Ann Reg Sci (2009) 43:251265

DOI 10.1007/s00168-008-0210-6
ORIGINAL PAPER

The geographical effects of the NAFTA on Canadian

provinces
Martin A. Andresen

Received: 20 May 2007 / Accepted: 2 January 2008 / Published online: 19 January 2008
Springer-Verlag 2008

Abstract This paper investigates the effects of the North American Free Trade
Agreement (NAFTA) on the Canadian provinces. A large body of research has emerged
testing the effects of the CanadaUS Free Trade Agreement and the NAFTA, but the
majority of that research has analyzed the effect of free trade at the national scale
despite the fact that different provinces have different industrial compositions and
levels of integration with the US. It is found that there is a geographical component
to the effect of the NAFTA, and this geographical component varies from province to
province.
JEL Classification

F130 F140 F150

1 Introduction
Since 1989, the year the CanadaUS Free Trade Agreement (CUFTA) entered into
force, Canadas exports of merchandise to the US have almost tripled and imports
of merchandise from the US have almost doubled in real terms. Canadas share of
trade with the US has risen from 69 to 73%; however, this increase is all due to
exports (7485%) given that Canadas import share from the US has fallen (6560%).
At the provincial level, all provinces except Newfoundland have more than doubled
their international trade with the US, 19892003 (Statistics Canada 2004). Curiously,
despite these significant increases in international trade between Canada and the US

I am grateful to Trevor J. Barnes for comments on an earlier draft of this paper.

M. A. Andresen (B)
School of Criminology, Simon Fraser University,
8888 University Drive, Burnaby, BC V5A 1S6, Canada
e-mail: andresen@sfu.ca

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M. A. Andresen

over the past 15 years, the American economist Paul Krugman has been cited as saying
that the impact of the North American Free Trade Agreement (NAFTA) on Canada is
zero (Contenta 1996).
The CUFTA outlined a systematic tariff reduction schedule between Canada and
the US that was completed by 1998 as well as instituting deeper levels of integration regarding institutional compatibility, the harmonization of rules for competition,
and investment. In other words, the CUFTA is much more than a free trade agreement. There is little doubt that the CUFTA has significantly changed the CanadaUS
trading relationship. As shown by Coulombe (2004) and Courchene (2003), Canadas
interprovincial trade was greater than Canadas international trade in the early 1980s,
but that trend had reversed by the early 1990s. But does the addition of Mexico have
any implications for Canada because Canada trades so little with Mexico? The short
answer is yes.
Canada may trade relatively little with Mexico, but USMexico trade has risen
significantly in recent years. With large volumes of trade flowing between the US and
Mexico, any alterations to the trading relationship between the US and Mexico could
alter Canadas trading relationship with the US. However, the effects of the NAFTA
on the Canadian economy have been elusive to identify. The purpose of this paper is
to identify the effect of the NAFTA on the Canadian economy. This is done both at
the national and provincial levels.1
Now that 14 years have passed since the establishment of the NAFTA a number
of studies have emerged testing its impact on its different countries. This literature,
along with some of its methodological issues, is discussed in the following section.
Section 3 outlines the data and methodology employed. The results are discussed in
Sect. 4. Section 5 concludes that the impact of the NAFTA has been positive for Canada
as a whole, but its effects vary geographically.

2 Past reseach of the effects of the NAFTA

Gould (1998) is the first study to explicitly test the independent effect of the
NAFTA. Using trade both originating and destined for the NAFTA countries and
a 90% confidence interval, Gould (1998) finds statistical support for the NAFTA generating increases in USMexico international trade, particularly imports from Mexico.
However, he finds that the impact of the NAFTA has been positive though statistically
insignificant for Canada with both the US and Mexico.
Krueger (1999) comes to a similar conclusion for Canada using a gravity model of
international trade. Though finding that the NAFTA has decreased NAFTA country
imports from non-members, the NAFTA has an insignificant positive effect on the
NAFTA countries. This is likely due to aggregation bias. The entire effect of the
NAFTA is insignificant for Krueger (1999) because CanadaUS international
trade dominates international trade within North America as a whole. Therefore,
1 Another literature that has investigated provincial-level trade is the work of McCallum (1995), Helliwell
(1996), and others that investigate the border effect. This literature, however, does not investigate the impact
of the NAFTA, per se.

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253

within Kruegers analysis, an insignificant effect of the NAFTA on CanadaUS likely

dominates Kruegers (1999) total intra-NAFTA effect.
The last national analysis of the effect of the NAFTA is the most comprehensive.
Romalis (2005) uses commodity level data, a sophisticated theoretical model, and
corresponding estimation procedure. He finds that the NAFTA has had a substantial
impact on international trade, but only a modest impact on welfare in the NAFTA
countries. This establishment of the positive impact on international trade is critical
because as stated by Gould (1998), the NAFTA can only impact welfare if it alters
international trade. As such, Romalis (2005) is the first national level analysis of the
effect of the NAFTA to find an overall positive effect.
Coughlin and Wall (2003) is the first paper to study the geography of the effects of
the NAFTA, albeit on US states.2 Employing a rather parsimonious gravity model of
international trade, Coughlin and Wall (2003) find that the overall effect of the NAFTA
on US exports to Canada is positive and statistically significant, a 15% increase in
international trade. Geographically, 36 US states had a greater than 10% increase in
international trade with Canada, while eleven US states exhibited little change (10
to 10%), and four US states had a decrease of more than 10%. When the individual
US states are aggregated into the nine Bureau of Economic Analysis regions, all US
regions indicate positive change for international trade with Canada.
With a Canadian geographical focus on the effects of the NAFTA, Wall (2003)
investigates the effects of the NAFTA on three Canadian regions (western, central,
and eastern Canada) with the nine Bureau of Economic Analysis US regions using
a parsimonious gravity model of international trade similar to that of Coughlin and
Wall (2003). Overall, Canadas exports and imports to and from the US are up 29 and
14%, respectively. Eastern Canada decreased exports and imports to and from the US
resulting from the NAFTA, down 9 and 13%, respectively. Central Canada exhibits
large increases in both exports to and imports from the US, up 43 and 18%, respectively. Western Canada demonstrates a 0.9 percent increase in exports to the US and
a 0.5% decrease in imports from the US leading Wall (2003) to claim that the overall
impact of the NAFTA on western Canada is insignificant.
The primary limitations of past research investigating the effects of the NAFTA
on Canada relate to geographical and statistical specification. The geographical specification is with regard to the scale of analysis. The vast majority of research on
the effects of the NAFTA is at the national scale of analysis. Such analyses ignore
the fact that regions within a country will trade differently from each other just as
two geographically close (contiguous) countries will trade differently (Hoare 1993).
Within countries as geographically large as Canada and the US the effects of free trade
agreements must be analyzed at the sub-national level or risk shrouding the effects of
free trade agreements through aggregation bias and the modifiable areal unit problem.
2 There are some studies not discussed here that do investigate Canadas regional trade such as Baldwin and
Brown (2004) and Brown and Anderson (1999), but these studies do not assess the impact of the NAFTA:
the latter uses 1 year of data (1992) and the former is concerned with employment and industry specialization. As such, these other studies, though concerned with the regional dimension of Canadas trade, do not
assess NAFTAs impact. Also not discussed here because of its scale of analysis is some interesting work
on high-technology firms in Toronto, ON that finds firm level responses to free trade depend on pre-free
trade export intensity and firm size Britton (2002a,b).

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M. A. Andresen

The statistical specification issue is one of misspecification. As indicated above,

parsimonious statistical models are used to assess the effects of the NAFTA on Canadian international trade. Most of these models include measures of GDP and NAFTA
variables, but the inclusion of other important variables such as time trends, exchange
rates, and other structural variables are not always present. This potentially leads to
statistical bias and incorrect inference. Additionally, not all of the statistical models use panel data estimation procedures when their data are spatial cross-sections
measured repeatedly over time. The lack of the implementation of these estimation
procedures also necessarily imposes statistical bias potentially leading to incorrect
inference. These issues are addressed in the present analysis.

3 Data and methodology

3.1 Statistical specification issues
The effects of the NAFTA on Canada as a whole and its provinces are estimated
using both international and interprovincial trade data only considering other
Canadian provinces and US states as export destinations and import origins. This
circumscription of trading partners is chosen because the vast majority of trade flowing to and from Canadian provinces is interprovincial and to the US. The addition of Mexico to the CUFTA could change US trading patterns with Canada. This
impact on Canada is a secondary effect, whereas measuring any impact on Canada
from changes in CanadaMexico trade is a primary effect. Though the primary effect
may be of interest, any significant economic (or welfare) impacts of the NAFTA will
occur through the secondary effect. This is simply because of the volume of trade (particularly Canadian exports) between Canada and the US. Even if the NAFTA were
to increase CanadaMexico international trade by 100%, the economic impact on
Canada would be small because CanadaMexico trade only accounts for 2% of
Canadas total international trade in 20030.6% of Canadas exports. However, even
a 5 or 10% increase in CanadaUS international trade would have a significant economic impact on Canadas economy. Consequently, the focus of the current analysis is
restricted to the trading relationship that may have a significant impact on Canadas
economic welfare.3
The gravity equation of international trade, used often to asses the NAFTA, has
been found to empirically capture both inter-industry trade and intra-industry trade
models. This equation can be theoretically derived for both models (see Anderson
1979; Anderson and van Wincoop 2003; Bergstrand 1985, 1989; Deardorff 1998;
Helpman and Krugman 1985), having both theoretical foundations and empirical
support. Therefore, the determinants of both inter- and intra-industry trade must be
included in any proper specification. This is not the case in the studies on the effects
of the NAFTA.
3 There is also the complication that Mexicos trade data are only available at the national level and the

current study has a regional focus.

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255

The variables that need to be included in a proper gravity equation model specification are the economic sizes (GDP) of the trading economies and the distances
between them (Tinbergen 1962; Pyhnen 1963; Linneman 1966). The level of economic development (GDP per capita) measures tendency toward intra-industry trade
(Frankel et al. 1995). Trade barriers (both tariff and non-tariff barriers) need to be
included because of their role in stimulating trade (Feenstra 2002). Relative factor
endowments (capitallabor and landlabor ratios) capture the degree of difference
between trading economies indicating inter-industry trade (Hummels and Levinsohn
1995). Exchange rate and linear trend variables must be included to account for
changes in the relative cost of Canadian goods and the general trend of increased
trade, respectively. Lastly, variables are needed to capture the presence of free trade
agreements.
The final issue with regard to statistical specification is the statistical estimation
procedure. Cheng and Wall (2005) and Wall (2000) both show that gravity models
of international trade that not only measure trade across space but across time are
improperly specified when estimated using OLS. The result of this misspecification
is biased statistical estimates and, therefore, potentially improper inference. A fixed
effect panel estimation procedure provides each bilateral trading relationship with its
own dummy variable that controls for this misspecification. This form of fixed effect
also controls for historical, social, political, and cultural factors, as well as distance
and contiguity measures (Cheng and Wall 2005).
The variables discussed above are estimated in the following panel gravity equation
specification spanning 19892001:
ln xi jt = +i j +1 ln yExporter t +2 ln yImporter t +3 ln ycExporter t +4 ln ycImporter t
+5 klExporter t + 6 klImporter t + 7 tlExporter t + 8 tlImporter t
+9 ln er t + 10 tariff t + 11 t + 12 NAFT A + ,

(1)

where xi jt is the bilateral trade between trading economies i and j at time t, is the
common intercept, i j represents the trading-partner-specific fixed effects, yExporter t
and yImporter t are GDPs at time t, ycExporter t and ycImporter t are GDP per capita at
time t, klExporter t and klImporter t are the capitallabor ratios at time t, tlExporter t and
tlImporter t are the land-labor ratios at time t, ert is the exchange rate between Canada
and the US at time t with interprovincial trade given an exchange rate value of one,
tariff t is the average CanadaUS tariff rate at time t, t is the linear trend, NAFTA is
a dummy variable that is one after 1993 and zero otherwise, and i jt is the remaining
iid error term.4 Because the CUFTA is in effect for the entire time span of these data,
19892001, the dummy variable for the NAFTA captures the effect of the NAFTA
independent of the CUFTA. The NAFTA variable takes on a number of forms in the
analysis below depending on the regression context.
Equation 1 is the general form of all the models estimated below: four regression models are undertaken in this analysis, two using CanadaUS international trade
4 All reported p values reflect White standard errors.

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M. A. Andresen

(n = 6,500) and two using both interprovincial and international trade (n = 7,085).
In the former analysis, the NAFTAs effects are investigated only for changes in the
Canadian trading patterns with the US, similar to most previous analyses. In the latter
analysis the NAFTAs effects are investigated both on changes in the Canadian patterns
with the US and with other Canadian provinces. Past research has not made such an
inquiry. Given the use of dummy variables in a semilogarithmic statistical equation,
the appropriate interpretation of that variable is critical. As shown by Halvorsen and
Palmquist (1980), the correct interpretation of a dummy variable in a semilogarithmic specification is that exp()1 represents the percentage change in the dependent
variable from the dummy variable changing its value from zero to onesee Kennedy
(1981) for a small sample equivalent.
All Canadian provinces (no territories due to a lack of explanatory variables) and
all US continental states are included in the data set. All zero values of bilateral trade
are replaced with one dollar to facilitate the natural logarithm.5 This allows for all
possible trading relationships to be modelled without any serious concerns for bias
(Greene 2000). All GDP and GDP per capita variables are measured in natural logarithms to ease interpretations: the coefficients for these variables are then elasticities.
All estimation is performed using NLogit 3.0.
One final methodological consideration is the issue of spatial dependence. However,
there are two complications that prevent the appropriate testing of spatial dependence
in this context. First, the data used in this analysis are spatial interaction data. As a
result, each province has 60 trading partners for each year. The nature of shapefiles
(when used with ESRI products or GeoDa) does not allow each spatial unit to have
multiple values for the same variable. This situation arises because the 60 values for
each year are not intrinsically a value associated with a single spatial unit (province),
but a value that represents a relationship between two spatial units. Secondly, the data
employed here are a panel. Therefore, each trading relationship has 13 observations,
one for each yeareach province has 780 observations for the dependent variables
in the analysis.6 The end result of these two complications is that the current data set
cannot be incorporated into a GIS format in order to create spatial weights matrices
and properly test for spatial dependence. This is problematic not only for the current analysis but also for other studies that employ either spatial interaction and/or
panel data, because in the presence of spatial dependence the variances for parameter
estimates are biased downwards, potentially indicating statistical significance when
results are not statistically significant. Future research clearly needs to develop a test
for spatial dependence in the presence of either spatial interaction and/or panel data.
However, previous (geographical) research on the effects of the NAFTA has not been
able to test for spatial dependence so the results presented below can be interpreted in
comparison to that previous research.

5 The number of zero values is small, only 17. This number equates to 0.26% of the observations and is
mostly for pre-NAFTA observations.
6 There is some double-counting here when considering to total size of the data set used in the analysis:

OntarioQuebec interprovincial trade is only counted once in the data, for example.

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257

3.2 Data
The data on CanadaUS international trade are obtained from Statistics Canada (2004).
These data measure trade at the 8- and 10-digit Harmonized Tariff Schedule (HTS)
level of aggregation for exports and imports, respectively, having Canadian provinces
and US states as the smallest geographic units. All HTS classifications are aggregated to these geographical units based on their origin and destination. Interprovincial
trade data have three sources: Statistics Canada (1998), Statistics Canada (2000), and
Statistics Canada (2005a) (CANSIM) for the most recent interprovincial trade data.
Provincial GDP, GDP per capita, and labor forces are also obtained through CANSIM. Provincial capital stocks are obtained through the Centre for the Study of Living
Standards (2005), available from the CSLS online. Arable land is obtained from Statistics Canada (1986, 1992, 1999, 2002, 2005b) censuses of agriculture. These data
are available at the provincial level, but only at 5-year intervalsintervening years
are obtained using linear interpolation.
US state GDP and GDP per capita are obtained from the Bureau of Economic Analysis and US state labor forces are obtained from the Bureau of Labor Statistics, all
available online. Arable land estimates for the US states are obtained from the United
States Department of Agriculture (2000). As with the Canadian data, arable land for
the US is only available at 5-year intervals, with the intervening years obtained through
linear interpolation.
US state capital stock estimates were not found to be available, nor were US state
total factor productivity estimates to use growth accounting techniques to calculate
state-level capital stocks.7 In order to calculate the capital stocks for each US states,
the annual US capital stock is distributed based on each states share of US GDP. This
same technique was used to calculate capital stocks for Canadian provinces to test the
similarity of this estimation to actual data. For the Canadian data, the two measures of
provincial capital stock have an extremely high and statistically significant correlation
coefficient, r = 0.969. Therefore, the estimates for US state capital stock cause little
concern for bias in any estimation.
Lastly, Canadian tariff rates are obtained through External Affairs Canada (1687)
and the US tariff rates are obtained through the The Center for International Data at
the University of California, Davis. All tariff rates are based at the commodity level
with the national Canadian and US tariff rates being the unweighted averages of the
commodity level tariff rates.
4 Results
4.1 CanadaUS international trade and the NAFTA
The statistical results from the four regression models are presented in Tables 1, 2, 3, 4.
Table 1 shows the results from the CanadaUS international trade data only measuring
7 Economists at the United States Federal Reserve Board were contacted regarding the availability of
US state capital stocks. They were not aware of any available data, free or proprietary, but did state that
proprietary data are likely to be available. However, no such data were found.

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M. A. Andresen

Table 1 CanadaUnited States

trade

Coefficient

0.59

GDPImporter

0.08

0.87

1.63

< 0.01

GDP per capitaImporter

2.74

< 0.01

Capitallabour ratioExporter

0.56

0.19

0.20

Capitallabour ratioImporter

0.28

0.22

Landlabour ratioExporter

0.02

0.33

Landlabour ratioImporter

0.02

0.48

Exchange rate

1.31

< 0.01

0.09

< 0.01

Average tariff rate

Linear trend

0.00

NAFTA

0.10

Table 2 CanadaUnited States

trade, provincial NAFTA effects

Coefficient

0.91
10.47

Percent
impact

0.03

p value

GDPExporter

0.43

GDPImporter

0.10

0.84

1.14

0.17

GDP per capitaImporter

2.76

< 0.01

Capitallabour ratioExporter

0.91

0.17

Capitallabour ratioImporter

0.29

0.20

Landlabour ratioExporter

0.01

0.47

Landlabour ratioImporter

0.02

0.48

Exchange rate

1.40

< 0.01

0.07

0.06

GDP per capitaExporter

Average tariff Rate

Linear trend

0.61

0.03

0.22

0.02

1.69

0.87

NAFTAAlbertaUS
NAFTASaskatchewanUS

0.00

0.17

0.98

0.19

21.23

0.02

NAFTAManitobaUS

0.16

17.01

0.01

NAFTAOntarioUS

0.05

5.54

0.25

NAFTAQuebecUS

0.05

4.68

0.38

0.03

3.17

0.65

NAFTABritish ColumbiaUS

Adjusted R 2 = 0.930
F = 167.24, P value <0.01
n = 6500
All p values are based on White
standard errors

p value

GDPExporter
GDP per capitaExporter

Adjusted R 2 = 0.930
F = 168.93, p value <0.01
n = 6500
All p values are based on White
standard errors

Percent
impact

NAFTANew BrunswickUS
NAFTANova ScotiaUS
NAFTAPrince Edward IslandUS

0.05

5.00

0.59

0.52

68.66

< 0.01

NAFTANewfoundlandUS

0.14

15.08

0.49

the effect of the NAFTA at the national level for a more direct comparison to past
research. The estimated coefficients for GDP, GDP per capita, and the relative factor
endowment variables are generally consistent with past research with the exception

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Table 3 CanadaUnited States
and interprovincial trade

Adjusted R 2 = 0.935
F = 183.94, p value <0.01
n = 7085
All p values are based on White
standard errors

259
Coefficient

Percent
impact

p value

GDPExporter

0.58

GDPImporter

0.06

0.18
0.90

GDP per capitaExporter

1.70

< 0.01

GDP per capitaImporter

2.29

< 0.01

Capitallabour ratioExporter

0.51

0.17

Capitallabour ratioImporter

0.15

0.42

Landlabour ratioExporter

0.02

0.04

Landlabour ratioImporter

0.02

0.27

Exchange rate

1.30

< 0.01

0.07

< 0.01

Average tariff rate

Linear trend

0.01

NAFTAUnitedStates

0.10

11.02

0.02

0.56

NAFTACanada

0.14

15.29

0.04

of the GDP variables being statistically insignificant. The GDP per capita variables,
however, are statistically significant and large in magnitude. This latter result coupled
with the presence of the relative factor endowment variables may be the cause for the
insignificant GDP resultsthese estimated coefficients, however, are not the primary
concern of this analysis. The exchange rate and linear trend coefficients have their
expected positive signs with the exchange rate elasticity being particularly high in
magnitude indicating the gains in trade from a weaker Canadian dollar. The average
tariff rate has its expected negative and statistically significant coefficient.
The national effect of the NAFTA is positive and statistically significant, contrary to
most of the past research. However, it should be noted that the key difference between
this national effect and most of the past research on the effects of the NAFTA is that
the current result is based on provincestate trade rather than CanadaUS aggregate
national trade. Nevertheless, the impact of the NAFTA on CanadaUS international
trade has been a 10.47% increase over and above any increases from the CUFTA.
This result is more modest than that found by Wall (2003), but his analysis separates
exports and imports for Canadian and US regions rather than dealing with total trade
between provinces and statesneither type of analysis is superior to the other, they
merely address different questions.
Turning to the geography of the effects of the NAFTA on Canadas trade to the
US, Table 2 exhibits significantly different results from Wall (2003). Except for
British Columbia, Alberta, and New Brunswick, all of the provincial NAFTA
effects are positive, contrary to that found by Wall (2003). Even the remaining Maritime provinces and Newfoundland, all exhibiting negative effects from the NAFTA
in Wall (2003) analysis, have positive coefficients with Prince Edward Islands coefficient being statistically significant and relatively high in magnitude, an increase of
more than 68%. Though Prince Edward Islands international trade with the US are
a small share of Canadas total trade with the US, this result exemplifies the impact
on results from changing the spatial scale of analysis. It is possible that this result for

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M. A. Andresen

Table 4 CanadaUnited States

and interprovincial trade,
provincial NAFTA effects

Coefficient

GDPExporter

0.45
0.10

0.82

GDP per capitaExporter

1.36

0.08

GDP per capitaImporter

2.45

< 0.01

Capitallabour ratioExporter

0.82

0.18

0.56

Capitallabour ratioImporter

0.18

0.33

Landlabour ratioExporter

0.01

0.49

Landlabour ratioImporter

0.02

0.40

Exchange rate

1.35

< 0.01

Average tariff rate

NAFTABritishColumbiaUS

0.05

0.03

0.03

0.12

0.02

1.68

0.86

0.01

1.09

0.86

NAFTASaskatchewanUS
NAFTAManitobaUS

0.19

20.41

0.01

0.16

17.77

0.01

NAFTAOntarioUS

0.06

6.17

0.17

NAFTAQuebecUS

0.05

5.04

0.33

0.03

3.05

0.65

NAFTANova ScotiaUS

0.06

6.14

0.50

NAFTAPrince Edward IslandUS

0.51

67.07

< 0.01

NAFTANewfoundlandUS

0.12

12.47

0.54

0.27

30.39

< 0.01

NAFTAAlbertaCanada
NAFTASaskatchewanCanada

0.26

30.10

< 0.01

0.19

21.05

0.05

NAFTAManitobaCanada

0.20

21.71

< 0.01

NAFTAOntarioCanada

0.12

13.01

0.02

NAFTAQuebecCanada

0.05

4.78

0.26

NAFTANew BrunswickCanada

0.03

3.04

0.55

NAFTAAlbertaUS

NAFTANew BrunswickUS

NAFTABritish ColumbiaCanada

F = 179.56, p value <0.01

n = 7085
All p values are based on White
standard errors

p value

GDPImporter

Linear trend

Adjusted R 2 = 0.935

Percent
impact

NAFTANova ScotiaCanada
NAFTAPrince Edward IslandCanada

0.06

6.62

0.19

0.22

24.11

< 0.01

NAFTANewfoundlandCanada

0.22

24.85

0.10

Prince Edward Island stems from the opening of the Confederation Bridge in June
1997 as this significantly decreased trade costs for the province. However, if this were
in fact the case a significant increase in interprovincial trade would also be expected.
As discussed below, this did occur but the effect on international trade with the US is
much greater. Turning to central Canada, the overall results are qualitatively similar
(in terms of coefficient sign) to that found by Wall (2003), with Ontario and Quebec experiencing a positive effect of approximately 5%. Western Canada also differs
significantly from Wall (2003) in that the overall impact of the NAFTA on western
provinces is positive. British Columbia and Alberta exhibit highly insignificant effects

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261

from the NAFTA, Saskatchewan exhibits a statistically significant positive effect of

21.23%, while Manitoba exhibits a statistically significant positive effect on international trade to the US of 17.01%.
The overall result presented here is that the NAFTA has had a positive impact
on trade for the individual Canadian provinces. British Columbias, Albertas, and
New Brunswicks NAFTA effects are negative but in such a low magnitude that it is
inconsequential. Not all of the provinces with significant and positive NAFTA effects
are significantly impacted by the non-tariff changes in the NAFTA. The insignificant
impact for many Canadian provinces may be a result of multicollinearity between
the provincial NAFTA variables. However, the correlations between the provincial
NAFTA variables are never greater than 0.102, indicating that multicollinearity is not
problematic.8 In order to better assess this issue, and provide results comparable to
previous research, the provincial NAFTA variables are aggregated to the traditional
regional grouping of western, central, and eastern Canada. The results of this aggregation (not shown for brevity) is that a great deal of variation in NAFTAs impact is
lost. For example, the significant results for Saskatchewan and Manitoba become statistically insignificant when aggregated to western Canada. Little changes for central
Canada because Ontario and Quebec have similar parameter estimates. Lastly, eastern
Canada has the only positive and statistically significant result, indicating a 17.54%
increase in international trade; this last result is clearly driven by Prince Edward
Islands effect that is reduced because of the inclusion of other eastern provinces.
Consequently, the present analysis exemplifies the impact of aggregating provinces
and states into larger sub-national regions to assess the NAFTA, or any other policy
change: aggregating provinces into larger sub-national regions conceals the distinctive
effects of the NAFTA on those provinces.
4.2 International and interprovincial trade and the NAFTA
Turning to the internationalinterprovincial results, presented in Tables 3 and 4, all of
the non-NAFTA variables in both regression results are quite similar to the two regression models discussed above; so they are not discussed. The results for the effects of
the NAFTA on interprovincial and international trade to the US, however, are worthy of independent comment. The effect of the NAFTA on international trade to the
US is positive, statistically significant, and very close in magnitude to the effect of
the NAFTA shown in Table 1. The effect of the NAFTA on interprovincial trade is
also positive and statistically significant, increasing interprovincial trade by 15.29%.
Therefore, at the national level, the effect of the NAFTA has been to increase both
international and interprovincial trade.
The geography of the effects of the NAFTA on international trade to the US and
Canadian interprovincial trade are shown in Table 4. Of the ten effects of the NAFTA
on interprovincial trade, seven of them are statistically significant, some positive and
8 The correlations between the provincial NAFTA variables and the other independent variables are most
often below 0.25 and never greater than 0.75. Therefore, none of the correlations are above 0.80, a common
threshold for a concern regarding multicollinearity.

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M. A. Andresen

some negative, generally confirming the national statistically significant result. Two
provinces exhibit both statistically significant and negative effects from the NAFTA on
interprovincial trade: British Columbia and Ontario. British Columbias effect is not
only negative and statistically significant, but high in absolute magnitude (a decrease
in interprovincial trade of 30.39%). The negative coefficient for British Columbia is a
curious result because British Columbia has increased its interprovincial trade over this
study period by 27%, significantly more than Ontarios and Quebecs meagre increases
of 7 and 8%, respectively. British Columbia has decreased its share of total trade to
and from other Canadian provinces, but those decreases are common for all Canadian
provinces. In fact, Alberta, Saskatchewan, Ontario, Quebec, and Nova Scotia all have
greater relative decreases in their shares of interprovincial trade than British Columbia
(Statistics Canada 1998, 2000, 2005a). Ontarios negative and statistically significant
interprovincial NAFTA effect is not of the same magnitude as British Columbia, but
a noteworthy 13.01%.
Similar to the NAFTA effects discussed above, when the provincial NAFTA variables are aggregated into the three traditional Canadian regions much of the interesting results are lost. The impact of the NAFTA on international trade is statistically
insignificant for western and central Canada and statistically significant and positive
for eastern Canada, similar to the results reported above. However, the effect of the
NAFTA on interprovincial trade is statistically significant in all three regions: positive
in western and eastern Canada, negative in central Canada. The result for central
Canada is representative of the provincial NAFTA results, but not for western and eastern Canada. New Brunswick has an insignificant but negative interprovincial NAFTA
effect and Nova Scotias interprovincial NAFTA effect is statistically insignificant.
More importantly, however, is that Alberta, Saskatchewan, and Manitobas positive
interprovincial NAFTA effects dominate British Columbias negative effect. Clearly
valuable information has been lost.
The utility of using individual provinces and states is manifest, rather than aggregated sub-national regions. Overall, the effects of the NAFTA are positive for the
Canadian provinces with regard to international trade to the US, without any significant loss of interprovincial trade aside from the loss for British Columbia that is more
than compensated by Albertas increase in interprovincial trade.

4.3 Implications of these results

The implications of these results are twofold. First, and quite clear from the discussion
of the regression results, is that any aggregated analysis of the effects of the NAFTA
shrouds the effects on smaller geographical units. As such, when investigating the
impacts of a national policy, the spatial unit of analysis must be chosen with care. It
may be true that the NAFTA has not had an impact on some provinces, but that is not
the case for all provinces.
Second, the NAFTA has been found to affect Canadas trade with itself and the
US, despite the fact that the CUFTA had already been in force. Because of these (geographical) effects of the NAFTA in the presence of another free trade agreement, any
future national policy formation regardless of how significant it is considered to be

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263

must consider its varied impacts across the Canadian economic landscape. As with
the NAFTA, further integration with the US may be considered insignificant with
regard to its impact on Canada. However, as discussed above, if an agreement alters
the US relationship with Mexico, for example, that agreement may have implications
for Canada.

5 Conclusions and directions for future research

This paper has investigated the effects of the NAFTA in Canada as a whole and its
provinces. Past research on the effects of the NAFTA have had difficulty finding any
effect because of a lack of post-NAFTA data, but that difficulty is not present in this
analysis having nine post-NAFTA years of international and interprovincial trade data.
Only two studies have investigated the geographical effects of the NAFTA with one
study focusing on the US and the other focusing on Canada. Though the latter study
used aggregated sub-national regions for its analysis in both Canada and the US, an
overall positive effect of the NAFTA is found with that effect varying across Canadas
economic landscape.
The results presented in this paper both complement and extend this past research:
the NAFTA has indeed had a significant positive effect on Canadas international trade
with the US, a statistically significant and positive impact on interprovincial trade, and
the geographical effects of the NAFTA are best viewed at the provincial level. Using
the Canadian provinces and US states as the spatial units of analysis, it is found that
the geographical effects of the NAFTA are overwhelmingly positive for international
trade to the US and that only British Columbia has experienced a significant negative
change in interprovincial trade resulting from the NAFTA.
Natural directions for future research are to investigate the driving forces behind
these changes. For example, the NAFTA altered the mean center of the consumer
market in North America. Because of this change, firms may be changing locations
within the same country or to another country, altering trading patterns. Alternatively,
provincialindustrial level analyses can be undertaken to further refine the spatial scale
of NAFTA effects.

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