Trade creation and trade diversion under NAFTA. Mexican perspective

Overview & Synopsis

Economic integration is one of the most typical forms of cooperation in the contemporary global economy and it would be difficult to find a country that would not be a member of at least one integration grouping. The investigation into this matter starts with the model laid out by Viner, a precursor of the analysis of the welfare effects of economic integration. He proposed concepts of trade creation and trade diversion as foundations for further, more comprehensive studies on the effects of trade agreements. Those studies, provided by, among others, Meade, Gehrels, Lipsey, Bhagwati and Richardson, demonstrated how modifications and different assumptions in theoretical studies influence the welfare effects of integration. Conclusions as to the latter issue, however, are not unambiguous. Despite abundant subject-matter literature, only a handful of available empirical analyses focus on concrete groupings and seek to evaluate membership in a trade agreement through the lenses of trade creation and trade diversion effects. The above is especially true of the second biggest integration grouping when it comes to trade volumes, the North American Free Trade Agreement (NAFTA). This publication seeks to provide an evaluation of the impact of NAFTA membership on the economy of Mexico, especially on the trade creation and trade diversion effects for this country. The publication seeks to validate two research hypotheses. The first of them argues that trade integration within the North American Free Trade Agreement is advantageous to the Mexican economy. The second one states that the scale of trade diversion effect for Mexico depends on the intensity of trade flows between NAFTA members prior to the conclusion of the Agreement.