Not all Free Trade Agreements have the same Advantages

Using NAFTA as an illustrating example, I show that heterogeneity in the effects of free trade agreements (FTAs) both within and across agreements is not very well understood. Not only has NAFTA reduced trade frictions significantly more than other FTAs, but each NAFTA member country has enjoyed larger gains in access to the other two markets in some sectors over others. Most notably, I observe a crucial role for reductions in unobservable non-tariff barriers in determining these patterns. I then show these overlooked sources of heterogeneity have important first order implications for both prices and welfare in general equilibrium. Using tariffs to project welfare for example not only greatly underestimates the overall welfare gains for all three countries - Mexico's in particular - but also overstates the benefits for U.S. producers. I also use a novel measure of the gains from specialization to show that these first order differences can in turn be amplified into even larger differences in more intricate welfare calculations.