TRADE LIBERALIZATION BETWEEN MEXICO AND THE UNITED STATES

In recent years, there has been growing interest in the concept of linking the United States, Mexico, and Canada together in a North American Common Market. Due to the dismissal of proposals for broad arrangements such as a common market or a customs union, attention has turned to less ambitious forms of trade liberalization, namely, a free trade area or sectoral free trade agreements. The potential of these trade agreements deserves closer attention in both countries. This dissertation examines the effects of a hypothetical U.S.-Mexican Free Trade Area (FTA) in manufactured goods and discusses its possible trade creation and trade diversion effects. The hypothesis under study is that trade creation would outweigh trade diversion if all trade barriers were eliminated between both countries. This study provides policy makers with information about prospective effects of trade negotiations and highlights those industries which are likely to be most sensitive to tariff cuts. A partial equilibrium trade liberalization model is used to compute the short-run impact of the FTA. Estimates of trade diversion are based on the assumption that, in the absence of the FTA, the shares of Third Country suppliers would have remained constant. If these shares decrease, trade diversion has taken place. Trade creation is estimated by considering the expansion in consumption, or the reductions in the shares of domestic suppliers. The results show that trade creation is far greater than the trade diversion; however, they also show an uneven benefit. Mexico will increase its exports only be 15.3 percent, while the United States will increase them by 53.8 percent. Even on items where Mexico apparently had a comparative advantage, the United States will benefit greatly. It was seen that, on items where Mexico had a surplus, this turned into a deficit and, in the best of the cases, the surplus diminished dramatically. Among countries which are economic equals, economic integration comes naturally. Economic integration between unequals does not. In the case of Mexico, the political resistance to formal economic integration with the United States is reinforced by economic inequalities.