Introduction

In December 1992, the heads of state of the United States, Canada, and Mexico signed a trade agreement that could significantly liberalize trade between these neighboring countries in North America. This chapter provides an analysis of the effects of the new agreement on one industry – the automotive sector. We focus on production, employment, and consumer welfare effects of the agreement as simulated in a calibrated general equilibrium model that accounts for production and trade in automotive parts, engines, and finished automobiles. The model distinguishes between the effects of the agrement on the “Big Three” North American firms and on foreign firms producing in North America. This distinction is quite important because the new agreement will introduce significant nontariff barriers (NTBs) in the form of content rules for firms selling in the expanded North American market. The model we have developed provides a framework in which we can evaluate the effects of these important new nontariff barriers that may become permanent features of the North American economic landscape.

The analytical framework employed in this chapter is based on two earlier papers [Hunter, Markusen, and Rutherford (1990) and López-de-Silanes, Markusen, and Rutherford, 1992)]. In this chapter, we have extended our previous modeling work in several areas. First, we now distinguish two primary factor inputs to production: labor, and capital. Second, our new model accounts for more aspects of intrafirm competition in the international auto market.