Trade Creation and Trade Diversion in the North American Free Trade Agreement: The Case of Agricultural Sector

This paper examines the impact of the U.S.-Mexico trade agreement under NAFTA. The results suggest that U.S. agricultural imports from Mexico have been responsive to tariff rate reductions applied to Mexican products. A 1 percent decrease in tariff rates is associated with an increase in U.S. agricultural imports from Mexico by 3.96 percent in the first six years of NAFTA and by 1.07 percent in the last six years of NAFTA. US imports from Mexico have also been attributable to the pre-NAFTA tariff rates. Overall, the results indicate that the U.S.-Mexico trade agreement under NAFTA has been trade creating rather than trade diverting