For release: March 4, 2003

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NAFTA's Overall Effect on North America Has Been Positive: St. Louis Fed Analysis

ST. LOUIS — The North American Free Trade Agreement (NAFTA) didn't produce the large "sucking sound" of jobs and factories that some pundits predicted. In fact, between 1993 and 1997, trade exports overall among the United States, Canada and Mexico increased, based on an analysis by Howard J. Wall, an economist with the Federal Reserve Bank of St. Louis.

Wall estimated the effects of NAFTA on the geographic pattern of North American trade for the March/April issue of Review (PDF - 124K), the Reserve Bank's bimonthly journal of economic and business topics.

Traditional economic models suggest that the creation of preferential trading areas (PTAs) will increase trade among members of that area, because the tariff between them has been eliminated, while decreasing trade between a member and a non-member. "The net effect, however, depends on complex factors, such as the size of the area and the industries involved, among others," said Wall. In particular, he argues, geographic factors are very important and, as a result, there can be substantial differences across regions in the effects that NAFTA has had.

Wall said PTAs affect geographic trade patterns because they can induce firms and their suppliers to move closer to a region more conducive to doing business. For example, a firm located in Massachusetts may be doing business with Canada, but decides that NAFTA has made prospective customers in Mexico even more appealing to its bottom line. If the firm relocates to be closer to Mexico, trade patterns will change because goods that were exported from Massachusetts to Canada, Mexico and the rest of the world would instead be exported from, say, Arizona.

Using available data and developing his own empirical model, Wall found the overall effects of NAFTA on the volume and pattern of North American trade has been significant. Among other findings:

• Because of NAFTA, 29 percent more merchandise flowed from Canada to the United States, and 14 percent more goods flowed from the United States to Canada. "About one-half of the increase in Canadian exports to the United States between 1993 and 1997 is attributed to NAFTA," said Wall.
  
  
• While the overall effect on trade between Canada and the United States was positive, Wall noted that there were large differences across U.S. regions. Exceptions were the Rocky Mountain region, with an estimated 6 percent fall in exports to Canada (with no change in imports), and the Far West, with an even smaller drop in exports to Canada. The results also indicate that the Great Lakes and South Central regions saw the largest exports to Canada, while the largest imports from Canada were for the Great Lakes and Southeast regions.



• The flow of merchandise from Canada to Mexico increased by 12 percent, and the flow from Mexico to Canada by 48 percent. In this case, NAFTA was responsible for about one-quarter of the increase in Canadian exports to Mexico during the period, and roughly 60 percent of the increase in Canadian imports from Mexico.
  

Wall found that the volume and pattern of North American trade with Europe and Asia also changed in the wake of NAFTA. Specifically, NAFTA led to large decreases in Canada's exports to Europe and Asia, a decrease in Mexican imports from Europe, and a large increase in Mexican trade with Asia.

Subscriptions to Review are available by calling (314) 444-8809. The publication is also available on the St. Louis Fed's Web site.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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