An Index of Canada - U.S. Economic Integration

Abstract

It is widely believed that the Canadian and U.S. economies have become more integrated following the implementation of the Canada-U.S. Free Trade Agreement and the North American Free Trade Agreement. In this study, we develop an integration index that combines a number of different measures of cross-border commercial activity into one indicator. We find that the two economies did indeed become much more integrated over the past decade and a half with the integration index more than tripling compared to Canadian nominal GDP which doubled over the same period. However, we also find that even though the level of the index has continued to increase since 2000, it has not kept pace with growth in Canadian GDP and thus, by this measure, the level of Canada-U.S. integration has declined. The reasons for this are likely a combination of the high-tech bust in 2000, strong Canadian domestic economic performance, a weakening U.S. dollar and strengthening linkages with countries other than the U.S.