Introduction Free trade is often viewed as beneficial to countries that allow it. The North American Free Trade Agreement (NAFTA) is the free trade agreement between the United States, Canada, and Mexico. The purpose of NAFTA was to eliminate trade barriers between the three North American countries. I will discuss the effects of NAFTA by looking at the GDP output per capital in the U.S. and Canada, investment activity in each country, and car and apparel production in the U.S. to show that the Rybcynski theory did not hold with the U.S. I also look at the H-O model and use NAFTA to test the validity of the model. I will start by briefly discussing the history of NAFTA, and the Heckscher–Ohlin model (H-O) and Rybsynski theories. I will then show the data that I was able to obtain, from the Bureau of Labor Statistics (BLS), Penn World Tables, The World Bank, Statistics Canada, and Organization for Economic Co-operation and Development (OECD). Once I briefly discuss the data I will show the series of regressions that I ran to show that the theory does not hold up in areas. I will finally finish with some concluding thoughts.
NAFTA can be traced all the way back to the 1970’s when Ronald Regan, then a candidate for the president of the United States expressed desire to have more free trade between the U.S. and other countries. The first free trade agreement between the U.S. and Canada was implemented in 1989 with the Canada-U.S. free trade agreement. This was superseded five years later in 1994 with the implementation of the new free trade agreement that includes Mexico. NAFTA was not fully phased in right away rather it was to be phased in over a fifteen year period. NAFTA was finally fully implemented recently in 2008 which removed agricultural trade restrictions. NAFTA was meant to try and balance out the economies of each country as the congressional budget office projected in 1993 that Mexico’s economy would grow between six and twelve percent by 2008 when NAFTA would fully be implemented compared to the same projections having the U.S. economy growing by only one forth of one percent during that same time period. NAFTA was also supposed to reduce the trade balance between the U.S. and Mexico. In 1993, Mexico only held ten percent of all U.S. imports and exports compared to 83.3 percent of Mexico’s exports and 71.2 percent of their imports were in the U.S. Canada was not expected to gain or lose much from NAFTA as they had already had their trade agreement with the U.S. implemented five years earlier. In the years since NAFTA was signed into law, trade policy in the U.S. has become a much more sensitive topic. Free trade was seen as a goal of the United States sin the end of World War II. Most economists at the time agreed that NAFTA would not impact the U.S. very much but they believed that Mexico would be the biggest benefactor of the trade agreement. There is some evidence like the increase in labor force participation in Mexico and investment going up.
The trade model The trade model that I use is the H-O model. The H-O model tries to explain how countries should go about their operations as goods are not equally distributed throughout the world. Countries with an abundance of goods should play up to their strength and export more of the goods that they have an abundance of and trade with other countries that have an abundance of a specific good that they do not have as much of. The H-O model goes beyond just scarce resources and factors in production and labor as well. For example, a country with very cheap labor will likely produce more labor intensive goods while another country with a lot of capital will produce more capital intensive goods. The H-O model uses a 2x2x2 model which assumes that the only difference between the two countries trading is the amount of labor and capital in each country. The model…