The Macroeconomic Impact of NAFTA Termination

U.S. president Trump’s administration has threatened to leave the North American Free Trade Agreement, and policymakers need answers about the effects that will materialize if this threat is carried out. How much would each country and industry gain or lose? Would trade imbalances within the region diminish? What would be the short-run costs of adjusting to new production and expenditure patterns? I use a dynamic general equilibrium model with a detailed input-output production structure and endogenous, time-varying trade elasticities to provide quantitative answers to these questions. If NAFTA is terminated, trade between NAFTA members will fall dramatically, particularly in sectors like agriculture where tariffs trade elasticities are high, and production in the transportation sector would decline. The macroeconomic and welfare consequences of NAFTA termination, however, are minor, and trade imbalances in the region would not decline.