Professor Tibor Besedeš and his co-authors Tristan Kohl (University of Groningen) and James Lake (Southern Methodist University) examine in their latest project how international trade between members of a trade agreement grows after the agreement enters into force. Their forthcoming paper in the Journal of International Economics, “Phase Out Tariffs, Phase In Trade?,” examines how the North American Free Trade Agreement (NAFTA) increased U.S. imports from Mexico and Canada.
A long-standing result in the international trade literature is that trade between members of an international trade agreement grows slowly, usually only doubling on average after ten years. The reason why it takes ten years for the complete effects of trade agreements to materialize are not well understood, though two explanations are thought to be behind it: (1) tariffs are usually reduced over a number of years rather than immediately when the agreement is signed and (2) prices are slow to change in response to reduced tariffs.
Professor Besedeš and his co-authors use data on product-level imports of the U.S. to shed light on what drove the gradual increase in U.S. imports from Canada and Mexico after NAFTA was enacted. U.S. imports from Canada and Mexico increased gradually after NAFTA started, and leveled off in the early-mid 2000s.
The authors were surprised to find that the bulk of the delayed trade growth came from products which had their tariff immediately removed after NAFTA was enacted. And trade growth for products whose tariffs were phased out over longer periods of time was approximately the same as for products whose tariffs were phased out immediately. Tariff reductions were also immediately reflected in prices paid to Mexican and Canadian exporters, which shows that slow changes in prices are not a possible explanation for the slow trade growth as previously thought.
The explanation Professor Besedeš and his co-authors offer argues that the delayed and gradual growth of U.S. imports from NAFTA countries had to do with a gradual spatial expansion into the U.S. of those products. Using spatially explicit U.S. import data over a 27-year period, the authors find that Canadian and Mexican exporters gradually increased the number of regional U.S. markets to which they exported their products. Canadian and Mexican exporters appeared to expand into U.S. markets sequentially, expanding into new regions only after establishing themselves in the previously entered regions.
These results offer a new perspective on how trade evolves between countries, showing how important spatial features of new markets are in export and import growth among countries.