Trade (Dis)integration: The Sudden Death of NAFTA
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Trade (Dis)integration: The Sudden Death of NAFTA Dimitrios Bakas 1,2
& Karen
Jackson 3 & Georgios Magkonis 4
# The Author(s) 2019
Abstract This paper uses a structural 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. Keywords NAFTA . Trade integration . Panel VAR JEL Classification F14 . F15 . C33
1 Introduction 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. This environment has led to questions about the effects of a ‘break-up’ shock. There are a number of notable examples, in the regionalism Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11079-01909567-1) contains supplementary material, which is available to authorized users.
* Dimitrios Bakas [email protected]
1
Nottingham Business School, Nottingham Trent University, Nottingham, UK
2
Rimini Centre for Economic Analysis (RCEA), Waterloo, Canada
3
Westminster Business School, University of Westminster, London, UK
4
Portsmouth Business School, University of Portsmouth, Portsmouth, UK
Bakas D. et al.
literature, on the collapse of large-scale and/or long-standing integration schemes: the break-up of empires (Head et al. 2010), the soviet block (Fidrmuc and Fidrmuc 2003) and more recently, Brexit (Dhingra et al. 2017). Head et al. (2010) explore the trade dynamics of former colonies with their coloniser, within a gravity framework. They find that hostile seperations, conceptually not too far removed from to a break-up shock, have a stronger immediate negative impact on trade compared to a mutually accepted split. While methodologically similar, Fidrmuc and Fidrmuc (2003) examine the trade effects of the collapse of the Soviet block and find evidence of a strong decrease of home bias in trade relations; where Suesse (2018) utilise a game-theoretical model and argue that even the expectation of the Soviet block collapse was sufficient to create a strong negative effect on trade that impacted on output. However, Thom and Walsh (2002) find no evidence of a negative impact of the break-up of the union, measured by the introduction of an exchange rate between the UK and Ireland in 1979. Finally, the recent evidence of Dhingra et al. (2017) on the welfare effects of Brexit, using a computational general equilibrium model, shows that the UK welfare losses from higher tra
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