Regional Economic Integration and Foreign Direct Investment: The North American Experience

This paper examines the relationship between regional economic integration and FDI in North America, where two RIAs have been established over the past decade: a bilateral free trade agreement between Canada and the U.S. (CUSTA) and a trilateral agreement (NAFTA) incorporating Mexico as well. The North American experiences suggest substantially more modest impacts of regional trade agreements on intra-regional trade creation and extra-regional FDI stimulation than is associated with the earlier stages of EU integration. At the same time, there is support for the European findings that trade and investment impacts will differ across countries within the integrating region. These results serve as a caution against generalizing from earlier experience when forecasting the impacts of expanded economic integration within Europe or the Americas. The consequences of regional economic integration are sufficiently conditioned by inherited policies, as well as by existing macroeconomic conditions, to make extrapolation from historical experience very risky and potentially misleading.