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Bilateral Trade Relationship Between The United States And Canada: Implications Of The Free Trade Agreement

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  • WON W. KOO
  • IHN HO UHM
  • JOEL T. GOLZ

Abstract

This study's primary objective is to evaluate empirically the economic effects of the U.S.‐Canada Free Trade Agreement (FTA). The paper emphasizes bilateral trade flows of agricultural and industrial products between the United States and Canada, given that the FTA removes tariff and non‐tariff barriers. It evaluates the FTA's impact on the two countries' trade with third countries. The paper specifies a traditional log‐linear trade model consisting of import demand and export supply equations for both agricultural and industrial products. It uses quarterly time‐series U.S. and Canadian trade data for 1972–1985. The study uses the two‐stage least‐squares estimator to estimate the models. The models had R coefficients ranging from 0.78 to 0.99, indicating that the models' explanatory variables explain most causes of variations in the dependent variable. This study reveals that U.S. imports of agricultural and industrial products from Canada were more sensitive than were Canadian imports not only to import and domestic prices but also to world prices. This is because Canadian consumers have less domestic substitutes than do their U.S. counterparts. Also, Canada has a smaller internal market than does the United States. The study estimates that U.S. imports from Canada will increase $2.8 billion while Canadian imports from the United States will increase $1.2 billion. The impact on the two countries' trade with third‐party countries will be insignificant.

Suggested Citation

  • Won W. Koo & Ihn Ho Uhm & Joel T. Golz, 1991. "Bilateral Trade Relationship Between The United States And Canada: Implications Of The Free Trade Agreement," Contemporary Economic Policy, Western Economic Association International, vol. 9(4), pages 56-69, October.
    • Handle: RePEc:bla:coecpo:v:9:y:1991:i:4:p:56-69
    DOI: 10.1111/j.1465-7287.1991.tb00350.x
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    References listed on IDEAS

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    1. Warner, Dennis & Kreinin, Mordechai E, 1983. "Determinants of International Trade Flows," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 96-104, February.
    2. Murray, Tracy & Ginman, Peter J, 1976. "An Empirical Examination of the Traditional Aggregate Import Demand Model," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 75-80, February.
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    4. Morris Goldstein & Mohsin S. Khan, 2017. "The Supply and Demand for Exports: A Simultaneous Approach," World Scientific Book Chapters, in: TRADE CURRENCIES AND FINANCE, chapter 2, pages 83-104, World Scientific Publishing Co. Pte. Ltd..
    5. Elie Appelbaum & Ulrich R. Kohli, 1979. "Canada-United States Trade: Tests for the Small-Open-Economy Hypothesis," Canadian Journal of Economics, Canadian Economics Association, vol. 12(1), pages 1-14, February.
    6. Stokes, Ernie, 1989. "Macroeconomic impact of the Canada-U.S. Free Trade Agreement," Journal of Policy Modeling, Elsevier, vol. 11(2), pages 225-245.
    7. Maury E. Bredahl & William H. Meyers & Keith J. Collins, 1979. "The Elasticity of Foreign Demand for U.S. Agricultural Products: The Importance of the Price Transmission Elasticity," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 61(1), pages 58-63.
    8. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-125, May.
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    Cited by:

    1. David Karemera & Won W. Koo, 1994. "Trade Creation And Diversion Effects Of The U.S.‐Canadian Free Trade Agreement," Contemporary Economic Policy, Western Economic Association International, vol. 12(1), pages 12-23, January.
    2. Michelle Casario, 1996. "North American Free Trade Agreement Bilateral Trade Effects," Contemporary Economic Policy, Western Economic Association International, vol. 14(1), pages 36-47, January.
    3. Koo, Won W. & Karemera, David, 1992. "Trade Creation and Diversion Effects of the U.S.-Canadian Free Trade Agreement," Agricultural Economics Reports 23345, North Dakota State University, Department of Agribusiness and Applied Economics.

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