Exchange Rate Uncertainty and Trade between U.S. and Canada: Is There Evidence of Third-Country Effect?

Abstract

In a recent article, we assessed the impact of exchange rate uncertainty on the trade flows of 152 industries that trade between the United States and Canada. We found that, in the short run, trade flows of almost two-thirds of the industries were affected by exchange rate uncertainty. However, in the long run, less than one-third of the trade flows were affected. Almost all industries that were affected by exchange rate uncertainty were found to be small, except for road motor vehicles—which make up to 20% of both imports and exports. Exports and imports of this largest industry were adversely affected by exchange rate uncertainty. We wonder how the results will change if we account for the “third-country effect,” especially the fluctuation of the U.S. dollar against the currency of the third member of NAFTA, Mexico. We find that, again, in the short run almost two-thirds of the industries are affected by exchange rate uncertainty. However, in the long run, only one-third of the trade flows are affected. The third-country effect seems to be present in the same number of industries, in the short run as well as in the long run.