Economic Integration and Regional Industrial Specialization: Evidence from the Canadian- US FTA Experience

We investigate the impact of Canada-U.S. trade integration on the degree of industrial specialization of the Canadian regions. Trade integration is captured through the decrease of trade-weighted tariffs that were boosted by the implementation of the Canadian-U.S. Free Trade Agreement. We found strong evidence to support integration’s long-run impact on the patterns of absolute industrial diversification. Significantly, this new finding remains robust to the exclusion of the primary sectors and to the potential presence of unit root in the data. Our results lead us to support a positive long-run relationship between trade integration and industrial diversification.