Predicting the Effects of NAFTA: Now We Can Do It Better!

Abstract

The North American Free Trade Agreement (NAFTA) is one of the most influential events in the North American economic history, but the economic forecasts regarding its effects on trade turned out to be vastly incorrect. This paper suggests and evaluates a new model for forecasting the effects of trade liberalizations that uses the framework to explain intra-industry trade instead of the usual approach. The performance of the model is evaluated by using it to forecast the effects of NAFTA from the point of view of 1989. The predictions of the model are compared with the post-NAFTA data and the forecasts of the existing models. The results show that the new model is able to predict the effects of NAFTA noticeably better than the existing trade models. The paper analyzes the reasons for this difference.