Countries don’t trade, firms do: A firm-level assessment of CETA

The impact of free trade agreements (FTAs) has been analysed by numerous empirical studies that focus on their effect on trade values. But what about the number of trading firms? Do FTAs lead to new firms becoming exporters or importers? Using data from the OECD-Eurostat Trade by Enterprise Characteristics dataset and estimating a structural gravity model, this paper examines the effect of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) on the number of EU exporting and importing firms. When debating its future effects during the negotiations, the CETA agreement was the subject of both hope and criticism, including its potential negative effect on small firms. We explore the heterogeneous response of firms to CETA by sector, firm size and EU country. We find a positive but diverse response from EU firms to the opportunities offered by the CETA agreement. On average, CETA increased the number of EU exporting firms by around 11%. The largest increases were found in Spain and Lithuania (over 30%), while the lowest increases were in Italy (8.7%). The increase in the number of trading firms has been higher for small than for large firms. These findings underscore the importance of considering firm-level impacts in trade policy assessments.