North American Free Trade Agreement Bilateral Trade Effects

Abstract

This study evaluates the effects of the North American Free Trade Agreement (NAFTA) on bilateral trade between the United States and Canada and between the United States and Mexico. Trade flow estimates are from a vector autoregression (VAR) model. The VAR methodology allows modeling bilateral trade in a flexible manner that incorporates both the interaction between different variables and the dynamics of trade, output, prices, and the exchange rate. After testing the outside sample forecasting ability of the models, the study produces dynamic forecasts of bilateral trade. It then compares forecasts incorporating the effects of the NAFTA with baseline forecasts. The results suggest expanded trade for all three countries and an improvement in the U.S. trade position with both Canada and Mexico. Copyright 1996 Western Economic Association International.

The impact of NAFTA on the Mexican‐American trade

“…Besides the initial trend, the exports to the U.S. increased significantly while the imports from the U.S. decreased for a short period (corresponding to the crisis) and then climbed to the same levels before the agreement. These observations contrast with the forecasted values predicted by other studies (e.g Casario, 1996). From a policy point of view, the results of this study suggest that further expansion of the treaty (or new treaties such as FTAA) will probably lead to even larger trade deficits, at least in the short term, for the U.S.…”

An Industrial Analysis of Trade Creation and Diversion Effects of NAFTA

“…However, in the long run industries should change in adjustment to, for instance, changing availability of resources, evolving market structures, evolving technologies, accession of other Western Hemisphere's countries to NAFTA 〈as suggested by Brown, et al [1996] and Casario [1996]〉. These changes may lead to more investments and more trade than expected.…”

“…Karemera and Koo [1994] used a one-digit Standard International Trade Classification (SITC) data, which is more aggregated than the three-digit SITC data used in this study. Thus, this study assesses more comprehensively the impacts of NAFTA at the industry level than other studies of its kind 〈e.g., Brown, D e a rd o r ff and Stern [1992]; Klein and Salvatore [1994]; Doroodian, Boyd and Piracha [1994];and Casario [1996]〉. Additionally, we employed a partial equilibrium model that specifically indicates whether trade expansion associated with NAFTA stems from trade creation (TC) or is due to trade diversion (TD).…”