This article examines the U.S. and Canadian responses to the early years of the U.S.-Canada Free Trade Agreement from a U.S. regional perspective. It draws on a highly detailed data base from Statistics Canada. Although the article discusses which regions enjoyed the fastest growth in trade with Canada over this period, and why, the major focus of the study is the impact of increased integration on the nature of trade and investment flows between the two countries. The author explores, for example, whether trade has expanded on the basis of comparative resource endowments or has taken the form of increased intra-industry trade, two-way trade in similar products, which largely reflects economies of large-scale production and specialization.

The author finds that, to date, U.S. and Canadian firms are emphasizing trade rather than direct investment as a means of serving the integrating market. However, the results concerning the foundations for this trade expansion are mixed. At the national level, trade has grown on the basis of comparative advantage, and the share of two-way trade is little changed. However, national data conceal a variety of regional experiences: The share of two-way trade has grown in over half the regions, and changes in the industrial composition of trade are greater within regions than the national data would suggest. Contrary to conventional wisdom, moreover, structural change was greatest where two-way trade grew most. Thus, the author ends by suggesting that the nature of the intra-firm--rather than the intra-industry--response may be the key to determining how smoothly economies adjust to increased integration.