Integration Interrupted

Integration Interrupted: The Impact of September 11, 2001

The economies of Canada and the United States, closely linked for many years, began a formal process of tighter integration with the Canada?United States Free Trade Agreement (1989) and North American Free Trade Agreement (1994). Due to the ease of border crossing, American and Canadian consumers took advantage of exchange rate variations to engage in cross-border shopping, implying a movement toward unified markets in the border regions. This process of integration was interrupted by tighter border controls after the terrorist attacks of 9/11. In this paper, we investigate the disruption of normal patterns of day tripping across the US-Canadian border. Using seasonally adjusted monthly data for the period 1994~2011, we show a robust relationship between the exchange rate and the flow of day trippers in each direction, implying cross-border shopping to be a major motive for day trippers. Using dummy variables to represent the security measures enacted in September 2001, and the stricter documentation required after January 2008, we show that both sets of measures significantly reduced cross-border trips and thickened the border.