Evaluating North American Trade Pre- and Post- USMCA Using Structural Gravity Model

The United States-Mexico-Canada Agreement (USMCA), effective in 2020, revised dairy trade provisions between the United States and Canada. However, disputes have arisen over the allocation of Canada’s tariff rate quotas (TRQs). This paper analyzes the impact of the USMCA on US dairy exports to Canada by quantifying changes in unobservable trade costs using an international border indicator and estimated trade elasticity within a structural gravity framework. Our empirical analysis finds no economically or statistically significant change in Canada’s trade costs facing U.S. dairy exports—either at the aggregate or individual product level—following the implementation of the USMCA on July 1, 2020. Moreover, we estimate that U.S. exports face higher trade frictions in Canada than in other major export destinations (eg, 65.1 percent higher than Mexico). Counterfactual simulations suggest that reducing U.S.-Canada export frictions to levels comparable to U.S.-Mexico would increase U.S. exports to Canada and Canadian exports to the U.S., albeit with a decline in intra-national trade. Export diversification toward emerging economies, coupled with targeted trade negotiations, could mitigate U.S. reliance on Canada’s dairy market.