Trade Creation and Trade Diversion Under NAFTA

Aggregate and more micro data on trade between the U.S., Canada, and Mexico are used to attempt to assess the early effects of Mexican entry into NAFTA. Although the fraction of Mexican trade with the U.S. and Canada has risen sharply, a number of factors have contributed to this result. Mexican reduction of tariffs and quantitative restrictions and the Mexican alteration of exchange rate policy at the end of l994 were both important. Based on early returns, the impact of NAFTA over its first three years does not appear to have been large relative to the effects of these other events.