The death of Canadian manufacturing plants: heterogeneous responses to changes in tariffs and real exchange rates

Abstract

We examine simultaneously the effects of real-exchange-rate movements and tariff reductions on plant death in Canadian manufacturing industries between 1979 and 1996. Consistent with the implications of recent international trade models with heterogeneous firms, we find that the impact of exchange-rate movements and tariff cuts on exit is heterogeneous—particularly pronounced among least efficient plants. Our results further reveal multi-dimensional heterogeneity that current models featuring one-dimensional heterogeneity (efficiency differences among plants) cannot fully explain: exporters and foreign-owned plants have much lower failure rates; however, their survival rates are more sensitive to changes in tariffs and real exchange rates.