Backus, D.K., P.J. Kehoe, and F.E. Kydland, 1994, “Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?,” American Economic Review, Vol. 84, No. 1, pp. 84–103.
Cuevas, A., M. Messmacher, and A. Werner, 2002, “Macroeconomic Synchronization between Mexico and its NAFTA Partners,” World Bank.
Gould, D.M., 1998, “Has NAFTA Changed North American Trade?,” Federal Reserve Bank of Dallas Economic Review, First Quarter, pp. 12–23.
Gruben, W.C., 2001, “Did NAFTA Really Cause Mexico’s High Maquiladora Growth?,” Federal Reserve Bank of Dallas Working Paper No. 0301.
Kose, M.A., C. Otrok, and C. Whiteman, 2003, “International Business Cycles: World, Region, and Country Specific Factors,” American Economic Review, forthcoming.
Kose, M.A., and K. Yi, 2003, “The Trade-Comovement Problem in International Macroeconomics,” International Monetary Fund Working Paper, forthcoming.
Kouparitsas, M., 1997, “A Dynamic Macroeconomic Analysis of NAFTA,” Federal Reserve Bank of Chicago Economic Perspectives, Vol. 21, pp. 14–35.
Lopez-Cordova, J.E., 2002, “NAFTA and Mexico’s Manufacturing Productivity: An Empirical Investigation Using Micro-Level Data,” Inter-American Development Bank, mimeo.
USITC (U.S. International Trade Commission), 1997, “The Impact of the North American Free-Trade Agreement on the U.S. Economy and Industries: A Three-Year Review,” Investigation No. 332–81, USITC Publication No. 3045.
Wall, H.J., 2003, “NAFTA and the Geography of North American Trade,” Federal Reserve Bank of St. Louis Review, Vol. 85, No. 2, pp. 13–26.
Waldkirch, A., 2003, “The New Regionalism and Foreign Direct Investment: The Case of Mexico,” Journal of International Trade and Economic Development, forthcoming.
Prepared by Ayhan Kose.
The United States has recently signed free trade agreements with Chile and Singapore in 2003. It has also begun free trade agreement negotiations with Morocco; five nations in Central America (CAFTA); five nations in the Southern Africa Customs Union (SACU); and Australia. The most ambitious one among these agreements is the Free Trade Area of the Americas (FTAA), which would include the United States and 33 other countries in the Western Hemisphere in one of the world’s largest free trade areas by progressively eliminating barriers to trade and financial flows. Market access negotiations have begun with the objective of concluding no later than January 2005.
Other studies employing aggregate trade data also document large changes in regional trade flows driven by NAFTA. For example, Wall (2003) estimates that NAFTA played an important role in boosting Canadian exports to the United States and Mexico by 29 percent and 12 percent, respectively, during 1993–1997. Gould (1998) and USITC (1997) report that the impact of NAFTA on trade flows in the region was significant.
To analyze the impact of NAFTA on trade flows, Krueger studies the changes in trade patterns and volumes between different groups of commodities and among NAFTA partners and the rest of the world using the data at the one-digit SITC level for the period 1990–1996. She concludes that the categories in which Mexican exports to the United States registered the largest increase overlap with those in which they rose most rapidly with the rest of the world, implying that the agreement was trade-creating. By contrast, Romalis (2002) uses more disaggregated data series, over a longer time period, and finds that NAFTA produced substantial trade diversion.
This finding is consistent with the general increase in the degree of business cycle comovement in the G-7 countries in recent years (see Chapter VIII).
In most cases, the increases in correlations are statistically significant. Cuevas, Messmacher, and Werner (2002) also study the impact of NAFTA on the degree of business cycle synchronization in the region.
The model extends the two-country, free trade, complete market model by Backus, Kehoe, Kydland (1994) by having three countries, trading frictions, and allowing for international financial autarky. For details, see Kose and Yi (2003).
Mexico had joined the General Agreement on Tariffs and Trade (GATT) in 1986 and began reforms to liberalize its trade regime. A comprehensive privatization and deregulation program was also undertaken during the period 1988–1994.
Chapter X contains a more detailed discussion of recent U.S. free trade agreements.