ABSTRACT
The US and Mexico have been increasing their trading volumes for decades. The commercial relationships between Canada and Mexico have been rather small. The exchange of goods, services and factors between these countries is a natural result of vicinity as well as differentials in the range of goods each economy produces, among other determinants (Frankel et al. 1995). Some authors also include different resource endowments (Estrada and Kushida 1983). However, such arguments do not suffice to explain the size of trade between Mexico and Canada; institutional practices might also be relevant. However, if the theory of international trade would include transport costs as a determinant of trade between two countries, the distance between Canada and the US and between the US and Mexico may become an important factor in the picture (Krugman 1991). In a sense, trade volumes as well as the directions of flow imply that these countries are integrated to a certain degree, since they supply and demand goods in each other’s markets. Those flows might be of importance for the circular flow of the economy (Pearce and Turner 1990).
