Trade liberalization, comparative advantage, and scale economies stock market evidence from Canada

https://doi.org/10.1016/0022-1996(94)90022-1Get rights and content

Abstract

The Canada-United States Free Trade Agreement (FTA) provides an excellent opportunity to analyze the impact of a comprehensive trade liberalization. In this paper, a stock market event study is employed to capture investors' expectations about the consequences of this agreement for manufacturing firms in Canada. The primary question addressed is whether abnormal stock market returns corresponding to news about the FTA are consistent with hypotheses based on comparative advantage and economies of scale. The results indicate that both comparative advantage and scale economies played a role in determining investors' perceptions of the impact of the FTA.

References (49)

  • H. Bowen et al.

    Multicountry, multifactor tests of the factor abundance theory

    American Economic Review

    (1987)
  • J.A. Brander

    Election polls, free trade, and the stock market: Evidence from the Canadian general election

    Canadian Journal of Economics

    (1991)
  • D.K. Brown et al.

    U.S.-Canada bilateral tariff elimination: The role of product differentiation and market structure

  • D. Cox et al.

    Trade liberalization and industrial organization: Some estimates for Canada

    Journal of Political Economy

    (1985)
  • M. Denny et al.

    Productivity in manufacturing industries - Canada, Japan and the United States

    Canadian Journal of Economics

    (1992)
  • Dun et al.

    Canadian key business directory

    (1988)
  • Dun's Marketing Services

    America's corporate families and affiliates

    (1988)
  • H.C. Eastman et al.

    The tariff and competition in Canada

    (1967)
  • G.M. Grossman et al.

    Import competition and the stock market return to capital

    American Economic Review

    (1989)
  • R. Harris

    Applied general equilibrium analysis of small open economies with scale economies and imperfect competition

    American Economic Review

    (1984)
  • J.C. Hartigan et al.

    The value of administered protection: A capital market approach

    Review of Economics and Statistics

    (1986)
  • E. Helpman et al.

    Market structure and foreign trade

    (1985)
  • I.J. Horstman et al.

    Up the average cost curve: Inefficient entry and the new protectionism

    Journal of International Economics

    (1986)
  • International Monetary Fund

    International financial statistics

    (1990)
  • Cited by (28)

    • How do investors in Chinese stock market react to external uncertainty? An event study to the Sino-US disputes

      2021, Pacific Basin Finance Journal
      Citation Excerpt :

      A large number of studies have also analyzed the impact of information uncertainty on the stock market and investors' expectations from the perspective of events. Some studies have quantified the stock market's response to the announcement of PTA member countries, and found that the announcement of trade liberalization has a significant negative effect on stock returns (Thompson, 1994; Breinlich, 2014; Moser and Rose, 2014). Breinlich et al. (2018) and Davies and Studnicka (2018) study the stock market's response to Brexit voting.

    • The heterogeneous impact of Brexit: Early indications from the FTSE

      2018, European Economic Review
      Citation Excerpt :

      While this work examines the introduction of trade barriers, other studies consider the impact of trade integration. For example, Thompson (1994) and Breinlich (2014) both examine the Canada-United States Free Trade Agreement. Thompson finds that larger firms in industries where Canada has a comparative advantage performed better; Breinlich builds on her results by showing that the same is true for more productive firms and those that export.

    • Who benefits from regional trade agreements? The view from the stock market

      2014, European Economic Review
      Citation Excerpt :

      The few empirical studies close to ours study the stock market reactions of individual firms. Thompson (1993, 1994), Rodriguez (2003) and Breinlich (2011) all exploit important news about the Canada-US free trade agreement and NAFTA. These papers use the stock market to study trade determination, and find evidence in favor of economies of scale, factor-intensity and heterogeneous firm models.

    • Analyst earnings forecast revisions and the persistence of antidumping relief

      2007, International Review of Economics and Finance
      Citation Excerpt :

      Examples are Dohlman (2001), Hartigan, Perry, and Kamma (1986, 1989, 1994 ), Hughes, Lenway, and Rayburn (1997), Lenway, Rehbein, and Starks (1990), Rehbein and Starks (1995), and Blonigen, Tomlin, and Wilson (2004). Other examples of the use of event studies in the analysis of trade policy are the Brander (1991) and the Thompson (1993, 1994) studies of the U.S./Canada free trade agreement. Begley, Hughes, Rayburn, and Runkle (1998) examined the effect of export taxes on Canadian softwood lumber on U.S. and Canadian firms.

    • Equity market integration in the NAFTA region: Evidence from unit root and cointegration tests

      2005, International Review of Financial Analysis
      Citation Excerpt :

      Indeed, in a more detailed study also using the event study methodology, Aggarwal, Long, Moore, and Ervin (1998) document the differential impact of the 1993 passage of NAFTA on the stock market valuation of many US industries. Similarly, Thompson (1994) notes some relative adjustment among various sectors but no significant stock market impact of the formation of NAFTA for Canadian firms. In a recent study of Canadian firms for the pre- and post-NAFTA periods, Mathur, Singh, and Gleason (2001) show that the formation of NAFTA did not affect the relationship between the degree of multinationality and firm performance.

    View all citing articles on Scopus

    This paper is based on my Ph.D. dissertation at the University of Michigan and was written in part while I was at the University of Toronto. I thank Alan Deardorff, Brian Erard, Nancy Gallini, James Levinsohn, Joel Slemrod, Robert Stern, Dan Trefler, Valerie Suslow, and seminar participants at the Canadian Economics Association Meetings, Carleton University, the University of Toronto, Wilfrid Laurier University, York University, the 1991 Summer Conference at the University of British Columbia, and the 1991 University of Western Ontario Conference on International Trade for helpful comments on earlier drafts of this paper and Maura Binley for research assistance. I am grateful to two anonymous referees for excellent suggestions.

    View full text