We build into a Ricardian model sectoral linkages and differing productivity levels across sectors to understand how the gains from tariff reductions in a given sector spread to the rest of the economy. We also propose a new method to estimate sectoral trade elasticities consistent with any trade model that delivers a gravity trade equation. We apply our model and use our estimated elasticities to identify the impact of NAFTA's tariff reductions on exports and imports of all members. We find that the trade and welfare effects of tariff reductions are reduced by more than 40% when the structure of production does not take into account intermediate goods in production and input-output linkages. We then decompose the effects of tariff changes for NAFTA members and find that 93% of Mexico's, 58% of Canada's and 55% of the United States' trade effects due to tariff reductions can be attributed to NAFTA's tariff reductions.

Analyzing the experience of Mexico under the North American Free Trade Agreement (NAFTA), 'Lessons from NAFTA' aims to provide guidance to Latin American and Caribbean countries considering free trade agreements with the United States. The authors conclude that the treaty raised external trade and foreign investment inflows and had a modest effect on Mexico's average income per person. It is likely that the treaty also helped achieve a modest reduction in poverty and an improvement in job quality. This book will be of interest to scholars and policymakers interested in international trade and development.