Review of Industrial Organization 15: 103–113, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
NAFTA as a Means of Raising Rivals’ Costs
CRAIG A. DEPKEN, II
The University of Texas at Arlington, Department of Economics, Arlington, TX 76019-0479, U.S.A.
JON M. FORD
Amgen, Inc., One Amgen Center Drive, Thousand Oaks, CA 91320-1799, U.S.A.
Abstract. The North American Free Trade Agreement (NAFTA) was designed to reduce tariff rates
between Mexico, Canada and the U.S.A. over a period of ten years. However, lower tariff rates are
only available to ﬁrms that comply with complicated and costly NAFTA ﬁling regulations. Such
regulations raise costs of small ﬁrms relative to large ﬁrms in a domestic industry which engages
in trade between NAFTA countries. This implication of NAFTA regulations can lead to increased
concentration in domestic industries, an hypothesis which can be tested as the transition period comes
to an end. Finally, our model suggests an explanation for why the levels of trade from the U.S.A. to
Mexico have been lower than general expectations.
Key words: Game theory, trade agreements, ﬁrm size, regulation.
JEL Citation Index: L51, F13.
The North American Free Trade Agreement (NAFTA), passed by the U.S. Congress
in 1994, was designed to reduce tariff rates between Mexico, Canada and the
U.S.A. over a ten year period. Several studies have investigated the effects of
NAFTA (and other regional trade agreements) on market behavior, levels of trade
and social welfare. However, the approach taken in these studies typically assumes
that free-trade is the result of these trade agreements and have not investigated the
short- and medium-run implications of these trade agreements.
NAFTA is advertised as introducing tariff-free trade after the transition period,
but it is not clear whether free-trade will actually be obtained. Several policies other
than tariffs can introduce distortions into international markets such as voluntary
export restrictions, quotas, export subsidies and regulatory costs. Moreover, a little
reported distortion in trade between NAFTA countries is being realized by ﬁrms
within the U.S.A. In particular, the tariff-reduction transition does not guarantee
The authors are grateful to David Kaserman and participants at the 1997 Southern Economic
Association Meetings, Session 115G for providing helpful comments on an earlier draft of this article.
The usual caveat applies.