Trade, wages, and productivity

Abstract

We develop a general equilibrium monopolistic competition model in which wages, productivity, consumption diversity, and markups respond to trade integration. We structurally estimate the model and simulate the impacts of removing all trade barriers generated by the Canada-U.S. border. Firm selection gets tougher by 8.09% in Canada and by 0.80% in the United States. Markups that consumers face, which are central to welfare, fall by up to 12.11% in Canadian provinces and by up to 2.82% in U.S. states. However, changes in markups measured at the firm level are ambiguous, thus providing a different piece of information.