Trade (Dis)Integration: The Sudden Death of NAFTA

Dimitrios Bakas,Georgios Magkonis,Karen Jackson

doi:10.2139/ssrn.3178694

Dimitrios Bakas, Georgios Magkonis + Show 1 more

Open Access

https://doi.org/10.2139/ssrn.3178694

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Abstract

This paper uses a PVAR model to study the macroeconomic effects of trade disintegration among NAFTA members. The results reveal substantial asymmetric responses, showing that the US is the most affected economy from a sudden negative trade integration shock. Moreover, Canada and the US are found to be relatively more interconnected with each other compared to the Mexican economy. Our findings question the US decision to push for the renegotiation of the NAFTA agreement.

Highlights

Regionalism has entered a new phase, with mega-regional trade negotiations suddenly collapsing and unexpected withdrawals from long-standing integration schemes
Deep divisions and turmoil over trade issues have been epitomised in the uncertain future of the North American Free Trade Area (NAFTA), where President Trump recently called for a renegotiation of the deal
In comparison to the current literature, we explore a trade disintegration shock within a structural panel VAR (PVAR) framework; thereby allowing us to examine the effect of the shock on various macroeconomic indicators for the three members of NAFTA (Canada, Mexico and the US)

Summary

Introduction

Regionalism has entered a new phase, with mega-regional trade negotiations suddenly collapsing and unexpected withdrawals from long-standing integration schemes. In comparison to the current literature, we explore a trade disintegration shock within a structural panel VAR (PVAR) framework; thereby allowing us to examine the effect of the shock on various macroeconomic indicators for the three members of NAFTA (Canada, Mexico and the US). PVARs can capture greater variety of potential interlinkages than GVARs (Pesaran et al 2004), which impose a particular structure on the interdependencies These are significant properties that allows us to assess and test the potential linkages and spillovers among the examined economies. In conducting this analysis, we provide a timely contribution to the literature considering the potential impact of a sudden collapse of trade between NAFTA members.

Empirical Model and Data

Main Results

Robustness

Conclusions