International Trade and Economic Growth: Causality Relations Within NAFTA

This research explores empirically the causal link between international trade and economic growth within a free trade area. In particular, we use data from the North American Free Trade Agreement (NAFTA) to estimate the causal relationship between economic growth and trade flows, but isolating trade within the bloc from trade with the rest of the world. The period considered is 1960-2014. Our analysis follows three strategies: we investigate Granger causality on a one-country and two-countries basis and then we include the three countries in the same framework, following the identification strategy proposed by Arellano and Bover (1995). We find that both exports cause growth and growth drives exports. This goes in the same direction as that one followed in the literature. However, under the third strategy, we do not find conclusive evidence that supports the idea that trade within a trade bloc is more important for growth than trade with the rest of the world. Moreover, the long run effect is more significant for growth during the whole period than when NAFTA has been active. Regarding the impact of growth on exports, we find that production is important for enhancing exports within NAFTA in both short- and long-run but when the whole period is considered.