BILATERAL TRADE RELATIONSHIP BETWEEN THE UNITED STATES AND CANADA: IMPLICATIONS OF THE FREE TRADE AGREEMENT

Won W. Koo, Ihn Ho Uhm and Joel T. Golz

Contemporary Economic Policy, 1991, vol. 9, issue 4, 56-69

Abstract: This study's primary objective is to evaluate empirically the economic effects of the U.S.‐Canada Free Trade Agreement (FTA). The paper emphasizes bilateral trade flows of agricultural and industrial products between the United States and Canada, given that the FTA removes tariff and non‐tariff barriers. It evaluates the FTA's impact on the two countries' trade with third countries. The paper specifies a traditional log‐linear trade model consisting of import demand and export supply equations for both agricultural and industrial products. It uses quarterly time‐series U.S. and Canadian trade data for 1972–1985. The study uses the two‐stage least‐squares estimator to estimate the models. The models had R coefficients ranging from 0.78 to 0.99, indicating that the models' explanatory variables explain most causes of variations in the dependent variable. This study reveals that U.S. imports of agricultural and industrial products from Canada were more sensitive than were Canadian imports not only to import and domestic prices but also to world prices. This is because Canadian consumers have less domestic substitutes than do their U.S. counterparts. Also, Canada has a smaller internal market than does the United States. The study estimates that U.S. imports from Canada will increase $2.8 billion while Canadian imports from the United States will increase $1.2 billion. The impact on the two countries' trade with third‐party countries will be insignificant.

Date: 1991
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