The heterogeneous impact of the EU-Canada agreement with causal machine learning

Abstract

This paper introduces a causal machine learning approach to investigate the effects of free trade agreements and applies it to the EU-Canada Comprehensive Economic and Trade Agreement (CETA). Previous estimates of the impact of trade liberalization have been found to be unstable and contradictory, possibly due to the presence of heterogeneous treatment effects. The matrix completion estimator computes multidimensional counterfactuals in trade data at the firm, product, and destination levels. Compared with other estimators, it relies on a weaker exogeneity assumption and a more general functional form. In the case of CETA, we obtain both positive and negative idiosyncratic treatment effects at the product-destination level, although the sales-weighted average treatment effect is 6.4% in the year after the agreement. At the same time, we can estimate idiosyncratic treatment effects for the extensive margin at the product-destination level; thus, we find product churning beyond regular entry-exit dynamics: 8.1% that were not previously exported, and about 7.3% that are no longer exported. Finally, we consider the case of multiproduct firms after ranking product portfolios. After CETA, we observe a reallocation of French exports toward the first and most exported products, possibly driven by increased competition in the local market by other European producers after trade liberalization.