Using confidential firm-level panel data from the Bureau of Economic Analysis, we examine how the bilateral trade flows of U.S. multinational corporations (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. parent sales to Canadian affiliates have little association with Canadian tariffs. These results contradict the notion that Canadian tariff reductions would lead to a ‘hollowing out’ of Canadian manufacturing. We also find substantial heterogeneity in MNC responses to tariff changes within narrowly defined manufacturing industries. Overall, bilateral trade liberalization is trade-creating, as U.S. MNCs integrated their North American production such that Canadian affiliates increased sales to the United States and reduced domestic sales.

In recent decades, U.S. foreign trade grew much faster than GDP, but there is no consensus why. Notably lacking is an understanding of the role of multinational corporations (MNCs), which mediate over half of world trade. We use Bureau of Economic Analysis data on U.S. MNCs to study the rapid growth of MNC-based trade from 1983 to 1996. Using a model of U.S. MNCs and Canadian affiliates, we decompose this growth by source. Tariff reductions can largely explain increases in arms-length MNC-based trade. But intra-firm trade growth is attributed mostly to “technical change.” We present additional evidence suggesting just-in-time production facilitated intra-firm trade.