NAFTA''s and CUSFTA''s Impact on North American Trade

This paper finds that NAFTA and CUSFTA have had a substantial impact on North American trade. The paper focuses on where the US sources its imports of almost 5,000 different commodities and compares this to where the European Union (EU) sources its imports of the same commodities. It identifies the impact of NAFTA using a differences in differences strategy, exploiting the substantial variation across commodities and time in the US tariff preference given to goods produced in Canada and Mexico. The paper finds that the recent rapid growth in Mexico’s share of US trade would have been much slower without NAFTA while Canada’s share may not have increased without CUSFTA. Useful products of the empirical work are estimates of consumer willingness to substitute between different varieties of a commodity, an important parameter in welfare analysis of trade liberalization. Estimated average elasticities of substitution typically range from 4 to 7. Elasticities of this magnitude imply that even modest trade liberalizations will have a pronounced effect on trade volumes. One alarming result is that NAFTA may have produced substantial trade diversion, because the largest tariff preferences are often in industries where imports from outside North America represent a substantial proportion of domestic absorption. ∗I would particularly like to thank my advisors, Daron Acemoglu, Rudi Dornbusch and Jaume Ventura. Thanks are also due to Mark Aguiar, Christian Broda, Gita Gopinath, Roberto Rigobon, Alwyn Young and participants at seminars and lunches at Chicago GSB, EIIT Conference 2001, Federal Reserve Bank of New York, University of Michigan, MIT and University of Pennsylvania. All errors are my own.