An Analysis of Comparative Advantage and Intra-North American Free Trade Agreement (NAFTA) Trade Performance

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Abstract

The authors analysed comparative advantage of Canada, Mexico and the United States in the context of the North American Free Trade Agreement (NAFTA). The authors found that there is empirical evidence as expected that the United States of America has a large number of products in which it has a comparative advantage in, followed by Canada. Mexico is the least competitive with fewer products compared to the United States of America and Canada. The authors have also concluded that having comparative advantage is not synonymous with trade performance in intra-regional trade as Mexico tends to benefit much more in spite of having a very few products in which it has comparative advantage as demonstrated by huge trade surpluses over Canada and the United States.

Keywords: comparative advantage, revealed comparative advantage, intra-NAFTA trade performance, International trade

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1. Introduction

There are many regional groupings around the world. Although free trade has not been attained globally, regional trading blocs seem to provide a mechanism of free trade. These regional groupings to a greater extent have removed trade restrictions within their members but remain with high walls of restrictions imposed on third parties (Institute for International Economics, 2012). The international participation in Free Trade Zones has significantly grown especially in the second half of the 20th century (Global Economics, 2012). This has resulted in many regional economic groupings which include: European Union (EU), Caribbean Common Market (CARICOM), Central American Common Market (CACM), Latin America Integration Association (LAIA), Association of South East Asia Nations (ASEAN), Mercosur, Southern Africa Customs Union (SACU), Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), Economic Community of Central African States (ECCAS), Economic Community of West African States (ECOWAS), Arab Maghreb Union (AMU), Community of Sahel-Saharan States (CEN-SAD), Inter-governmental Authority for Development Community (IGAD) and Southern African Development Community (SADC) (Claiming Human Rights, 2012; FAO, 2012).

The largest and most successful of the regional groupingis the European Union (EU). It has achieved the highest level of integration than any other groupings by establishing the European Monetary Union (EMU). The EU constitute a very small portion of world population accounting for 6.3% but command 20% of world GDP and more than 40% of the world exports (Global Economics, 2012). The EU and its member states have organized huge amount of resources for economic recovery (European Union, 2012). However, in Africa despite the mushrooming of regional economic integration groupings, Sub Saharan economic growth achievement remains very poor (World Bank, 2012). There are mixed results when regional groupings are evaluated. The most powerful nation on the planet, the United States of America, saw it fit to join two other nations namely Canada and Mexico to form the North American Free Trade Agreement (NAFTA). The authors intend to investigate whether there is evidence of comparative advantage in NAFTA and evaluate the group's trade performance. Although, there may be some studies which have been done in the past on NAFTA, the authors intend to focus on recent data from 2007 to 2010 in establishing whether NAFTA has comparative advantage and analyse its trade performance. According to Shinyekwa and Othieno (2011) some products do not obviously maintain revealed comparative advantage (RCA) beyond four yearst. This provides a strong justification to carry out this investigation.

The concept of establishing the North American Free Trade Agreement (NAFTA) began in 1979 during the United States of America's President Ronald Regan election campaign. He saw the existence of NAFTA as a way of encouraging economic growth through free movement of goods and services between the United States of America, Canada and Mexico. …