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Measuring the impact of CCFTA on Canadian exports to
Chile trough product diversification, new entry and
margin of trade ∗
Marcel C. Voia
Department of Economics
Carleton University
Ottawa, Ontario
CANADA K1S 5B6
Zhiqi Chen
Department of Economics
Carleton University
Ottawa, Ontario
CANADA K1S 5B6
April 22, 2013
Abstract
Trade agreements are viewed as instruments to improve bilateral relationship between
countries and induce economic integration and growth. The results of the analysis of the
free trade agreement between Chile and Canada(CCFTA) can be used to understand the
short and long run dynamics of trade agreements between two small economies one devel-
oped and the other one developing. The analysis employs nonparametric decompositions
to evaluate the impact of product diversification and the margins of trade and a regression
discontinuity approach to evaluate the impact of the CCFTA for the Canadian exporters
to Chile. The results show that there is an effect of trade liberalization as more firms and
products enter the Chilean market after the implementation of the CCFTA. The effect
becomes more significant after the tax drops towards zero and seems to be driven by the
intensive margin of trade. On the other hand, the new firms/products entry do not explain
the results on the sale/value, which are changing in a less pronounced way. This result can
∗The assistance and hospitality of Statistics Canada Business and Labour Market Analysis department isgratefully acknowledged. We are especially indebted to Shenjie Chen and Emily Yu from Foreign Affairs andInternational Trade Canada for their continuous support and suggestions and to Youssef Budribila for excellentresearch assistantship.The contents of this paper have been subject to vetting and pass the Disclosure Rules andRegulations set forth by Statistics Canada. All errors are our own.
1
be explained by the endogenous re-allocation of the resources that overlap with subsequent
trade agreements that Chile signed with USA and European Union.
Key Words: Trade Agreements; Evaluation of CCFTA, Nonparametric Decompositions,
Regression Discontinuity.
JEL Classification: F12, F13.
1 Introduction
Beginning with the second half of the last century, we observed an increase in the economic inte-
gration across borders and also an increase in growth in international trade due to an increase in
exchanges at the establishment of commercial enterprises. This dynamic was accompanied by a
series of multinational agreements on international trade and economic cooperation that resulted
in an unprecedented economic development. These agreements were viewed as instruments used
to facilitate a stable and predictable environment for global market participants.
In 1997, Canada and Chile signed a free trade agreement. This agreement was the second in
importance after NAFTA (1994) and was the first agreement signed with a country from South
America considered an emerging economy. There are few stylized facts suggesting that after
this agreement both the exports and the imports to and from Chile increased in a significant
way.
Firstly, the bilateral trade in goods has increased by 226% (growing from $718 million in
1997 to $2.34 billion in 2006); secondly, bilateral trade in services reached $164 million in 2005;
and thirdly, Canadian investments in Chile reached $5.17 billion in 2006 (information taken
from Foreign Affairs and International Trade Canada website). In terms of export gains from
the trade agreement, the Canadian manufacturing industries benefited the most, in particular
the winning industries were: Chemical Manufacturing, Plastic and Rubber Products Manufac-
turing, Fabricated Metal Products, Machinery Manufacturing (highest increase), Computer and
Electronic Products, Transportation Equipment, Machinery Equipment and Supply. In terms
of exported products Canada benefited from ores, machinery and equipment, mineral fuels and
oils, iron and steel products, plastics, chemical products, pharmaceutical products, precision
and medical equipment, and tools of base metal.
Consequently, it is important to understand what drives these changes in the behavior of
Canadian exporters. Understanding the effects of this agreement is helpful as they will give a
picture of what to expect from other bilateral trade agreements that were signed more recently
and from agreements that will be signed in the future. However, we should be aware that
each individual agreement has its own initial conditions and dynamics and even if many theo-
ries were developed recently to explore more sophisticated conditions of the trade agreements,
2
these theories may not be able to fully explain different observed outcomes from different trade
agreements.
Having this in mind, this project investigates the effect of Canada-Chile Free Trade Agree-
ment (CCFTA) on Canadian Exporters by answering two important questions: 1. Did the
CCFTA increase the diversification of products and induced more entry on the export market?
2. Was the intensive or the extensive margin of trade the most important factor that changed the
dynamics of firms and of their products? Answering these questions can help build a benchmark
measure of performance that will help Canada’s negotiations in other trade agreements. Under-
standing the dynamics of exporters associated with a trade agreement is also very important
for policy makers as exporting has been considered an important tool to improve productivity,
especially for a small open economy like Canada. This is especially important for Canada as it
is well documented that productivity was suffering for the past two decades and Canada started
to fall behind on this particular aspect of the economy . The exporters are viewed as able
to acquire new technology and managerial decisions from their international contacts that are
important drivers of productivity changes. Therefore, it is important for the policy makers to
understand the factors that determine changes in the behavior of exporters due to a change in
a new trade policy.
In searching to answer our questions of interest, the following findings are outlined:
• There is a trade liberalization effect that is driven in the short run by the intensive margin
of trade, while in the long run the intensive margin dies off and the extensive margin of
trade picks up.
• The extensive margin of trade picks up after the taxes are removed which also overlaps
with a period where other trade agreements are signed by Chile (with EU and USA).
• The results are driven by an increasing number of new Canadian firms and products
entering the Chilean market after 2002.
• The results also show that the new firms/products entry do not explain the results on the
sales and value of exports, which are changing in a less pronounced way.
• The regression discontinuity design used to test short and long term impacts of CCFTA
as well as the indirect impact of other trade agreements between Chile and Europe and
USA show that the impact of the CCFTA on the value of exports is less important than
the impact of CCFTA on the total sales.
• Scale effects may be generated by CCFTA.
• The manufacturing industry is the net winner of this Trade Agreement.
3
2 Literature Review
The literature on trade agreements discusses topics as: trade creation and diversion, scale effects
and other effects that are not directly quantifiable, and also the effects of trade agreements on
the regional and global integration.
Viner, T. (1950) and Meade J. (1955) are the first to explain the expansion of FTA by
looking at the effects of trade creation which improves overall welfare (in this case the partner
country’s firms are producing at higher cost than the cost of production by domestic firms)
and diversion which reduces the welfare (here the cost of production is reversed). These two
offsetting characteristics of trade are very hard to disentangle.
Another venue of research is based on the relative difference between the price of exports
versus the price of imports, which in literature is called terms of trade. This literature is focused
on the impact of the terms of trade on the export specialization and its impact on the volatility
of trade. The literature shows that commodity prices are more volatile than manufacturing
prices, and, therefore, countries that specialize in commodities have more volatile economies
than countries that are specialized in manufacturing. This may lead to a deterioration of the
terms of trade which will lead to welfare losses. The question resulted from the terms of trade
literature is mainly used in development literature. Williamson et al. (2008,2011) look at the
long horizon effect of the terms of trade, while Irwin (2005) and ORourke (2007) focus on the
terms-of-trade deteriorations across the Atlantic economy, and hence to sizable welfare losses.
The Scale Effects literature focus on the extent the FTA is integrating the markets with
effects on the growth of the markets. Balassa B. and Grubel H. (1967, 1970) produced the first
papers to discuss the economies of scale and the possibility of product differentiation. Their ideas
were later theorized by Krugman P. (1980) which used a one sector model to prove his theory.
Later works by Helpman E. (1981) introduced multiple sector models. This literature is part of
the ”new trade theory” that explains the rising intra-industry trade in differentiated products
among countries at similar income levels and the ”new new trade theory that refers mostly to
the micro level impacts as it is argued that FTA offers firms an opportunity to take advantage
of economies of scale, which may lead to cost reductions due to increases in production. It is
also argued that an increase in the intensity of competition due to FTA will potentially induce
firms to be more efficient and increase their productivity.
H.J. Wall (2003) argued that Canadian firms were lobbying for support for trade agreements
with the United States in order to exploit economies of scale and increase their exports to the
countries in North America and to the rest of the world.
The impact of economies of scale due to the increase in production has also a positive impact
on the volume of trade in inputs and intermediate goods as these goods may need to be imported
from inside the FTA, or outside it. FTA was also shown to attract investment, including foreign
direct investment (FDI). Therefore, in the long run, changes in trade flows can lead to firm
4
relocation between member countries of an FTA based on comparative advantages. Further,
the economies of scale can be also captured by the multi-product destination exporter model
of Bernard, Redding and Schott (2009). Consequently, the economies of scale due to FTA
generate dynamics with significant impact on the economies that are engaged in trade that lead
to increase in production and efficiency which lead to higher productivity.
The literature about preferential trade agreements is focused on issues related to the regional
integration. After early 1990s, the regional trade agreements (RTA) grew significantly. Today
many countries are members of more than one RTA. Different regions were created characterized
by integration across the North-South and schemes that involve both developing and industri-
alized countries. Some of the new agreements have even members that are from more than one
of the world’s geographic regions, while other agreements are of large geographical scale that
include continents or relationships across continents.
Bhagwati and Panagariya (1996) criticized the development approach among the developing
countries suggesting that the larger the share of third country imports in total imports, the
bigger the tariff revenue loss when a region is formed. Consequently developing countries, which
are more trade dependent outside the formed region and have higher initial tariffs will lose more
when a region is formed because more tariff revenue is redistributed away from them. This will
generate high costs in terms of trade diversion which will increase the probability that the RTA
as a whole will lose.
On the other hand Venables, (1999) suggests that schemes of North-South integration type
are likely to be more beneficial to developing countries as industrialized countries are more
efficient global suppliers and the costs of trade diversion will be minimized. Schiff and Winters
(2003) expand on this finding by pointing out that even small cost disadvantages for Northern
firms can be costly for Southern partners because of the large amount of trade that is involved.
This leads to a substantial transfer of rents from Southern consumers to the Northern exporting
firms.
There is also a less developed literature about the non-quantifiable effects of FTA. A 2000
World Bank publication discusses a variety of additional effects that may result from regional
integration agreements. These RTA can generate spillovers in different areas of collaboration.
Some of the non-quantifiable effects refer to an increase in the economic security among mem-
bers; the FTA members can pool their bargaining power and negotiate more efficiently in the
international arena; RTA can induce more permanent domestic reforms that are due to the
increased possibilities for cooperation in environmental or technological assistance projects.
To study empirically the effects of the trade agreements, different methodologies were intro-
duced. Here we should emphasize the gravity models, welfare calculations and nonparametric
decompositions, which were introduced to assess the trade creation effects, welfare gains and
losses and the contributions of intensive and extensive margins of trade. While these method-
5
ologies provide specific informations about the results of the trade agreements conditional on
the question of interest, it is important to emphasize that a comprehensive answer of the ef-
fects of the trade requires the usage of a combination of available and new methods in order to
maximize the information available in a given data set. Therefore, the up to date findings on
trade agreements are the result of specific methodologies that were employed to answer specific
questions. Consequently, with the use of a gravity model, the work by Baier and Bergstrand
(2007) show that trade agreements double trade between partner countries over 10 years., while
recent research on trade diversion by Freund and Ornelas (2010) show that trade diversion may
be specific to some agreements but was not viewed as key factor for the terms of trade. Other
older focused studies as the one by Trefler (2004) found that that trade diversion for the Canada-
United States free trade agreement was negligible. To asses the welfare gains of trade Arkolakis,
Costinot, and Rodriguez-Clare (2009) suggest a simplified calculation that can be captured via
two important variables: share of expenditure on domestic goods and the trade elasticity. The
recent research shifts focus on testing the new theories associated with trade agreement that
focus on firms. As the micro data on firms is sometimes scarce, these theories are still tested.
In particular we should mention the paper by Melitz and Trefler (2012) who assessed the pro-
ductivity gains from the reallocation of resources from less-efficient firms to more-efficient firms
within the same industry in freer trade.
From these empirical research findings, one can provide insights into specific aspects of the
trade agreements, but cannot give a comprehensive answer about the overall effects of any given
trade agreement. In line with the new theories of trade, this report will set focus on firm level
data in particular the Canadian exporters to Chile and will focus on quantifying the economies
of scale associated to the CCFTA using a nonparametric analysis and recent developments in
treatment effects literature that are used to evaluate the effects of different policies. We should
note that the proposed analysis was conditioned by the nature of available data provided by
Statistics Canada.
3 Available Data
The data used in this study is from the Export Registry (1995-2005) and covers the universe
of Canadian exporting firms that have at least one shipment to a foreign market from 1993
to 2005. The Export Registry is linked with the Longitudinal Employment Analysis Program
(LEAP) data and the Corporate Tax Statistical Universal File (T2SUF). The LEAP database
is an administrative database created by the Business and Labour Market Analysis (BLMA)
division at Statistics Canada that provides longitudinal data on the behaviour of employment
levels of Canadian businesses (Baldwin, Dupuy and Penner, 1992). It covers the period 1984
to 2007, and makes use of administrative tax records from the Business Register and from the
6
Survey of Employment, Payrolls and Hours (SEPH) to generate employment profile of businesses
over time. The T2SUF file includes all incorporated firms that file a T2 tax return with the
Canada Revenue Agency (CRA). The T2 file provides data on sales, gross profits, equity and
assets for all incorporated firms in Canada. The linked data provided to us contain only the
information of sales. Finally, the length of the linked data is asymmetric with respect to the
time of the CCFTA agreement, as more years of data are available post agreement than prior
agreement.
The final data set has the following information:
• firm characteristics on a yearly basis, here we include: size (number of employees), labour
productivity (sales per worker), see Bernard and Jensen (1995, 1999), which have been
found to be important drivers of firms export Decisions. The firm’s age is an important
variable for the study (see Agarwal et al. 2002, Cefis and Marsili 2005, Disney et al. 2003,
Esteve et al. 2004, Thompson 2005). The age of the firm can be determined from the
LEAPs data. Other firms specific variable that is important for the study is the country
of ownership (see Audretsch and Mahmood 1995, Mata and Portugal 2002). This variable
is informative as a trade agreement between Canada and Chile may induce foreign firms
to entry in Canada and benefit from this agreement.
• product characteristics on yearly basis. The information is obtained from a product code
that is classified at 8-digit Harmonized Schedule (HS8). As the data does not provide
product-specific characteristics these characteristics need to be identified in order to dis-
tinguish between the core product and the marginal product.
• industry characteristics. The database provides information with regard to the industry
to which an exporter is classified at 6-digit North American Industry Classification Code
(NAICS6).
• macro variables at the industry level: Real Canada-Chile exchange rate at the industry
level over the period 1995-2005, computed as
RERit = ertCaIPPIitChIPPIit
where ert is the nominal exchange rate (Chilean Peso/Canadian Dollar), CaIPPIit is the
Canadian Industry Product Price Index for industry i at time t and ChIPPIit is the
Chilean Industry Product Price Index for industry i at time t.
For firms that enter the market before 1993, the data cannot identify the first year of a firm’s
entry and exit into and out of foreign markets (here Chile), number of years it exported, as well
as its value of exports, number of exporting destinations if different than Chile, and number of
7
products exported in each year. This information can be only identified for firms that enter the
market after 1993. Other information that is not available from the data includes: the export
penetration index at the industry level and market share size at the industry level, a measure
of debt per assets, the exposure to CCFTA as the domestic-shipment weighted average of tariff
reductions in the six-digit NAICS6 industries in which the firm was active in 1998, the actual
location of firms, macro variables at the industry level as the change in the difference in tariffs
between Canada and Chile specific to each industry.
The linked data provided by Statistics Canada covers a high proportion of the firms. How-
ever, the linking is not done uniformly for all available years. The most recent years are better
linked than the earlier years. We checked to see if the unlinked data can bias the trade effects
by plotting the data for the number of firms and products for the linked and unlinked data over
the period of interest (see Fig.1).
insert Fig.1 here
The graph shows that the unlinked firms and products are moving in a proportional way
with the linked firms and products, therefore the data that is available for this study should be
able to pin down the trade effect if present.
4 Methodology
4.1 Nonparametric Identification
4.1.1 Transition Probabilities using frequency distributions
As the focus of the study is the impact of the CCFTA on the margins of trade between Canada
and Chile, the analysis should start by identifying from non-parametric perspective if the agree-
ment has shifted the Canadian exporters’ market from different other Latin American countries
towards Chile. This analysis can start by looking at the entry-exit patterns of Canadian ex-
porters on the Chilean market relative to the Latin-American market. The information obtained
from this analysis will give us an idea about unconditional trends for the Canadian Exporters
after the introduction of the CCFTA.
One step transition probabilities are computed in order to determine the probability of
changing the markets from the neighboring Latin American Countries to Chile. In particular,
two transition matrices are computed, one for the data available prior the CCFTA and one for
the data available after the CCFTA. The computed probabilities are capturing:
pi,Chile = Pr(Firm is in Chile at time t|Firm was in country i at time t− 1)
8
where i =Argentina, Barbados, Bolivia, Brazil, Columbia, Costa-Rica, Cuba, Dominican Repub-
lic, Ecuador, Guatemala, Jamaica, Peru, Paraguay, Trinidad and Tobago, Uruguay, Venezuela.
4.1.2 Identification of the Margins of Trade
To explore non-parametrically if the extensive (newer products) or the intensive margins (older
products) are driving the shift in the volume of exports observed in the data we can use a
decomposition of the growth in total sales of the exporting firms due to the older and newer
products as follows:If we define the value of exports in year t as Xt = ptxt, where pt is the
number of exported products and xt is the average value per product. The pt = ot + nt is the
sum of the old products ot and the new products nt. Now, we can express the export growth
from t to t+ 1 as
Xt+1 −Xt = pt+1xt+1 − ptxt = ot+1[xt+1 − xt]− dtxt︸ ︷︷ ︸extensive
+nt+1xt+1︸ ︷︷ ︸intensive
Similarly, the contribution of the older firms (the intensive margin) and the contribution of the
newer firms (the extensive margin) can be identified. The nonparametric decomposition of the
export growth rate of total sales can be expressed into the intensive margin and extensive margin
components using for example a similar method as the one described in Besedes, T. and Prusa,
T. J., (2011)) as follows: If we define as J the set of NAICS6 industries available in the data,
i− th is the year of service, the value of exports in year t as Xt = ntxt, where nt is the number
of exporting relationships and xt is the average value per relationship. The nt = st + εt is the
sum of the survived relationships st and the new relationships εt and ht is the hazard rate of a
relationship. Now, we can express the export growth from t to t+ 1 as
Xt+1 −Xt =∑j∈J
I∑i=1
[(1− hij,t+1
)nij,t]︸ ︷︷ ︸
survival−stayers
[xij,t+1 − xij,t
]︸ ︷︷ ︸deepening
−I∑i=1
[(hij,t+1
)nij,tx
ij,t
]︸ ︷︷ ︸failure
+ εj,t+1x0j,t+1︸ ︷︷ ︸
entry
where
(1− hij,t+1
)is the percentage of surviving relationships between t and t+1,
(1− hij,t+1
)nij,t
gives the total number of surviving relationships between t and t+1,[xij,t+1 − xij,t
]is the deepen-
ing of the growth of trade for surviving relationships,(hij,t+1
)nij,t is the number of relationships
that end in year t+1,(hij,t+1
)nij,tx
ij,t is th total value of the ended relationships and εj,t+1x
0j,t+1 is
the value of new entrants in year t+1. Further, to asses the conditional trends for the Canadian
Exporters on the Chilean market different conditional type models can be used.
9
4.1.3 Identifying the Average Effects of the Trade Agreement - Regression Dis-
continuity Approach
To evaluate if there is a treatment effect in the neighborhood of the policy change, we implement
a regression discontinuity approach based on the method introduced by David Lee and Thomas
Lemieux (2009).
The main idea behind the regression discontinuity (RD) design is that firms that are just
below the cutoff (who did not receive the treatment enter Chile’s market before trade agreement)
were good comparisons to firms just above the cutoff (who did receive the treatment, enter Chile’s
market after the trade agreement). The identification of the trade effect in the neighborhood of
the free trade agreement can be explained with the following reduced form specification
yi = β0 + β1Treatmenti + δ(Tax) + εi
where Treatment = 0 if Tax >= 11, which is the Chilean tax for before CCFTA and Treatment =
1 if Tax < 11, which is the Chilean tax after CCFTA. The underlying assumption for the identifi-
cation of the treatment effect is that the δ(Tax) is continuous around the cutoff. The estimation
is performed at 1 year, 2 year and 3 year windows around the cutoff point. According to Hahn,
Todd and Van der Klaauw (2001) the treatment effect is identified as
β(z0) =limzz+0
Y (yi|zi = z−)− limzz−0Y (yi|zi = z)
limzz+0p(z)− limzz−0
p(z).
If the treatment is happening immediately (we have a discrete jump at the cutoff in the treat-
ment variable) than we have a sharp regression discontinuity and the denominator in the above
equation becomes equal to 1, while if the effect is fuzzy around the cutoff, the denominator will
be between 0 and 1. To determine what type of design we have we plot the number of total
products exported and the value of exports to Chile by windows of years to measure the changes
over a specific period of time (see Fig. 2 and Fig.3)
insert Figures: 2, 3 here
Looking at the graphs for the number of products we see a relatively sharp discontinuity at
the time of CCFTA implementation while for the export values the effect is not that visible.
A similar pattern is obtained if we plot the total number of firms exporting to Chile and their
total sales. An interesting finding is that indirect effects of subsequent trade agreements between
Chile and USA and Chile and European Union (2002 and 2003) are observed. However, these
effects are not sharp in nature as they are smoother. Consequently, we will use different window
lengths around the cutoff point to see how robust is the estimation of the potential jump in the
treated outcome around the trade agreement date. The same methodology will be used to asses
10
the indirect effect on the Canadian exporters of other agreements Chile made with Europe and
USA. Both the sharp and the fuzzy discontinuity designs will be used in the analysis.
The estimation of the about treatment parameter is done using local local polynomial re-
gression to the left and to the right of the discontinuity point as follows:
minβ(.)E(yi − α− β(zi))2K(
zi − z0h
),
where K(zi−z0h
)is a Kernel function that gives more weight to the observations that are close to
the discontinuity point and less weight further away from the discontinuity point. It is important
to note that RD evaluation provides also an answer to a specific question: in this particular
example what is the treatment effect of CCFTA for the Canadian Exporters when we evaluate
their exports and total sales values (Average Treatment Effect on the Treated - ATT). Te
advantages of this method over other methods that are evaluating the ATT (propensity score
matching for example) is that it provides a clean evaluation with minimal assumptions and
bypasses many of the questions related to different parametric model specifications, questions
that may be related to which variables to include in the model and their functional forms. One
limitation associated with this method is that other aspects of the impact distribution may be
of interest in an evaluation of the treatment effects of any given policy. However, we consider
this method fit for this analysis for its superior advantages and due to the specificity of our
question of interest.
5 Results
5.1 Unconditional Analysis
The results presented in this section are used to understand the patterns in data which will help
to explain the economies of scale due to product diversification, new entry and margin of trade
Firstly, by looking at the entry-exit patterns of Canadian exporters in the Chilean market
relative to the Latin-American market before and after the CCFTA, we can express the transition
probabilities into Chile of the firms that were previously exporting in other Latin American
countries. Figure 4 presents the results of the transitions into Chile before and after CCFTA. The
graph shows that, after CCFTA, there was a movement into Chile of exporters from bigger Latin
American countries: Argentina, Brazil, Columbia, Peru, Uruguay and a movement out from
Chile into smaller Latin American countries: Barbados, Bolivia, Cuba, Dominican Republic,
Ecuador, Paraguay and Trinidad Tobago. As the more productive firms tend to enter bigger
markets, the inflow of the firms from bigger countries may suggest that, once CCFTA was in
place, some of these firms started to see opportunities in the Chilean market. This transition into
11
Chile of probably more productive firms may explain the outflow from Chile towards the smaller
markets of probably less productive firms. The inflow of firms into Chile from the neighboring
countries may explain part of the trends of entry into the Chilean market
insert Fig.4 here
Secondly, a look at the number of industries, firms and products associated to Chilean market
(Figures 5,7 and 8) before and after the free trade agreement suggests that there is a positive
trade effect that is visible locally around the CCFTA. As pointed earlier (in the methodology
section), these categories of outcomes show a sharp change around the free trade agreement
and a smooth change around the subsequent agreements between Chile and USA and Chile and
European Union.
insert Figures 5, 7 and 8 here
Test of discontinuities around these dates of interest were performed and the results confirm
the existence of these discontinuities. As the graphical representations suggest, a sharp regression
discontinuity design should be applied when the trade effects on new firms and products is tested
around CCFTA. To test the indirect effects associated with the subsequent agreements signed by
Chile with USA and European Union a fuzzy regression discontinuity design should be applied.
Further, a detailed analysis at the industry distribution level is presented in Figure 6.
insert Figures 6 here
The results of the Industry analysis, which is used to pin down the industries that benefited
from the CCFTA show that:
• there is a relative stable number of industries in the neighborhood of the CCFTA, with
visible changes on longer horizons and
• some industries grew more than others (especially the manufacturing ones):
– Chemical Manufacturing
– Plastic and Rubber Products Manufacturing
– Fabricated Metal Products
– Machinery Manufacturing (highest increase)
– Computer and Electronic Products
– Transportation Equipment
– Machinery Equipment and Supply
12
Next, an investigation of the value of exports and total sales of Canadian exporters to Chile
(Figures 9 and 10) show different patterns than the other outcomes and also different patterns
among themselves. There is no obvious jumping pattern at the time of the trade agreement
for sales, but rather a period before the agreement, while the value of exports has a longer lag
response.
insert Figures 9 and 10 here
Thirdly, we want to measure the margin of trade associated to the entry on the new firms,
new products and their relative effect. In other words we look at the extensive margin of trade.
Figures 11, 12 and 13 are showing these results.
insert Figures 11, 12 and 13 here
The results observed in these graphs can be summarized as follows:
• The intensive margin associated with the older products is the one that is driven by the
free trade initially, but changes with time.
• When we mix the margin of trade between firms and products, the result becomes very
interesting. The new firms are bringing in more older products than older firms bringing
in new products immediately after the free trade.
• However, if we look on longer horizons after the free trade agreement, the contribution
of the new firms with new products increase almost exponentially towards the end of the
observed period.
As a result of the above findings we can conclude that the new firms and the new products are
driving the long run effect of the trade, while the older firms and products are driving the short
run effect of the trade (the intensive margin drives the short run and the extensive margin drives
the long run). In what follows we present a potential theoretical explanation of our findings.
5.2 Intensive Margin of Trade Liberalization in the Short-Run and
Long-Run. A Diagrammatic Illustration.
The following discussion using graphical representations helps at explaining the empirical find-
ings from the previous section. In the diagram from Figure 14, MC and AC denote an exporter’s
marginal cost curve and average cost curve, respectively.
insert Figure 14 here
13
Before the trade agreement, the firm faces trade costs t per unit. The demand curve for the
firm’s product in the export market is represented by D, and the corresponding marginal revenue
curve is given by MR. The amount of export, q0, is determined by the firm’s profit-maximization
condition, MR = MC + t.
Suppose the trade agreement removes the trade costs t (see Figure 15).
insert Figure 15 here
In the short run, the number of exporters is fixed. Hence, there is no change in the firm’s
demand curve and marginal revenue curve. The amount of export, q1, is determined by the
condition MR = MC. Note that the firm’s profits go from zero to positive as a result of
trade liberalization. In the long run, positive profits attract entry, and the entry of additional
firms shifts downward the demand curve of each incumbent firm. This pushes down the firm’s
marginal revenue curve, reducing the volume of export to below q1. The diagram on Figure 15
illustrates a very special situation where the demand curve has shifted downward so much that
the incumbents volume of export falls back to q0 in the long run. In the diagram, D is the new
demand curve facing the incumbent firm, and MR is the corresponding marginal revenue curve.
The MR curve intersects the MC curve at the quantity q0.
5.3 Measuring the Effects of CCFTA using the Regression Discon-
tinuity (RD) Design Analysis
The RD analysis requires a sharp design evaluation at the CCFTA and a fuzzy design evaluation
at the subsequent free trade agreements (the ones that are potentially observed in the data
between Chile and EU/USA). The results of this analysis will provide a measure of the Average
Treatment Effects on the Treated (ATT). In this case we will evaluate the ATT effects for the
Canadian Exporters to Chile of their export and total sales values.
The results of the analysis are presented in Table 1.
In summary, the findings of this analysis show that CCFTA generated the following effects:
• There is a direct positive long term impact for exporters on their export values (about 54
million dollars).
• There is an indirect positive long term impact for exporters on their total sales value
(about 1 billion dollars).
• The ATT is much larger for sales than for export values, implying positive scale effects.
14
Table 1: ATT (in thousands of dollars) exports and sales at 1997 and 2002
Treatment Window Outcome Coef Std Error p-value1997 1 year exports 27385.88 8717.32 0.0021997 2 years exports 53858.5 15782.3 0.0011997 3 years exports 54712.8 15667.4 0.0001997 all years exports 54427.8 15700.3 0.0011997 1 year sales 929835 259746 0.0001997 2 years sales 1014891 510456.9 0.0471997 3 years sales 1030641 512212 0.0441997 all years sales 1021313 510984.7 0.0462002 1 year exports -11363.2 6339.5 0.0732002 2 years exports -7657.97 11131.5 0.4912002 3 years exports -7486.4 11141 0.5022002 1 year sales -52407.8 32786.1 0.112002 2 years sales -32318.4 63.624.9 0.6282002 3 years sales -30901.8 63748.9 0.628
The subsequent trade agreements made by Chile with EU/USA generated the following
effects:
• There is a direct negative short term impact for exporters on their export values (about
11 million dollars in the first year, no significant effect after the first year)
• There is no indirect negative (short or long) impact for exporters on their total sales value
(ATT negative but not statistically significant)
• The subsequent trade agreements have only a marginal impact on the export and sale
values of Canadian exporters as their effect is not lasting.
Robustness checks were also performed using conditional RD analysis where the control
variables were firm size and firm productivity. The results of the conditional RD analysis do not
change the results for ATT, which means that the unconditional results are not endogenously
driven.
The fact that we do not observe significant effects of the subsequent trade agreements suggest
that the ATT obtained for the actual CCFTA was not altered by those agreements. Also, the fact
that the ATT was stable over different window lengths and no other discontinuity was identified
for the period of investigation and that controlling for different other factors did not change the
results of the analysis may point out that the ATT measure was consistently estimated.
Graphical representations of the above analyses are found in Figures 16, 17 and 18.
insert Figures 16, 17 and 18 here
15
The graphical representations show the discontinuity for both outcome variables: export and
total sales values associated with the CCFTA and the lack of discontinuity when other trade
agreements took place. These graphical representations also confirm the long-run numerical
findings of the actual RD analysis. The graphs for both the export values and total sales show
that while the trade agreement is visible in short run, in long run the preference erosion due to
new trade agreements may be present. However, the long-run effects seems to be stable.
6 Conclusion
The project Measuring the impact of CCFTA on the trade between Canada and Chile through
product diversification, new entry and margin of trade contributes to the understanding of the
impact of the free trade agreement between Chile and Canada(CCFTA) in the following way:
First, using transition probabilities to look at the entry-exit patterns of Canadian exporters in
and out of the Chilean market relative to other Latin-American countries, the results show that
after the CCFTA, there was a movement into Chile of exporters from bigger Latin American
countries: Argentina, Brazil, Columbia, Peru, Uruguay and a movement out from Chile into
smaller Latin American countries: Barbados, Bolivia, Cuba, Dominican Republic, Ecuador,
Paraguay and Trinidad Tobago. As the more productive firms tend to enter bigger markets, the
inflow of the firms from bigger countries may suggest that, once CCFTA was in place, some of
these firms started to see opportunities in the Chilean market. These transitions into Chile of
probably more productive firms may explain the outflow from Chile towards the smaller markets
of probably less productive firms. The inflow of firms into Chile from the neighboring countries
may explain part of the trends of entry into the Chilean market that were identified with the
next set of results.
Second, the results show that there is a trade liberalization effect that is driven in the short
run by the intensive margin of trade, while in the long run the intensive margin dies off and the
extensive margin of trade picks up. The extensive margin of trade picks up after other trade
agreements are signed by Chile (with EU and USA). Therefore, the effect of preference erosion
due to subsequent trade agreements that increase the extensive margin of trade and do not affect
the intensive margins can be explained by assuming that individual’s utility function follows a
Constant Elasticity of Substitution, and that consumers in Chile would like to take an infinite
number of varieties of products on that ground. This result can be explained by the fact that we
observe both more new Canadian firms and products getting in despite the preference erosion.
A detailed industry distribution analysis of the number of firms that are entering/exiting
Chile show that the industries that were actually contributing to the results of the extensive
margin of trade were the manufacturing ones: Chemical Manufacturing, Plastic and Rubber
Products Manufacturing, Fabricated Metal Products, Machinery Manufacturing (highest in-
16
crease), Computer and Electronic Products, Transportation Equipment, Machinery Equipment
and Supply.
Firm and product level analyses show that the intensive margin associated with the older
products is the one that is driven by the free trade initially, but changes with time. The new
firms are bringing in more older products than older firms bringing in new products immediately
after the free trade. However, if we look on longer horizons after the free trade agreement, the
contribution of the new firms with new products increase almost exponentially towards the end
of the observed period (2008). As a result the new firms and the new products are driving the
long run effect of the trade, while the older firms and products are driving the short run effect
of the trade (the intensive margin drives the short run and the extensive margin drives the long
run). The results also show that the new firms/products entry do not explain the results on the
sales and value of exports, which are changing in a less pronounced way.
An analysis of sales and value of exports show different patterns. There is no obvious jumping
pattern at the time of the trade agreement for value of exports and total sales, but rather a
period after the agreement. The total sales have a longer lag response than the value of exports.
These results can be explained by the endogenous re-allocation of the resources that overlap
with subsequent trade agreements that Chile signed with European Union and USA.
Finally, a regression discontinuity design was employed to test short and long term impacts of
CCFTA as well as the indirect impact of other trade agreements between Chile and Europe and
USA. The results of the analysis reveal that the impact of the CCFTA on the value of exports
is less important than the impact of CCFTA on the total sales. This result may be driven by
the scale effects generated by CCFTA. The analysis also show that there is a direct positive
long term impact for exporters on their export values (about 54 million dollars), while there is
an indirect positive long term impact for exporters on their total sales value (about 1 billion
dollars). The Average Treatment on the Treated (ATT) effect is much larger for sales than
for export values, implying positive scale effects. Subsequent trade agreements made by Chile
with EU/USA generated the following effects: There is a direct negative short term impact
for exporters on their export values (about 11 million dollars in the first year, no significant
effect after the first year) There is no indirect negative (short or long) impact for exporters on
their total sales value (ATT negative but not statistically significant). The subsequent trade
agreements have only a marginal negative impact on the export and sale values of Canadian
exporters as their effect is not lasting.
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8 Apendix
8.1 Figures
21
0
200
400
600
800
1000
1200
1400
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Axi
s Ti
tle
Number Candian Firms & Products : Export to Chile_Linked and Unliked datas
Total Firms_Unlinked Total Products_Unlinked Total Firms_Linked Total Products_Linked
Figure 1: Firms and Products - linked and unlinked data
22
0
100
200
300
400
500
600
700
800
93-96 94-96 95-96 96 97 98 98-99 98-00 98-01 98-02 98-03 98-04 98-05 98-06 98-07
258.5
289 304.5
374
418
460 472
482.6666667 489.5 507
547.8333333
600.5714286
649.75
694.8888889
725.8
758.9090909
Number of Products by Windows
Figure 2: Number of Exported Products to Chile by Window
23
0
50000000
100000000
150000000
200000000
250000000
93-96 94-96 95-96 96 97 98 98-99 98-00 98-01 98-02 98-03 98-04 98-05 98-06 98-07 98-08
Values by Windows
Figure 3: Value of Exports by Window
24
0
2
4
6
8
10
12
14
16
18
20
Axi
s Ti
tle
Transition to Chilie before and after 1997
Before 97 After 97
Figure 4: Transition Probabilities into Chile before and after CCFTA
25
-20
0
20
40
60
80
100
120
140
160
180
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
56
71
78
110
119
126 123 124
128 131
147
160
166
154
160
176
0
15
7
32
9 7
-3
1 4 3
16 13
6
-12
6
16
Number of Industries (by leapnaics)
Number of Industries (by leapnaics) New industries
Figure 5: Number of Industries
26
1993
1996
1999
2002
2005
2008
0
50
100
150
200
250
300
350
400
450
500
11
1
11
5
22
1
31
1
31
5
32
3
32
7
33
4
33
9
41
4
41
8
44
3
44
7
45
3
48
3
49
3
51
8
52
4
53
3
56
2
71
1
72
2
91
1
Figure 6: Distribution of Industries
27
-100
0
100
200
300
400
500
600
700
800
900
1000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
85 104
140
299
356
419
382
420 430
465
622
747
798 821
846
944
0 19
36
159
57 63
-37
38 10
35
157
125
51 23 25
98
Number of Canadian Firms Exporting to Chile from 1993 to 2008
Number of Firms New Firms
Figure 7: Number of Firms
28
-200
0
200
400
600
800
1000
1200
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
167
258 235
374
418
460 484
504 510
577
752
917
994
1056
1004
1090
0
91
-23
139
44 42 24 20 6
67
175 165
77 62
-52
86
Number of Products Exported by Canadian Firms to Chile (by leapnaics)
Number of Products New Products
Figure 8: Number of Products
29
-1E+08
0
100000000
200000000
300000000
400000000
500000000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Values of Export and Marginal values
Value of Exports to Chile by Canadian Firms Marginal Values
Figure 9: Export Values
30
-1E+12
-5E+11
0
5E+11
1E+12
1.5E+12
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sales
Sales Marginal sales
Figure 10: Sale Values
31
0
100
200
300
400
500
600
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Firms distribution Old_Old Old_New
New_Old New_New
Figure 11: Firms - old and new
32
0
100
200
300
400
500
600
700
800
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Product distribution
old_old old_newnew_old new_new
Figure 12: Products - old and new
33
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Value of Exports to Chile
Old Firm-Old Product Old Firm-New Product
New Firm-Old Product New Firm-New Product
Figure 13: Export Values - old and new
34
Figure 14: Trade Dynamics without Trade Liberalization
35
Figure 15: Short and Long Run Dynamics of Trade Liberalization
36
Figure 16: Export Values -benchmark 1997
37
Figure 17: Sales - benchmark 1997
38
Figure 18: Export Values - benchmark 2002
39