Is NAFTA Trade‐Creating or Trade‐Diverting? A System GMM Approach

This paper estimates the trade creation and trade diversion effects of the North American Free Trade Agreement (NAFTA) using a panel data set of 77 countries for the period 1989–2016. We found that the formation of NAFTA has resulted in both import trade creation and diversion. However, the magnitude of trade creation is higher than that of trade diversion. On the sectoral level, trade creation and diversion occur in both agricultural and non‐agricultural imports, with trade creation exhibiting a higher magnitude. The magnitude of trade creation and diversion is found to be the highest for agricultural imports, which are followed by total and non‐agricultural imports, respectively.