The macroeconomic impact of NAFTA termination

Abstract

US President Trump has threatened to leave the North American Free Trade Agreement. How much would each member country gain or lose if this threat were carried out? Would trade imbalances within the region diminish? What would the transition to new production and consumption patterns look like? I provide quantitative answers to these questions using a dynamic general equilibrium model with a multi‐sector input–output production structure, heterogeneous firms that make forward‐looking export participation decisions, and adjustment frictions in trade and factor markets. Regional trade flows would fall dramatically, and while the US trade deficit with Canada would decline, the deficit with Mexico would grow. Welfare would fall by 0.04%, 0.12%, and 0.2% in the United States, Canada, and Mexico, respectively, and transition dynamics would significantly affect welfare in both the short run and the long run.

Estimating the trade elasticity over time

“…and Wang (2011); search frictions as in Drozd and Nosal (2012); di¤erence between the adjustments in extensive and intensive margins of trade as in Arkolakis, Eaton, and Kortum (2012); …xed versus variable trade costs or investments in reducing future export costs as in Alessandria, Choi, and Ruhl (2014); the speed of adjustment of capital in the distribution sector as in Crucini and Davis (2016); adjustment of capacity in bilateral network links as in Anderson and Yotov (2017); plant-level irreversibility in the structure of inputs used in production as in Ramanarayanan 2017; …xed and sunk costs of export participation as in Fitzgerald and Haller (2018); or adjustment frictions in factor markets as in Steinberg (2018).…”

The Dynamic Effects of Multilateral Trade Policy With Export Churning

“…The work closest to this article is by Steinberg (2022Steinberg ( , 2020. Steinberg (2022) develops a partial equilibrium model of exporting where new exporters to a destination grow over time by attracting new customers, similar to Arkolakis (2010).…”

Trade and the propagation of global shocks

“…On a related matter but in a different context—with a closed economy—Atalay (2017) estimated a similar production function with intermediate goods instead of energy, and also found elasticities of substitution close to zero, between 0.02 and 0.05. Using these results in his calibration strategy, Steinberg (2019, 2020) used a Leontieff production function very similar to ours with capital/labor inputs and intermediate inputs.…”

“…This paper is also linked to the literature of applied general equilibrium models of trade, surveyed by Kehoe et al (2017), that is widely used to evaluate the effects of trade reforms. Recent examples are Steinberg (2019), that studies the impact of trade disruptions emerging from Brexit, and Steinberg (2020), which focuses on the consequences of the end of NAFTA. In these models specialization is due to sectorial productivity differences, while in ours it is caused by factor endowment differences.…”