Using the New Products Margin to Predict the Sectoral Impact of Trade Reform

This paper develops a methodology for predicting the impact of trade liberalization on exports by industry (2-digit ISIC) based on the distribution of exports before the reform by product (5-digit SITC). Using the results of Kehoe and Ruhl (2009) that much of the growth in trade after trade liberalization is in products that are traded very little or not at all, we characterize industries in Canada, Mexico, and the United States by the fractions of exports in 1988 accounted for by these least traded products. We show that a prediction of trade growth 1988–2007 by industry based on these data performs significantly better than the leading applied general models that were originally used for the policy evaluation of North American Free Trade Agreement.