U.S.-Canada Bilateral Tariff Elimination: The Role of Product Differentiation and Market Structure

Abstract

The purpose of this paper is to analyze some important issues that arise in the modeling of bilateral tariff removal and to assess these issues computationally in the context of the US-Canada FTA. Our paper is structured as follows. The differentiated products models are discussed in the following section, and the theoretical relationship between tariff liberalization and firm output is developed. We also comment on the demand structure adopted in some previous modeling efforts. In particular we will discuss the practice of assuming both firm and national product differentiation and the implications for the debate concerning intra- vs. inter-industry trade, rationalization of the productions process, and the gains from trade.