Intranational Trade Diversion, the Canada-United States Free Trade Agreement, and the L Curve

Abstract

Abstract This paper provides an empirical analysis of the comparative evolution of intranational and international trade in the Canadian provinces since 1981. We establish a striking empirical fact, the L curve, that characterizes the comparative evolution of intranational (interprovincial) and international trade shares to GDP between 1981 and 2000. We also use a panel data model to evaluate the impact of changing trade costs induced by the CUSFTA on the intensity of international and interprovincial trade. The analysis casts doubt on the intranational trade diversion hypothesis, common in trade models such as the structural gravity model of Anderson and van Wincoop (2003) that was used recently to revisit the Canada–U.S. border effect. International trade appears to complement rather than substitute for interprovincial trade.