Stephen TappResearch Director,

Institute for Research on Public Policy (IRPP)

Canadian Economics Association Annual MeetingsRyerson University

May 29, 2015

Contributors

Canada, US, Europe

academics: economics, business, public policy, law

government researchers

practitioners

1

IRPP trade volume

25 chapters, 5 published:

Firm-level (Steve)

Global value chains (Ari)

Canadian trade policies (Bob)

irpp.org/research/trade

2

Firm-level trade theory and Canadian evidence

Theory predicts several trade/productivity channels

Firm-level data clarify those most relevant for Canada

What factors influence success abroad?

How do firms respond to tariff cuts?

Are SMEs international experiences different?

3

Aggregate correlation

* Trade share = exports + imports/GDP (current dollars); Business sector MFP. Source: Baldwin and Yan (IRPP)

4

Trade and productivity, 1981-2013

5Domestic marketDont produce

Export and domestic market

Productivity

Profits

Total profits

cpo cpe

*cpo/e= cut-off productivity for operating/exporting Source: Lapham (IRPP)

Sorting by export status, Melitz model

Fixed trade costs Uncertain up-front investments

Theory: more-productive firms export (self-selection)

*Export share of total shipments. Small firms (10-99 employees); Medium (100-250); Large (>250) Source: Baldwin and Yan (IRPP)

Export intensity* by firm size

6

Exporter shares

35.2

71.5

78.9

0

10

20

30

40

50

60

70

80

Number of firms Employment Shipments

Pe

rce

nt

Manufacturing firms, 1974-2010

33.1

37.0

43.4

0

5

10

15

20

25

30

35

40

45

50

Small Medium Large

Pe

rce

nt

Canadian data: exporters produce more and larger firms export more.

early-1990s, big exporter productivity advantage

7Source: Baldwin and Yan (IRPP)

Labour productivity ratio Canadian manufacturing firms, exporters vs. non-exporters, 1990-96

162.9

100

0

20

40

60

80

100

120

140

160

180

1974-79 1979-84 1984-90 1990-96 1996-2000 2000-05 2005-10

Pe

rce

nt

Exporters were > 60% more productive than non-exporters

Exporters >60%

more productive

New exporters had the

best productivity growth

evident in other periods now a stylized fact.

7Source: Baldwin and Yan (IRPP)

Labour productivity ratio Canadian manufacturing firms, exporters vs. non-exporters, 1974-2010

0

20

40

60

80

100

120

140

160

180

1974-79 1979-84 1984-90 1990-96 1996-2000 2000-05 2005-10

Pe

rce

nt

Full sample, exporters 13% more productive

Full sample: exporters

13% more productive

Theory: firm-level treatment effects

8

Source: Baldwin and Yan; and Lapham (IRPP)

Trade/liberalization raise productivity:

Specialization, economies of scale, increased capacity use

Knowledge and technology transfer

Stronger incentives to invest and innovate

Export-import complementarities

Canadian manufacturing firms, 2002-06

Export/import firms

9Source: Baldwin and Yan (IRPP, forthcoming)

All firms

100%

Traders

67%

Import inputs only

17%

Export only

22%

Export and import inputs

28%

Non-traders

33%

Canadian manufacturing importer-exporter premia, 2002-06

performance benefits (after controls)

*Manufacturing exporters that imports inputs vs. non-traders, OLS regression with year and industry fixed effects. Source: Baldwin and Yan (IRPP, forthcoming)

10

10%

6%

0

2

4

6

8

10

12P

erc

en

t

Productivity Wages

now suggests causal effects: firms that start trading become more productive

Average productivity difference, 2002-06

*Propensity score matching and difference-in-difference regressions control for self-selection Exporting-importing manufacturers vs. non-traders. Source: Baldwin and Yan (IRPP, forthcoming)

5%

9%

-10

-5

0

5

10

Year 1 Year 2 Year 3 Year 4

Productivity gain from starting to export and import

Productivity loss from stopping to export and import

11

Average productivity difference, 2002-06

5%

9%

-1%

-8%-10

-5

0

5

10

Year 1 Year 2 Year 3 Year 4

Productivity gain from starting to export and import

Productivity loss from stopping to export and import

*Propensity score matching and difference-in-difference regressions control for self-selection Exporting-importing manufacturers vs. non-traders. Source: Baldwin and Yan (IRPP, forthcoming)

11

now suggests causal effects: firms that stop trading become less productive

New prediction: Reallocation from less- to more-productive firms

12

Source: Lapham (IRPP)

Trade liberalization spurs entry and exit, Melitz model

Profits

Productivity

EntryExit

domestic firms

exporters

4.3

4.1

3.5

1.4

0.5

0%

20%

40%

60%

80%

100%

Between plants(~60%)

Within plants (~40%)

Exporter growth

Contraction/exit of least productive firms

Better access to imports

Existing exporters raise productivtity

New exporters investand raise productivity

Canadian manufacturing after tariff cuts.

13

Source: Trefler and Melitz (2012); Lileeva and Trelfer (2010)

Sources of increased productivity, 1988-96

Recent anomaly: worse exporter productivity

14Source: Baldwin and Yan (IRPP)

Labour productivity ratio Canadian manufacturing firms,exporters vs. non-exporters, 1974-2010

85.6

0

20

40

60

80

100

120

140

160

180

1974-79 1979-84 1984-90 1990-96 1996-2000 2000-05 2005-10

Pe

rce

nt

exchange rates impact the new exporter productivity premium

15Source: Baldwin and Yan (2012)

Estimated contributions to productivity growth gaps of new exporters

TariffsExchange rate

Actual (annual average)

Estimated- with unchanged tariffs and exchange rates

- attributed to tariff changes

- attributed to exchange rate changes

Productivity gap, entrants less continuing non-exporters

Recall, new importer-exporters did better in CAD appreciation.

New policy goal: get more CanadianSMEs exporting to emerging markets

Source: DFATD16

Modest median benefits; large performance gaps

Firm-specific factors (size, productivity, innovation activities)impact SMEs export market survival probabilities

19

7

-17

79

5

-69

-80 -60 -40 -20 0 20 40 60 80

Top Exporters

Median Exporters

Bottom Exporters

Sales growth (%)

Emerging markets sales growth (%)

*No firm-level controls. Source: Sui and Goldfarb (2014) 17

75th

25th

50th

Exporter percentile

Performance of Canadian SMEs with exports to an emerging market, 1994-2008

Internet-enabled businesses reach farther

eBay 19

Traditional (large) 8

Traditional (overall) 3

*Data 2008-2013. Source: Ahmed and Melin (IRPP, forthcoming)

Share of Canadian exportersby markets served

5%1%

94%

57%

21% 23%

0%

25%

50%

75%

100%

U.S. only Non-U.S. only Both U.S. andnon-U.S.

Technology-EnabledExporters

Traditional Exporters

Export markets served by Canadian businesses (avg.)

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Firm-level approach

Reveals differences:

in firm performance (new exporters vs. exporter-importers); within industry responses; by firm size

Shows that:

better firms trade; and that trade betters firms

trade and policy can help (or hinder) Canada's economic performance

Quantifies which mechanisms matter

reallocation; investment; exchange rates; tariffs

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Policy implications

Reduce fixed costs of international participation

Facilitate imports

Consider entry/exit not only existing trade and traders

Study distributional impacts of trade on firms/workers

Need firm-level data, Canadian models

Source: Lapham (IRPP)20

Outstanding issues

From productivity to jobs, income, distributional issues

Beyond manufacturing to resources, agriculture, services, electronic commerce

How/can policy encourage international activity without increasing risk or rewarding existing behavior?

How/can/should SMEs be targeted?

21