Putting Canada in the Penalty Box: Trade and Welfare Effects of Eliminating North American Free Trade Agreement

27 Pages Posted: 7 Jun 2020

See all articles by Scott L. Baier

Scott L. Baier

Clemson University - John E. Walker Department of Economics

Jeffrey H. Bergstrand

affiliation not provided to SSRN

John P. Bruno

University of Notre Dame - Department of Economics

Date Written: December 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 UK referendum. Moreover, in 2019, the existence of the entire North American Free Trade Agreement (NAFTA) is at risk if the US withdraws—a threat President Trump has made if the proposed US–Mexico–Canada Agreement is not passed by the US 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 US 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% is nearly two times that of Mexico's loss of 1.15% and is nearly eight times the US' loss of 0.27%. The simulations will illustrate the important influence of trade costs—international and intranational—in contributing to the gains (or losses) from an EIA's formation (or elimination).

Keywords: economic integration agreements, gravity equations, international trade

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 North American Free Trade Agreement (December 2019). The World Economy, Vol. 42, Issue 12, pp. 3488-3514, 2019, Available at SSRN: https://ssrn.com/abstract=3621012 or http://dx.doi.org/10.1111/twec.12870

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

affiliation not provided to SSRN

No Address Available

John P. Bruno

University of Notre Dame - Department of Economics ( email )

United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
61
PlumX Metrics