The U.S.‐Canadian trade and exchange rate uncertainty: Asymmetric evidence from commodity trade

Abstract

AbstractAlthough the main goal of the original NAFTA treaty was to promote trade among the U.S., Canada, and Mexico, exchange rate uncertainty among the members is still a factor affecting trade. A previous study that assessed asymmetric effects of the real peso‐dollar volatility on trade flows between Mexico and the U.S. used the nonlinear ARDL approach and found that increased (decreased) volatility hurts (boosts) exports of nearly 50% of the industries that trade between the two countries. In this paper, we carry out the same analysis using trade data from 34 (24) large U.S. exporting (importing) industries to (from) Canada. We find that nearly 38% of the industries are affected by the U.S. dollar‐Canadian dollar volatility. However, the majority of the affected industries export more when exchange rate volatility increases or decreases. It appears that traders are more risk tolerant in the case of U.S.‐Canada trade but risk averse in the case of U.S.‐Mexico.