I have argued above that one might expect the hazard of exporting increasing–returns–to–
scale manufacturing products to have the lowest hazard when destined to NAFTA markets given advantages offered by access to larger markets. The above results that IRS manufac-turing products face the highest hazard are potentially indicative of the opposite holding.
However, the appropriate examination of such a hypothesis entails comparing the hazard of exporting to NAFTA members, to which I now turn. Rather than introducing a number of interacted variable to examine whether the effect of NAFTA is different for different returns–
to–scale products, I estimate the hazard of exporting for each of the three returns–to–scale types of products, focusing on the NAFTA–in–effect coefficients, and compare the fitted hazards for each country. In order to conserve space I only present coefficients relevant to NAFTA.4 Table 4 collects the results.
Exports of all three countries in all three returns–to–scale types face a lower hazard.
4Full results are available on request.
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Canada
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.249*** -0.264*** -0.167***
(0.064) (0.083) (0.055)
NAFTA in effect 0.068 0.157* 0.031
(0.067) (0.085) (0.059)
Mexico
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.589*** -0.499*** -0.611***
(0.057) (0.078) (0.056)
NAFTA in effect 0.187*** 0.087 0.061
(0.043) (0.060) (0.040)
United States
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.984*** -0.917*** -0.860***
(0.117) (0.125) (0.066)
NAFTA in effect 0.398*** 0.416*** 0.213***
(0.123) (0.126) (0.068)
Robust standard errors clustered by relationships in parentheses with *, **, *** denoting signifi-cance at 10%, 5%, and 1%; year in spell and spell number fixed effects included.
Table 4: Effect of NAFTA across Returns to Scale
In the case of Canada, the onset of NAFTA has no significant effect on the hazard of ex-porting increasing–returns–to–scale manufacturing and constant–returns–to–scale products, and only marginally increases the hazard of exporting increasing–returns–to–scale natural resource products. In the case of Mexico, the net effect of NAFTA which was to increase the hazard of exporting to NAFTA members (see Table 2) seems to be driven by its ef-fect on increasing–returns–to–scale products facing a higher hazard. The other two types of products do not seem to be affected by the onset of NAFTA. In the case of the U.S., the onset of NAFTA increases the hazard of exporting all three types of products based on the returns–to–scale used in production.
Figure 6 shows the estimated effects of differences between the different types of returns to scale and their interaction with the implementation of NAFTA for exports to NAFTA
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0.1.2.3.4.5.6.7 IRS nat res, NAFTA in effect
canada irs natural resources IRS nat res, NAFTA in effect
mexico irs natural resources IRS nat res, NAFTA in effect
us irs natural resources
Figure 6: Estimated Hazard and the Effect of NAFTA and Returns to Scale Differences
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members. The top panels examine differences between constant–returns–to–scale and increasing–
returns–to–scale manufacturing goods, while the bottom panels focus on constant–returns–
to–scale and increasing–returns–to–scale natural resource products. Canadian exports of IRS manufacturing products face a lower hazard than exports of CRS products. The hazard of exporting both types of products increases with the onset of NAFTA, though the increase is small, preserving differences between them. Canadian exports of IRS natural resource products face a lower hazard in the absence of NAFTA than do exports of CRS products.
The onset of NAFTA makes the two much closer.
There are almost no differences between the hazard of IRS manufacturing and CRS prod-ucts for Mexican exports to NAFTA members in the absence of NAFTA. NAFTA increases both hazards, with the hazard of IRS manufacturing products increasing more. A similar conclusion can be drawn for IRS natural resource products when compared to CRS products, though differences brought on by NAFTA are smaller. Differences in the hazard of export-ing to NAFTA members of the three types of products are largest for the U.S. While IRS manufacturing products face a lower hazard than CRS products in the absence of NAFTA, the enactment of NAFTA increases the hazard of both largely eliminating any difference between the two. IRS natural resource exports of the U.S. face a lower hazard than exports of CRS products. While NAFTA increases both hazards, it increases the hazard of exporting IRS natural resource products by a much larger margin resulting in them having the higher hazard. Thus, only for Canada is there evidence of the expected effect of NAFTA, of IRS manufacturing products having the lowest hazard after the enactment of NAFTA.
Table 5 contains the time–dependent effects of NAFTA for each returns to scale type, shedding more light on the exact nature of the effect of NAFTA on the hazard of exporting.
For Canada, NAFTA has increased the hazard of exporting IRS manufacturing and CRS products only during its first three years, while the hazard of exporting IRS natural resource products was higher in the first three years as well as between 2003 and 2005. For Mexico,
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Canada
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.249*** -0.263*** -0.166***
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.589*** -0.499*** -0.612***
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.984*** -0.917*** -0.860***
Robust standard errors clustered by relationships in parentheses with *, **, *** denoting signifi-cance at 10%, 5%, and 1%; year in spell and spell number fixed effects included.
Table 5: Time–Dependent Effect of NAFTA across Returns to Scale 25
NAFTA has increased the hazard of exporting IRS manufacturing products consistently ever since it was enacted. It has increased the hazard of exporting IRS natural resource products only between 2000 and 2002, while its effect on CRS products is most varied. It has initially reduced it, and then increased it between 1997 and 2002, with no effect since 2003. NAFTA’s effect on the hazard of U.S. exports to NAFTA members is the most consistent one, having increased the hazard for every type of product in almost every year. Higher hazard of CRS products started in 2000, while the higher hazard of IRS natural resource products was in effect until 2003.
5 Conclusion
In this paper I investigated how the North American Free Trade Agreement has affected the members’ hazard of exporting and how differences in returns to scale in production manifest themselves in exports of three members: Canada, Mexico, and the United States. NAFTA itself has not had a beneficial effect effect on the hazard of exporting. Rather, the effect has been negative for the U.S. and Mexico, with the hazard of their exports to NAFTA members increasing with the enactment of NAFTA. However, the said increase was not large enough to fully offset the lowers hazard exports to NAFTA members enjoy due to the geography of the FTA and proximity of the members to each other. Canada, Mexico, and the U.S. enjoy a significantly lower hazard on exports to each other without the presence of NAFTA. Given the particular geography of NAFTA, the effect of common borders between the members, a well known positive force in international trade, is largely indistinguishable from the effect of NAFTA. The nature of the geography of NAFTA makes it difficult to broadly conclude that every free trade agreement increases the hazard of exports between the members, calling for an investigation of the effect of free trade agreements with less restrictive geographic characteristics.
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In terms of differences across the nature or returns to scale, increasing returns to scale in manufacturing increases the hazard relative to constant returns to scale. Exports to NAFTA members in these products are affected differently in the three members countries. Canadian exports of IRS manufacturing products have a lower hazard than CRS products after the enactment of NAFTA. While there are no differneces between the two types of products exported by Mexico in the absence of NAFTA, NAFTA itself has increased the hazard of IRS manufacturing products more than that of CRS products. In the U.S. NAFTA has completely eroded the advantage in terms of a lower hazard that IRS manufacturing goods enjoyed prior to its onset.
Canadian exports of IRS natural resource products to NAFTA members have been ad-versely affected by the onset of NAFTA relative to CRS products facing the same hazard as CRS products after NAFTA’s onset. Mexican exports of IRS natural resource products to NAFTA members have experiences an increase in the hazard due to NAFTA which is higher than that of CRS products. U.S. exports of IRS natural resource products used to enjoy a lower hazard than CRS products prior to NAFTA. NAFTA has increased the hazard of both and reversed their ordering with IRS natural resource products facing a higher hazard.
I presented the first evidence of the effect of a free trade agreement on the hazard of exporting. While NAFTA increases the hazard of exporting, further investigation is needed with free trade agreements among countries which are not as geographically clustered as the NAFTA members are. Mercosur and the European Union are two free trade areas which offer a different geography which could shed additional results on the role of a free trade agreement. In addition, I presented the first evidence on the effect of the returns to scale on the hazard of exporting. Unlike differences along the product differentiation dimension, which are largely consistent across a number of countries, the identified effects of returns to scale are exporter specific. Since these results are based on three exporters only, additional investigation of other countries is warranted.
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