Estimating the Effect of Changing Canada-US Border Costs on North American Trade Patterns and Expenditures: Detailed Methodology - ARCHIVED

This paper shows how to estimate the effect of the Canada-United States border on non-energy goods trade at a sub-provincial/state level using Statistics Canada’s Surface Transportation File (STF), augmented with United States domestic trade data. It uses a gravity model framework to compare cross-border to domestic trade flows among 201 Canadian and United States regions in year 2012. It shows that some 25 years after the Canada-United States Free Trade Agreement (the North American Free Trade Agreement’s predecessor) was ratified, the cost of trading goods across the border still amounts to a 30% tariff on bilateral trade between Canadian and United States regions. The paper also demonstrates how these estimates can be used along with general equilibrium Poisson pseudo maximum likelihood (GEPPML) methods to describe the effect of changing border costs on North American trade patterns and regional welfare.