NAFTA effects and the level of development

Much attention has been given to the impact that free trade agreements have had on member countries. There has been relatively little attention given to the impact on nonmembers, especially as it relates to both trade and FDI. This paper uses a gravity model framework to estimate the impact that the North American Free Trade Agreement (NAFTA) had on U.S. trade and FDI relationships with both member and nonmember countries. The estimated impacts are refined to account for each country's level of development. The results confirm many previous studies on the ability of the standard gravity model to explain trade and FDI patterns. This study goes further and establishes that there are additional impacts related to both membership in the NAFTA and levels of development.