NAFTA as a means of raising rivals' costs

The North American Free Trade Agreement (NAFTA) was designed to reduce tari ff 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 co mplicated and costly NAFTA filing regulations. Such regulations raise costs of small firms relative to large firms in a domestic industry which engage s in trade between NAFTA countries. This implication of NAFTA regulations c an lead to increased concentration in domestic industries, an hypothesis wh ich can be tested as the transition period comes to an end. Finally, our mo del suggests an explanation for why the levels of trade from the U.S.A. to Mexico have been lower than general expectations.