DP11011 The Effect of Trade Liberalization on Firm-Level Profits: An Event-Study Approach

Author(s): Holger Breinlich
Publication Date: December 2015
Keyword(s): Canada-U.S. Free Trade Agreement, profitability, stock market event studies, trade liberalization
JEL(s): F12, F14, G14
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11011

I use an event study approach to present novel evidence on the impact of trade liberalization on firm-level profits. Using the uncertainty surrounding the negotiation and ratification process of the Canada-United States Free Trade Agreement of 1989 (CUSFTA), I estimate the impact of different types of tariff reductions on the abnormal returns of Canadian manufacturing firms. I find that Canadian import tariff reductions lead to lower, and reductions in Canadian intermediate input tariffs to higher abnormal returns. The impact of U.S. tariff reductions is less clear and depends on the size of the affected firms. I also calculate the total profit increase implied by my estimates. Overall, CUSFTA increased per-period profits by around 1.2%. This was mainly driven by intermediate input tariff reductions which more than offset the negative effect of Canadian import tariff reductions.