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The economics of revoking NAFTA

Raphael Auer, Barthélémy Bonadio and Andrei Levchenko

No 739, BIS Working Papers from Bank for International Settlements

Abstract: In a world economy interconnected by global value chains (GVCs), domestic productivity depends on the availability of imported inputs and the vast majority of workers stands to lose from protectionism. To exemplify this, we provide a quantitative assessment of the aggregate and distributional effects of one hypothetical protectionist measure - the case of revoking the North American Free Trade Agreement (NAFTA). Using a multi-country, multi-sector, quantitative model of global production, we show that a full revocation extending to both tariffs and non-tariff trade barriers would result in a real annual GDP loss of US$ 37 billion in Canada, US$ 22 billion in Mexico, and US$ 40 billion in the USA. In contrast, annual combined losses would amount to less than US$ 5 billion if only tariff rates were to be increased. For both counterfactuals, the distributional impacts across sectors would be an order of magnitude larger than the aggregate effects. Combining these results with information on the geographic distribution of sectoral employment, we show that almost all regions in North America would record reductions in their average real wage.

Keywords: NAFTA; quantitative trade models; distributional effects; protectionism (search for similar items in EconPapers)
JEL-codes: F11 F13 F16 F62 J62 R13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-lab
Date: 2018-08
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Handle: RePEc:bis:biswps:739