US-Canada trade liberalization and MNC production location

Using confidential firm-level panel data from the Bureau of Economic Analys is, we examine how the bilateral trade flows of U.S. multinational corporat ions (MNCs) and their Canadian affiliates responded to U.S.-Canadian tariff reductions from 1983 to 1992. We find that Canadian affiliate sales to the United States are negatively correlated with Canadian tariffs, but U.S. pa rent sales to Canadian affiliates have little association with Canadian tar iffs. These results contradict the notion that Canadian tariff reductions w ould lead to a "hollowing out" of Canadian manufacturing. We also find subs tantial heterogeneity in MNC responses to tariff changes within narrowly de fined manufacturing industries. Overall, bilateral trade liberalization is trade-creating, as U.S. MNCs integrated their North American production suc h that Canadian affiliates increased sales to the United States and reduced domestic sales.