Armington Models and Terms-of-Trade Effects: Some Econometric Evidence for North America

Elasticities of substitution among U.S. imports from Mexico, Canada, the rest of the world, and competing domestic production are estimated for twenty-two mining and manufacturing sectors, based on quarterly data for 1980-88. These elasticities will provide a benchmark for computable general equilibrium models of North American trade liberalization. The authors also find that estimated Armington elasticities are low and, therefore, researchers may want to reconsider the device of using high values of Armington elasticities in multicountry computable general equilibrium models to avoid large terms-of-trade losses associated with preferential trade liberalization.