Regionalization and Home Bias: The Case of Canada

Regionalization and Home Bias: The Case of Canada

The bilateral trade flows between Canada and the US have grown rapidly in the 1990s. Are they evidence of an emerging North American trading bloc? A gravity model of trade finds that while economic size and proximity can explain much of the substantial trade between Canada and the US, the US bias in Canada`s merchandise trade has grown since the formation of the Canada-US Free Trade Area. The rise in the US bias reflects an emerging gap between Canada`s home bias relative to the US and its home bias relative to the other major industrial countries.