Opportunities for Foreign Trade and the Extent of Suboptimal Capacity in Canadian Manufacturing Industries

Abstract

<p>This dissertation examines the impact of trade barriers on suboptimal capacity in Canadian manufacturing industries in 1968, 1970 and 1979. Suboptimal capacity (i.e. failure to realize scale economies) is a frequent explanation of persistent low productivity levels in Canada relative to the US. The basic question addressed in this thesis is whether small markets prevent scale efficiency in Canada, and if so, how? In this regard a model of the determination of plant scale in a homogeneous goods industry protected by tariffs is developed. The model allows for free entry and the solution concept in Cournot-Nash Equilibrium. Three hypothesis are tested: the small market hypothesis, the trade liberalization hypothesis, and the Eastman-Stykolt hypothesis. The trade liberalization hypothesis predicts that US-Canadian trade barriers promote scale inefficiency by separating a small Canadian market from the large US market. The Eastman-Stykolt hypothesis predicts that the interaction of small Canadian market size and high trade barriers should lead to more scale inefficiency. These hypotheses are tested on data supplied by the US International Trade Commission and Statistics Canada. The thesis confirms the importance of small markets in explaining scale inefficiency. US-Canada nominal tariff protection and Canadian Non-Tariff Barriers (NTBs) seem to be closely associated with scale inefficiency in Canada. There is some support for the Eastman-Stykolt effect. The thesis concludes that the Canadian producers would realize economies of scale if Canada trade protections and US tariffs are reduced. Many studies have documented these effects but our study is the first to explicitly deal with NTBs. The key contributions are: (a) improved modelling of the effect of trade barriers on plant scale, and (b) improved test of the Eastman-Stykolt hypothesis.</p>