The Ebb and Flow of Comparative Advantage: Trade and the Industrial Specialization of Canadian Manufacturing Regions, 1974 to 1999

Utilizing a longitudinal micro data file of manufacturing plants (1974 to 1999), this study tests the effect of higher levels of trade on the level of industrial specialization experienced by regional manufacturing economies. Consistent with trade driven by comparative advantage, the analysis demonstrates that higher levels of export intensity (exports as a share of output) across regions are associated with greater industrial specialization. However, the analysis also shows that changes in export intensity are only weakly associated with changes in specialization. This occurs because comparative advantage tends to shift away from industries that account for a large share of regional manufacturing employment and towards industries that initially have lower shares. This ebb and flow of comparative advantage helps to explain why Canadian manufacturing regions have not become more specialized in an environment of increasing integration into the world market.