Effects of the North American Free Trade Agreement

Abstract

The North American Free Trade Agreement (NAFTA) continues to be controversial. Using an econometric model of import demand and export supply, the effects of NAFTA on bilateral trade between NAFTA partners are estimated. The model accounts for NAFTA effects separately from the impacts of exchange rate movements between NAFTA members, growth in import demand due to changes in gross domestic product, and rest-of-the-world exchange rate effects. Quarterly time series data from 1986 to 2005 are employed. Counterfactual comparisons of model predictions indicate NAFTA has increased bilateral trade between the United States and Mexico. The effects of NAFTA on U.S.-Canadian and Canadian-Mexican trade are mixed and less pronounced.