Electronic Commerce, Exchange Rate Volatility and Changes in Trade Patterns: Canada Under NAFTA

Abstract

The formation of the North American Free Trade Agreement has heightened interest in the issues surrounding regional and international trade flows. Papers by Helliwell (1996) and McCallum (1995) estimated that interprovincial trade is twenty times as large as trade between provinces and states of equal size and distance. These papers have stressed that interregional trade dominates international movements even when adjustments are made for distance and trade barriers. At the same time, the growth of the new economy through the growth of business-to-business and business-to-consumer electronic commerce may suggest changes to this pattern of activity. As well, altered volatility of the exchange rate may have had an impact on the pattern of trade flows.This paper examines these issues by using data from the Canadian Provincial Economic Accounts for the period 1981 to 2003 to estimate an almost ideal demand system in an attempt to explain the demand for goods produced in the home province, other Canadian provinces, and other countries. The results suggest that NAFTA and e-commerce have tended to reduce the size of the border, while exchange rate volatility has had no significant impact.