2 - A CGE Decomposition Approach to Identifying the Effects 27 of Trade Reform: NAFTA and the U.S. Economy Between 1992 and 1998

Summary

Trade policies often get a bad rap. When it is difficult to pinpoint the causes of poor economic outcomes, it is convenient to attribute the problems to trade policies. In a much quoted article, Kehoe (2005) criticizes Computable General Equilibrium (CGE) modellers for underestimating the trade-stimulating effects of the North American Free Trade Agreement (NAFTA). His evidence is that in the ten years following the signing of NAFTA, trade volumes for NAFTA countries grew more quickly than was shown ex ante in the CGE results. However, properly interpreted, the CGE results were not about how fast trade would grow in these ten years. Rather, they were about how NAFTA would affect growth in trade. Put another way, the CGE modellers were making projections of how much trade growth should be attributed to NAFTA. In this chapter, we address the attribution issue. Using a detailed CGE model, we decompose movements in U.S. macro and industry variables from 1992 to 1998 into contributions of NAFTA factors and other factors.

INTRODUCTION

The aim of this chapter is to identify as closely as possible the effects on the U.S. economy of the North American Free Trade Agreement (NAFTA) in the early years of its implementation. Towards this objective, we use a Computable General Equilibrium (CGE) model to provide a decomposition of U.S. growth in macro variables and industry outputs between 1992 and 1998.

To see what is involved, we suggest that readers look immediately at Tables 2.1 and 2.2. The layout of these tables can be understood by examining the first row of Table 2.1. It shows that between 1992 and 1998 real gross domestic product (GDP) for the United States grew by 24.40 per cent (row 1, column 1). Of this, 0.19 per cent (row 1, column 2) is attributable to what we refer to as NAFTA factors. Within this 0.19 per cent, columns 3 to 6 in row 1 identify the contributions to the GDP of changes specific to Canada and Mexico in U.S. tariffs and other aspects of U.S. trading relations. Column 7 of row 1 shows that growth of 24.20 per cent in the United States GDP was attributable to factors such as technical change (column 8), growth in aggregate employment (column 9), and developments in international trade not specific to Canada and Mexico (column 10).