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Journal of Economic Integration 1998 September;13(3) :400-425.
An Industrial Analysis of Trade Creation and Diversion Effects of NAFTA

David Karemera Kalu Ojah 

South Carolina State University
Saint Louis University
Copyright ©1998 Journal of Economic Integration
Welfare effects of economic integration are often studied with aggregate data, and as such provide limited insights about the effects of trade pacts to individual economic agents in the free trade area. In this study a three-digit disaggregated commodity/industry data grouped under the Standard International Trade Classification is used to empirically assess the economic benefits of the North American Free Trade Agreement (NAFTA). Import demand elasticities from a dynamic demand model were used to estimate both trade creation and trade diversion effects of removing all tariff barriers from among NAFTA countries - US, Canada and Mexico. Results show that US imports of crude oil and petroleum products from Canada and most US imports from Mexico are more sensitive to domestic prices than to bilateral import prices. Further, results indicate that US will benefit the most from the initial trade effects of NAFTA, while Mexico will benefit the least. Specifically, US exporters of automatic data processing equipment, and pulp and waste paper products will benefit the most from increased trade with NAFTA countries. Mexican exporters of crude oil, and vegetables and fresh produce; and Canadian exporters of paper and paperboard products will be the most beneficiaries of NAFTA among exporters in these respective countries. (JEL Classification: F1, F2)
1. Klein, Lawrence R. and Dominick Salvatore [1995], "Welfare Effects of the North American Free Trade Agreement," Journal of Policy Modeling 17, No. 2; pp. 163-176.
2. Koo, Won W., Ihn H. Uhm, and Joel Golz [1991], "Bilateral Trade Relationship Between the United States and Canada: Implications of Free Trade Agreement," Contemporary Policy Issues, October; pp. 56-69.
3. Doroodian, K., Roy G. Boyd, and Matloob Piracha [1994], "A CGE Analysis of the Impact of Trade Liberalization between the US and Mexico," Atlantic Economic Journal 22, No. 4; pp. 43-54.
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