Trade and production impacts of rolling back NAFTA's agricultural preferences: An application of the systematic heterogeneity general equilibrium gravity model

We explore several scenarios under which NAFTA preferences for agriculture are rolled back using a systematic heterogeneity general equilibrium (GE) gravity model. In the systematic heterogeneity model, the distribution of productivity within the agricultural sector is linked to land and climate characteristics. The set of agricultural products in which a country is likely to have comparative advantage is then influenced by these characteristics. A country’s production and bilateral trade response to changes in a competitor’s trade costs is thus larger (smaller) for competitors that are more (less) likely to have comparative advantage in a similar set of products. We find that rolling back NAFTA agricultural preferences depresses North America consumer demand for agricultural products and decreases producer competitiveness, both within and outside North America. As a consequence, NAFTA members’ exports decline in North America and globally.