This paper analyzes mergers and acquisitions (M & A) as a previously neglected channel of industrial restructuring in the face of trade liberalization. Using the Canada-United States Free Trade Agreement of 1989 as a natural experiment, I show that trade liberalization leads to a significant increase in M & A activity. I also provide evidence that resources are transferred from less to more productive firms in the process and that the magnitude of the overall transfer is quantitatively important. Taken together, these results suggest that M & A is an important alternative to the previously studied adjustment channels of firm and establishment closure and contraction. This has strong implications for the design of competition policy in the wake of trade liberalizations since M & A may offer a more efficient way of transferring resources than contraction and closure of low productivity firms combined with internal growth of more efficient firms.

This paper examines the effects of trade liberalization on merger behavior. We endogenize merger choice among owners in an oligopolistic industry in asymmetric countries to analyze the consequences of trade cost reductions on competitiveness and welfare. In this context, the non-cooperative game supports asymmetric market structures. We also find that trade liberalization is not necessarily pro-competitive in countries with the competitive advantage, even if trade costs are completely abolished. Moreover, the tariff-jumping explanation of international mergers does not necessarily apply. The welfare analysis shows that merger behavior can significantly alter any gains from liberalization. Countries should consider enforcing competition in regional agreements. Specifically, to avoid a reduction in domestic welfare following trade-liberalizing reductions in trade costs, a high-cost country's optimal policy may be to ban international mergers.