Abstract

The main goal of the former NAFTA and current United States–Mexico–Canada Agreement (USMCA) was to remove barriers to trade and increase trade in both directions. Clearly, the goal will be achieved more effectively if the real exchange rate was fixed among the three members. But they are not. They change not only due to changes in the nominal exchange rates but also due to changes in prices. We investigate whether the real peso-Canadian dollar plays any role in the trade between Mexico and Canada. We consider the trade balance of 16 industries that trade between the two countries and find that when we estimated a traditional linear model, indeed, we did not find much of a long-run impact on the trade balances. However, when we estimated a nonlinear model, we discovered long-run effects in 11 industries. While in two industries we found evidence of symmetric J-curve, in nine industries the concept of asymmetric inverse J-curve received support, included one of the largest industries that engage in 1/3rd of the trade.