Estimates of the Trade and Welfare Effects of NAFTA

Lorenzo Caliendo, Fernando Parro
2011 Social Science Research Network  
We build into a Ricardian model sectoral linkages, trade in intermediate goods, and sectoral heterogeneity in production to quantify the trade and welfare e¤ects from tari¤ changes. We also propose a new method to estimate sectoral trade elasticities consistent with any trade model that delivers a multiplicative gravity equation. We apply our model and use our estimated elasticities to identify the impact of NAFTA's tari¤ reductions. We ...nd that Mexico's welfare increases by 1.31%, U.S.'s
more » ... y 1.31%, U.S.'s welfare increases by 0.08%, and Canada's welfare declines by 0.06%. We ...nd that intra-bloc trade increases by 118% for Mexico, 11% for Canada and 41% for the U.S. We show that welfare e¤ects from tari¤ reductions are reduced when the structure of production does not take into account intermediate goods or input-output linkages. Our results highlight the importance of sectoral heterogeneity, intermediate goods and sectoral linkages for the quanti...cation of the welfare gains from tari¤s reductions. JEL classifcation: F10, F11, F13, F14, F17. , four anonymous referees and many seminar participants for useful conversations and comments. We thank Zina Saijid for excellent research assistance. Correspondence: Caliendo, lorenzo.caliendo@yale.edu, Parro, fernando.j.parro@frb.gov. The views in this paper are solely the responsibility of the authors and should not be interpreted as re ‡ecting the views of the Board of Governors. 1 Non-tradable goods (services) accounted for more than 80% of the total ...nal goods demanded in the year 1993 for the U.S. 2 An exception is the work of Arkolakis, Costinot, and Rodriguez-Clare (2012) where they evaluate the welfare gains from trade openness implied by a variety of international trade models including multi-sector models. 3 In Section 2 we document that sectoral trade in intermediate goods is particularly important for NAFTA members. 4 These models have been criticized for their complexity, lack of transparency and analytical foundations, and the arbitrary choice of the value of key parameters (Baldwin and Venables 1995 describe them as "black boxes"). 7 The number of regional trade agreements (RTAs) signed in the world has increased dramatically in the last 20 years. In 1990 there were close to 25 RTAs signed, by 2010 more than 180. By the year 2002 more than one third of world trade was covered by RTAs. 8 Jacob Viner's (1950) work was among the ...rst to study the welfare analysis of trade policy. Bhagwati, Krishna, and Panagariya (1999) put together many of the major theoretical contributions since Viner.
doi:10.2139/ssrn.1916287 fatcat:r44yxp5jxjaabkm2h5vbjgia4y