NAFTA and the Realignment of Textile and Apparel Trade: Trade Creation or Trade Diversion?*

Abstract

Abstract A modified version of the partial‐equilibrium gravity model, originally proposed by Fukao et al. (2003 ), is employed to investigate the changing pattern of US textile trade. We use US Bilateral Manufacturing Imports and Exports data for 1989–2001 to assess the impact of labor wages, tariffs, and exchange rates on the composition of US textile imports before and after the creation of NAFTA. The analysis is performed at the SIC two‐digit industry level and the more disaggregated four‐digit sector level. We find little evidence of trade diversion in textiles frequently attributed to NAFTA, while trade creation is clearly present. Furthermore, lower wages in some textile‐exporting countries (e.g. countries in Asia) do not appear to significantly increase these countries' shares of US textile imports at the expense of other trading partners. However, variations in currency exchange rates and tariffs have substantial effects on the composition of US imports.

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