Putting Canada in the Penalty Box: Trade and Welfare Effects of Eliminating NAFTA

37 Pages Posted: 25 Jul 2019

See all articles by Scott L. Baier

Scott L. Baier

Clemson University - John E. Walker Department of Economics

Jeffrey H. Bergstrand

University of Notre Dame

John P. Bruno

University of Notre Dame - Department of Economics

Date Written: 2019

Abstract

Three years ago, very few economists would have imagined that one of the newest and fastest growing research areas in international trade is the use of quantitative trade models to estimate the economic welfare losses from dissolutions of major countries' economic integration agreements (EIAs). In 2016, "Brexit" was passed in a United Kingdom referendum. Moreover, in 2019, the existence of the entire North American Free Trade Agreement (NAFTA) is at risk if the United States withdraws - a threat President Trump has made if the proposed United States-Mexico-Canada Agreement is not passed by the U.S. Congress. We use state-of-the-art econometric methodology to estimate the partial (average treatment) effects on international trade flows of the six major types of EIAs. Armed with precise estimates of the average treatment effect for a free trade agreement, we examine the general equilibrium trade and welfare effects of the elimination of NAFTA (and for robustness U.S. withdrawal only). Although all the member countries' standards of living fall, surprisingly the smallest economy, Mexico, is not the biggest loser; Canada is the biggest loser. Canada's welfare (per capita income) loss of 2.11 percent is nearly two times that of Mexico's loss of 1.15 percent and is nearly eight times the United States' loss of 0.27 percent. The simulations will illustrate the important influence of trade costs - international and intranational - in contributing to the gains (or losses) from an economic integration agreement's formation (or elimination).

Keywords: international trade, economic integration agreements, gravity equations

JEL Classification: F100, F130, F140, F150

Suggested Citation

Baier, Scott Leonard and Bergstrand, Jeffrey H. and Bruno, John P., Putting Canada in the Penalty Box: Trade and Welfare Effects of Eliminating NAFTA (2019). CESifo Working Paper No. 7678. Available at SSRN: https://ssrn.com/abstract=3422261

Scott Leonard Baier (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-4534 (Phone)

Jeffrey H. Bergstrand

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556
United States
574-631-6761 (Phone)
574-631-5255 (Fax)

HOME PAGE: http://www3.nd.edu/~jbergstr

John P. Bruno

University of Notre Dame - Department of Economics ( email )

United States

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