I have argued above that one might expect the hazard of exports ceasing for increasing–
returns–to–scale manufacturing products to be the lowest when destined to NAFTA markets given advantages offered by access to larger markets. The above results that IRS manufacturing products face the highest hazard are potentially indicative of the opposite holding. However, the appropriate examination of such a hypothesis entails
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0.1.2.3.4.5.6.7
1 2 3 4 5 6
Time
NAFTA member, no NAFTA NAFTA 1994−1996 NAFTA 1997−1999 NAFTA 2000−2002 NAFTA 2003−2005
canada
0.1.2.3.4.5.6.7
1 2 3 4 5 6
Time
NAFTA member, no NAFTA NAFTA 1994−1996 NAFTA 1997−1999 NAFTA 2000−2002 NAFTA 2003−2005
mexico
0.1.2.3.4.5.6.7
1 2 3 4 5 6
Time
NAFTA member, no NAFTA NAFTA 1994−1996 NAFTA 1997−1999 NAFTA 2000−2002 NAFTA 2003−2005
us
Figure 7: The Effect of NAFTA across Time
26
comparing the hazard of exports to NAFTA members ceasing for each returns–to–
scale product separately, to which I now turn. Rather than introducing a number of interacted variables to examine whether the effect of NAFTA is different for different returns–to–scale products, I estimate the hazard of exports ceasing for each of the three returns–to–scale types of products, focusing on the NAFTA–in–effect coeffi-cients, and compare the fitted hazards for each country. In order to conserve space I only present coefficients relevant to NAFTA.5 Table 4 collects the results.
Canada
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.263*** -0.274*** -0.176***
(0.066) (0.086) (0.059)
NAFTA in effect 0.076 0.164* 0.033
(0.069) (0.089) (0.061)
ρ 0.0315*** 0.0259*** 0.0299***
Mexico
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.703*** -0.624*** -0.773***
(0.063) (0.090) (0.067)
NAFTA in effect 0.182*** 0.082 0.025
(0.049) (0.071) (0.049)
ρ 0.161*** 0.174*** 0.203***
United States
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -1.097*** -1.042*** -1.029***
(0.116) (0.126) (0.076)
NAFTA in effect 0.431*** 0.457*** 0.195***
(0.120) (0.130) (0.078)
ρ 0.119*** 0.135*** 0.239***
Robust standard errors clustered by relationships in parentheses with *, **, *** de-noting significance at 10%, 5%, and 1%; year in spell and spell number fixed effects included.
Table 4: The Effect of NAFTA across Returns to Scale
Intra–NAFTA exports of all three countries in all three returns–to–scale types face a lower hazard. In the case of Canada, the onset of NAFTA has no signifi-cant effect on the hazard of exports increasing–returns–to–scale manufacturing and
5Full results are available on request.
27
0.1.2.3.4.5
canada constant returns to scale
0.1.2.3.4.5
1 2 3 4 5 6
Time
no NAFTA NAFTA in effect
mexico constant returns to scale
0.1.2.3.4.5
1 2 3 4 5 6
Time
no NAFTA NAFTA in effect
us constant returns to scale
Figure 8: The Effect of NAFTA and Returns to Scale on the Estimated Hazard
28
constant–returns–to–scale products ceasing, and only marginally increases the haz-ard for increasing–returns–to–scale natural resource products. In the case of Mexico, the net effect of NAFTA which was to increase the hazard associated with exports to NAFTA members (see Table 2) seems to be driven by its effect on increasing–returns–
to–scale manufacturing products. The other two types are not affected by the onset of NAFTA. In the case of the U.S., the onset of NAFTA increases the hazard for all three types of returns to scale.
Figure 8 shows the estimated hazard of exports to NAFTA members ceasing for the different types of returns to scale and the effect of NAFTA on the estimated hazard. I include the 95% confidence interval for the estimated hazard of exports to NAFTA members ceasing. The top panels examine increasing–returns–to–scale man-ufacturing products, the middle panels increasing–returns–to–scale natural resource products, and the bottom panels constant–returns–to–scale products. In the case of Canadian exports, despite the fact that the effect of the onset of NAFTA is esti-mated as significant, the estiesti-mated hazard for the onset of NAFTA is not statistically significantly different from that for exports to NAFTA members, with the possible exception of IRS natural resource products.
In the case of Mexico NAFTA does not have a significant effect of the hazard for IRS natural resource and CRS products, as the two estimated hazard are within the 95% confidence interval. However, the effect of NAFTA is statistically significant for IRS manufacturing products. The largest effect that NAFTA has had on the hazard of exports ceasing is for U.S. products across the full spectrum of returns to scale. In the case of each returns–to–scale product type, the difference between exports to NAFTA members in the absence of NAFTA and after its onset is statistically significant. Thus, NAFTA has increased the hazard of U.S. exports to NAFTA members ceasing, by almost ten percentage points at the start of a spell in the case of IRS products and some five percentage points in the case of CRS products.
29
Canada
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.260*** -0.271*** -0.173***
(0.066) (0.086) (0.059)
NAFTA in effect 1994–1996 0.283*** 0.371*** 0.192**
(0.086) (0.112) (0.077)
NAFTA in effect 1997–1998 0.006 0.110 0.022
(0.088) (0.114) (0.079)
NAFTA in effect 2000–2002 -0.093 -0.065 -0.103
(0.079) (0.104) (0.072)
NAFTA in effect 2003–2005 0.110 0.227** 0.048
(0.072) (0.095) (0.066)
ρ 0.0318*** 0.0259*** 0.0306***
Mexico
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -0.703*** -0.626*** -0.774***
(0.063) (0.090) (0.067)
NAFTA in effect 1994–1996 0.110* -0.040 -0.136**
(0.056) (0.082) (0.057)
NAFTA in effect 1997–1998 0.214*** 0.088 0.044
(0.056) (0.080) (0.056)
NAFTA in effect 2000–2002 0.325*** 0.289*** 0.196***
(0.057) (0.080) (0.056)
NAFTA in effect 2003–2005 0.098* 0.004 0.021
(0.057) (0.082) (0.057)
ρ 0.159*** 0.168*** 0.193***
United States
IRS Manufacturing IRS Natural Resources CRS
NAFTA members -1.092*** -1.041*** -1.035***
(0.116) (0.126) (0.076)
NAFTA in effect 1994–1996 0.525*** 0.463*** 0.135
(0.137) (0.151) (0.090)
NAFTA in effect 1997–1998 0.244* 0.500*** 0.115
(0.138) (0.148) (0.089)
NAFTA in effect 2000–2002 0.637*** 0.610*** 0.385***
(0.134) (0.147) (0.087)
NAFTA in effect 2003–2005 0.270* 0.232 0.146
(0.139) (0.152) (0.089)
ρ 0.118*** 0.135*** 0.238***
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
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 exports ceasing. For Canada, NAFTA has increased the hazard of IRS manufacturing and CRS products only during its first three years, while the hazard IRS natural resource products was higher in the first three years as well as between 2003 and 2005. This is confirmed by plots in Figure 9 where the estimated hazard during these periods is outside the 95% confidence interval.
For Mexico, NAFTA has increased the hazard for IRS manufacturing products consistently ever since it was enacted, though the effect has declined in magnitude after 2002. The effect is statistically significant for the 1997 to 2002 period, and only marginally so for the other two periods (Figure 9). NAFTA has increased the hazard for IRS natural resource products only between 2000 and 2002, which is statistically significant as illustrated in Figure 9. NAFTA’s effect on the hazard of Mexican exports of CRS products is the most varied. It has initially reduced it with the estimated hazard right on the lower bound of the 95% confidence interval, and then increased it between 1997 and 2002, a statistically significant effect. NAFTA has had 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. Exports of CRS products have a higher hazard of ceasing in a statistically meaningful manner only for the 2000–2002 period. Exports of IRS natural resource products have had a higher hazard in every period, with differences statistically sig-nificant, though only marginally for the 2003–2005 period. Exports of IRS manufac-turing products had a statistically significant higher hazard in every period, with the effect stronger immediately after NAFTA’s onset and between 2000 and 2002.
31
0.1.2.3.4.5
canada constant returns to scale
0.1.2.3.4.5
mexico constant returns to scale
0.1.2.3.4.5
us constant returns to scale
Figure 9: The Effect of NAFTA and Returns to Scale Differences
32
5 Conclusion
In this paper I investigate how the North American Free Trade Agreement has af-fected the members’ hazard of exports ceasing and how differences in returns to scale manifest themselves in the hazard of exports ceasing for the three members: Canada, Mexico, and the United States. NAFTA itself has not had a beneficial effect on the hazard of exports ceasing. Rather, the effect has been negative for the U.S. and Mex-ico, with the hazard of their exports ceasing to NAFTA members increasing with the enactment of NAFTA. However, the said increase was not large enough to offset the much lower hazard of exports ceasing to NAFTA members enjoy due to the geography of the free–trade area 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 free trade agreements increase the hazard of exports between the members ceasing, calling for an investigation of the effect of free trade agreements with less restrictive geographic characteristics, or a broader set of such agreements.
The effect of NAFTA is much stronger once one scratches below the surface, in terms of evaluating its effect on each returns to scale type. It has had the most consistent effect on U.S. exports of all three types, particularly in the case of both increasing returns to scale product types. In addition, it has had different effects during different subperiods since its inception, likely reflecting the ability of firms to adjust to new conditions and the fact that some of its provisions were phased in over time.
I presented the first evidence of the effect of a free trade agreement on the hazard of exports ceasing. While NAFTA increases the hazard, further investigation is needed
33
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 exports ceasing. 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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