes protectionism in all countries engaged in intra‐industry trade because skilled workers gain at the expense of unskilled workers from multilateral trade liberalization within the skill‐intensive sector. We examine empirical evidence on whether skilled individuals are more supportive of trade liberalization than unskilled individuals across 31 countries with different levels of intra‐industry trade and skill endowments. We find that the extent to which countries engage in intra‐industry trade in high‐tech commodities is strongly linked with the intensity of opposition to protection by skilled labor. Regression results strongly support our hypothesis that skilled workers, almost everywhere, are more likely to support free trade.

Are Service Firms Affected By Exchange Rate Movements

There is a growing literature addressing the effects of exchange rate movements on manufacturing firms, but almost no analysis concerning firms in the service sector. We analyze the effects of industry specific real exchange rate movements on the profitability, survival, and sales of Canadian service sector firms. Using rich firm-level data and service trade data, our empirical results show that real appreciations of the Canadian dollar reduce firm probability of survival, sales, and profitability while depreciations have the opposite effect. Overall, our findings suggest a significant exchange rate effect on service firms that is qualitatively similar to that found for manufacturing firms. However, the magnitude of the exchange rate effects is quite different for manufacturing and service firms. The impact of the exchange rate on profits is larger for manufacturing firms; the impact on survival is larger among service sector firms; and the impact on sales is of similar magnitude.

Plant Scale and Exchange‐Rate‐Induced Productivity Growth

This paper examines the impact of exchange rate movements on firm‐level productivity through changes in the scale of production. We employ plant‐level data to examine whether, and in what direction, exchange rate movements affect the scale of production, and how these changes in scale influence productivity. The paper finds that a real appreciation of the domestic currency reduces shipments and this negative effect is larger for exporters (both domestic and foreign owned). The paper also finds evidence that the appreciation‐induced reduction of scale negatively affects productivity at the plant level. This scale effect more than offsets any potential gains from the appreciation‐induced reduction in the price of imported inputs.

North American integration and plant closures in Ontario

INTRODUCTION One expected adjustment from increased North American integration was that there would be rationalization in Canada’s manufacturing industries. Proponents of the Canada-US Free Trade Agreement (CUSTA) argued that plant closings were part of a rationalization process that would yield large benefits to Canada as the manufacturing industry would become more competitive and would operate on a larger scale. The notion that Canada stood to gain significantly through rationalization was an extension of the success that was gained through the 1965 Auto Pact and was formalized in a model by Cox and Harris (1985). The notion was accepted by the MacDonald Commission and became the intellectual foundation of the proponents’ case for free trade with the United States. Opponents of CUSTA agreed that plants would close, but these would be branch plants operating in Canada that would pull out in the wake of CUSTA and destroy thousands of jobs. However, the impact of CUSTA on plant closings in Canada has not been carefully examined and data on plant closings are not available from Statistics Canada. At this point, we do not know if CUSTA resulted in rationalization. There is some empirical evidence that firms in small-scale Canadian industries realized losses with the advent of CUSTA. Brander (1991) and Thompson (1994) independently examined the stock market price reactions to events that increased the probability that CUSTA would succeed. They found that firms operating in industries with small-scale production experienced losses. More recently Head and Ries (1999) provide some direct evidence that rationalization occurred in Canadian manufacturing industries after 1988. Between 1988 and 1994 the number of plants decreased by 21 percent while output per plant increased by 34 percent.1 However, Head and Ries find that this rationalization is explained by a change in the structure of the Canadian manufacturing sector and an overvalued Canadian dollar. Moreover, they find that Canadian tariff reductions did lead to fewer plants as predicted, but also led to a reduction – rather than an increase – in plant scale. What role did CUSTA and NAFTA play in the Ontario plant closures? This is a difficult question to answer because other factors clearly affected business decisions in Canada during the period. 23

Firm Dynamics in Retail Trade: The Response of Canadian Retailers to Exchange Rate Shocks

We use comprehensive firm‐level data to estimate the responses of heterogeneous Canadian retail firms to real exchange rate movements. Our analysis focuses on a period characterized by large fluctuations in the Canadian dollar, providing an opportunity to quantify both intensive and extensive margin responses in retail industries to real exchange rate shocks and to examine how those responses differ across firms, locations, and sub‐industries. Our results indicate that a real Canadian currency appreciation significantly reduces a retailers sales, employment, and profits. The strength of this negative effect is decreasing in the distance of a retailer from the US‐Canada border. We do not find evidence of a strong relationship between real exchange rate movements and the number of operating firms nor the probability of firm survival. These findings are consistent with the view that a real Canadian dollar appreciation increases cross‐border shopping by Canadians, resulting in a negative demand shock for Canadian retailers, and the dominant response by firms to such a shock is through the intensive margin.