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posted on 01 July 2017

Intra-Industry Trade With Mexico May Aid U.S. Global Competitiveness

from the Dallas Fed

-- this post authored by Jesus Canas, Aldo Heffner and Jorge Herrera Hernandez

Since the enactment of NAFTA, U.S. - Mexico trade and manufacturing processes have become increasingly integrated through cross-border production linkages. A new Banco de México economic model finds that U.S. imports from Mexico can be explained by taking into account the level of U.S. exports - suggesting that trade with Mexico may have contributed to enhanced U.S. global competitiveness.

The U.S. - Mexico commercial relationship reflects decades of production integration, starting with Mexico’s border industrialization program that established the maquiladora industry in the 1960s.

Expansion of trade between Mexico and the United States - a large portion of it coming through Texas - accelerated in the late 1980s, shortly after Mexico joined the General Agreement on Tariffs and Trade. U.S. - Mexico trade grew 108 percent in inflationadjusted terms between 1986 and 1993.

Trade flows further expanded following implementation of the North American Free Trade Agreement (NAFTA) in 1994. U.S. - Mexico trade rose 283 percent between 1993 and 2016, from $137 billion to $525 billion. Mexico today is the U.S.’s third-largest trading partner (behind China and Canada) and Texas’ No. 1 foreign market.

Studies suggest that perhaps half of U.S. - Mexico trade volume is made up of intermediate goods - items used to produce finished products. Given the large volume of intra-industry trade, it may not be surprising that a recent Banco de México analysis found it is necessary to explicitly consider the performance of U.S. exports to the rest of the world.

This analysis is groundbreaking because it suggests that U.S. export competitiveness depends partly on Mexican imports. While it has been long known that Mexican imports benefit domestic consumption and production destined for sale inside the U.S., little has been known about how Mexican imports may be boosting U.S. companies’ ability to export globally. The linkage underscores how production processes increasingly straddle the 1,954-mile border and how Texas plays an important role as a trade participant and principal gateway.

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