Estimates of the Trade and Welfare Effects of NAFTA

52 Pages Posted: 3 Nov 2012

See all articles by Lorenzo Caliendo

Lorenzo Caliendo

Yale University - School of Management

Fernando Parro

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: November 2012

Abstract

We build into a Ricardian model sectoral linkages, trade in intermediate goods, and sectoral heterogeneity in production to quantify the trade and welfare effects from tariff changes. We also propose a new method to estimate sectoral trade elasticities consistent with any trade model that delivers a multiplicative gravity equation. We apply our model and use our estimated elasticities to identify the impact of NAFTA's tariff reductions. We find that Mexico's welfare increases by 1.31%, U.S.'s welfare increases by 0.08%, and Canada's welfare declines by 0.06%. We find that intra-bloc trade increases by 118% for Mexico, 11% for Canada and 41% for the U.S. We show that welfare effects from tariff reductions are reduced when the structure of production does not take into account intermediate goods or input-output linkages. Our results highlight the importance of sectoral heterogeneity, intermediate goods and sectoral linkages for the quantification of the welfare gains from tariffs reductions.

Suggested Citation

Caliendo, Lorenzo and Parro, Fernando, Estimates of the Trade and Welfare Effects of NAFTA (November 2012). NBER Working Paper No. w18508. Available at SSRN: https://ssrn.com/abstract=2170631

Lorenzo Caliendo (Contact Author)

Yale University - School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://faculty.som.yale.edu/lorenzocaliendo

Fernando Parro

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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