Estimates of the trade and welfare effects of NAFTA

Lorenzo Caliendo, Fernando Parro

Research output: Contribution to journalArticle

194 Scopus citations

Abstract

We build into a Ricardian model sectoral linkages, trade in intermediate goods, and sectoral heterogeneity in production to quantify the trade and welfare effects from tariff 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 tariff reductions. We find that Mexico's welfare increases by 1.31%, U.S.'s welfare increases by 0.08%, and Canada's welfare declines by 0.06%. We find that intra-bloc trade increases by 118% for Mexico, 11% for Canada, and 41% for the U.S. We show that welfare effects from tariff 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 quantification of the welfare gains from tariffs reductions.

Original languageEnglish (US)
Article numberrdu035
Pages (from-to)1-44
Number of pages44
JournalReview of Economic Studies
Volume82
Issue number1
DOIs
StatePublished - Nov 1 2012

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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