| This research presents empirical analyses of U.S. bilateral trade flows with Canada, Japan, and Mexico, and assesses the impact of trade liberalization on trade flows along with the possibility of U.S. trade creation and diversion. The empirical analyses use quarterly data from January 1980 through December 2000, and measure U.S. bilateral trade flows with its three major trade partners (Canada, Japan, Mexico) utilizing a standard trade model and a gravity model. Based on the selection of exchange rates and prices, the time periods, and econometric techniques, various conclusions on bilateral trade flows have been drawn. With this in mind, both the vector autoregressive and vector error correction methodologies were used to estimate the possible effects of the North American Free Trade Agreement on U.S. trade patterns and trade creation and diversion. Based on the estimations, NAFTA over its first six years seems to have had a rather permanent, sustained effect on U.S. trade with Mexico. A statistically weak but intriguing effect was found in U.S. trade with Canada. For U.S. trade with Japan, NAFTA had no significant effect. The expansion of U.S. trade, due to NAFTA, was found to be trade creating and but not diverting. Although trade diversion is a possibility, it is unlikely to be a large problem. |
