Estimates of the Trade and Welfare Effects of NAFTA

Abstract

We build into a Ricardian model the role of trade in intermediate inputs, sectoral linkages and differing productivity levels across sectors. We also propose a method to estimate sectoral trade elasticities. In our model, the trade effects due to overall tariff reductions account for most of the observed changes in trade flows for NAFTA members. We decompose the effects of NAFTA and find that 93% of Mexico’s, 58% of Canada’s and 55% of the United States’ trade effects can be attributed to NAFTA’s tariff reductions. Trade in intermediate inputs and input-output linkages can amplify the welfare effects of tariff reductions.

Keywords: Multi-sector, Multi-country, Ricardian model of Trade, Input-Ouput, Linkages, NAFTA

JEL Classification: F10, F13, F14