Let's Make A Deal: An Event Study Analysis of the Effect of NAFTA Renegotiations on Canadian Firms

Abstract

On September 30th, 2018, Donald Trump agreed to terms on the United States-Mexico-Canada Agreement. The deal was a renegotiation of the North American Free Trade Agreement at the end of a fifteen month renegotiation process. The deal had both tangible and intangible components. I use the event study methodology to estimate abnormal returns of Canadian firms after the deal as well as three distinct events leading up to it. I test abnormal returns against a list of firm characteristics on both the firm and industry levels. I also look at industry abnormal returns for each event. I find that when the perceived probability of Canada being included in the renegotiated deal goes up, smaller, exporting firms experience positive abnormal returns. When the perceived probability of Canada being included in the deal goes down, I find that low-skilled, bigger, importing firms experienced positive abnormal returns. Most of my results are consistent with past trade theory implemented on international trade regarding Canada. However, I also find unique results that trace back to the main components of the deal. The long term effects will only be known in the coming years, so my thesis offers a preliminary estimate of market expectations of future Canadian firm profits.