Ten Years of NAFTA: Economic Integration in North America

• Author: Roberto Cardarelli
• Pages: 1-4

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During the last decade, several papers have appeared that assess the impact of NAFTA on the economies of its members. This article briefly surveys recent IMF research on the effects of NAFTA on trade and financial flows in the region; on whether increased economic integration has resulted in a higher business cycle interdependence among NAFTA partners; and, finally, on whether free trade agreements have favorably affected growth performance of both Canadian and Mexican economies, and their catching up with the U.S. economy, over the past decade.

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Ten Years of NAFTA: Economic Integration in North America

A large body of research shows that the North American free trade agreements have been followed by a dramatic increase in trade and financial flows among partner countries. Kose, Meredith, and Towe (forthcoming) and Cardarelli and Kose (forthcoming) show that the free trade agreements played a significant role in increasing Canadian and Mexican exports to the United States over the 1990s, and changed the composition of sectoral trade flows across these countries. In particular, both Canadian and Mexican exports have shifted toward manufactured goods, and vertical specialization-the amount of imported goods embodied in exports-and intrafirm trade among the NAFTA partners have increased substantially.

However, isolating the effects of NAFTA on its members is a particularly difficult task: NAFTA came after a series of other trade agreements signed over the 1980s, including the 1988 Canada-U.S. Free Trade Agreement. Moreover, other significant shocks that occurred over the past decade may have affected trade and financial flows in the region. Using a gravity model to analyze the impact of NAFTA on Mexico's trade performance, Krueger (1999) finds that most of the increase in Mexican trade after NAFTA was driven by factors other than the agreement, including Mexico's unilateral reduction of tariffs following its entry into GATT in 1986 and the collapse of the Mexican peso in 1994. Using a shift-in-share analysis, Krueger (1999, 2000) also finds that, over the 1990s, Mexican exports gained shares in both the United States and the rest of the world, suggesting that NAFTA was a trade-creating, and not a trade-diverting, agreement. As for Canada and the United States, Bayoumi and Klein (1997) find that, despite the trade agreement and the geographical closeness, the United States-Canada border remains a significant barrier, and that...