Trade Variety and Productivity in Canada

This paper combines the effects of import and export variety growth on technological development in a monopolistic competition model with endogenous technology. Using highly disaggregated international trade data at the national and provincial levels from 1988 to 2006, it is found that export variety and import variety account for 10.41% and 1.57% respectively of the variation in Canadian provincial productivity differences, and for 9.92% and 6.95% of within-province productivity growth. Evaluated at the sample mean, Canadian productivity gained 0.74% as a result of trade variety growth: export variety contributed 0.41% and import variety contributed 0.33%. While the USA is the single most important source of export-led Canadian productivity growth, its relative importance is much less on the import side. Emerging markets in Asia, especially China, contributed significantly to Canadian productivity growth by increasing import variety for Canadian producers.