Multiproduct firms and product scope adjustment in trade

A recent theoretical literature has emphasized the importance of multiproduct firms in trade. However, models within this literature have reached contradictory conclusions regarding the product-level response of firms to changes in trade costs. This paper attempts to resolve these contradictions by employing Bayesian techniques to estimate the product portfolio response throughout the distribution of US firms following the Canada–US Free Trade Agreement of 1989. I find evidence of a differential response among firms that are heterogeneous in terms of their involvement in foreign markets. Firms with less than 10–20% of total sales accounted for by foreign markets reduced product diversification as trade costs fell, while more foreign-oriented firms increased diversification. •I examine the effect of CUSFTA on US firm product diversification.•I use Bayesian techniques to estimate heterogeneous firm responses to trade.•Foreign-oriented firms diversify after CUSFTA. Domestic firm diversification falls.•My results are robust to various measures of foreign orientation.•Model comparison provides additional evidence of heterogeneous firm responses.