United States Manufacturing Direct Investment and Trade: The Case of Canada and Mexico under NAFTA and Earlier Trade Liberalization Measures

This paper examines the apparent impact of the formation of the North American Free Trade Agreement (NAFTA) and earlier relevant trade liberalization measures on U.S. manufacturing direct investment and trade vis-¨¤-vis Canada and Mexico. Employing a maximum likelihood regression approach that focuses on the relationship between U.S. manufacturing direct investment in Canada and Mexico and its manufacturing trade with each of these countries, as well as the real GDP of each country, serving as a ¡°gravity model¡± proxy variable, empirical results are presented for the period 1989-2013. The results suggest that the process of regional economic integration in North America, with its concomitant relaxation of trade barriers, has served to modify what one would otherwise expect on the basis of the conceptual frameworks and scenarios that have thus far been developed in the literature with regard to the relationship of foreign direct investment to international trade. With regard to the expected relevance of gravity-type influences on U.S. direct manufacturing investment in its two NAFTA partners, for Canada these influences appear to be confirmed, but not so for Mexico, owing to the close interconnection between U.S. manufacturing direct investment in Mexico and its Mexican manufacturing trade.