Working Paper: NBER ID: w12457
Authors: Beata Smarzynska Javorcik; Wolfgang Keller; James Tybout
Abstract: This paper uses a case study approach to explore the effects of NAFTA and GATT membership on innovation and trade in the Mexican soaps, detergents and surfactants (SDS) industry. Several basic findings emerge. First, the most fundamental effect of NAFTA and the GATT on the SDS industry was to help induce Wal-Mart to enter Mexico. Once there, Walmex fundamentally changed the retail sector, forcing SDS firms to cut their profit margins and/or innovate. Those unable to respond to this new environment tended to lose market share and, in some cases, disappear altogether. Second, partly in response to Walmex, many Mexican producers logged impressive efficiency gains during the previous decade. These gains came both from labor-shedding and from innovation, which in turn was fueled by innovative input suppliers and by multinationals bringing new products and processes from their headquarters to Mexico. Finally, although Mexican detergent exports captured an increasing share of the U.S. detergent market over the past decade, Mexican sales in the U.S. were inhibited by a combination of excessive shipping delays at the border and artificially high input prices (due to Mexican protection of domestic caustic soda suppliers). They were also held back by the major re-tooling costs that Mexican producers would have had to incur in order to establish brand recognition among non-Latin consumers, and in order to comply with zero phosphate laws in many regions of the United States.
Keywords: NAFTA; GATT; Walmart; Mexican industry; innovation; trade
JEL Codes: F1; F23; L65; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| NAFTA and GATT (F13) | Entry of Walmart into Mexico (L81) |
| Entry of Walmart into Mexico (L81) | Pressure on SDS firms to innovate and reduce profit margins (L19) |
| Pressure on SDS firms to innovate and reduce profit margins (L19) | Market share losses for firms unable to adapt (L19) |
| Entry of Walmart into Mexico (L81) | Efficiency gains for Mexican producers (F14) |
| Efficiency gains for Mexican producers (F14) | Labor-shedding and innovation (O49) |
| Presence of multinationals (F23) | Technology transfer and process improvements among local firms (O36) |
| Non-tariff barriers (F13) | Constraints on export growth (F14) |
| High costs of brand recognition and compliance with U.S. regulations (M38) | Limitations on potential for Mexican SDS exports to non-Latino consumers in the U.S. market (F61) |