Journal article

Relaxing CAFE: Foreign direct investment, NAFTA and domestic product standards

Phillip McCalman, Alan Spearot

Canadian Journal of Economics | WILEY-BLACKWELL | Published : 2015

Abstract

This paper studies the effects of domestic product standards on the offshoring behaviour of automotive firms. In particular, we examine an important non-tariff barrier to trade within US fuel economy policy—the Corporate Average Fuel Economy (CAFE) “two-fleet rule.” By leveraging the removal of the two-fleet rule upon implementation of NAFTA and exploiting a policy discontinuity based on vehicle characteristics, we present evidence that the costs of offshoring were reduced to a larger degree for varieties that were subject to US fuel economy rules. Specifically, we estimate that prices fell between 5% to 10% for varieties subject to the CAFE two-fleet rule relative to varieties that were exe..

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University of Melbourne Researchers

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Funding Acknowledgements

We thank John Ries and two referees for extremely helpful comments. This paper has benefited from presentations at the All-UC Conference on Energy and Environmental Economics, UC Santa Cruz, Berkeley ARE; the Midwest International Economics conference; and the Canadian Economics Association annual conference along with a discussion by Deborah Swenson and comments by Jesse Cuhna, Carlos Dobkin and Jonathan Robinson. Outstanding research assistance from Sean Tanoos is gratefully acknowledged. The authors thank Rick Schmitgen and Lisa Williamson for data assistance. Support from the UC Center for Energy and Environmental Economics and the UCSC Committee on Research is gratefully acknowledged.