Working Paper: NBER ID: w4713
Authors: Gordon H. Hanson
Abstract: In this paper, I study the effect of economic integration with the United States on state-industry employment growth in Mexico. I disentangle the effects of two opposing forces on regional labor demand: transport-cost considerations, which, all else equal, encourage firms to relocate their activities to regions with relatively good access to foreign markets, and agglomeration economies, which, all else equal, reinforce the pre-trade pattern of industry location. I find that trade liberalization has strong effects on industry location. Consistent with the transport-costs hypothesis, post-trade employment growth is higher in state-industries that are relatively close to the United States. The results on agglomeration effects are mixed. Employment growth is higher where agglomeration in upstream and downstream industries is higher, but not where the agglomeration of firms in the same industry is higher. The results suggest trade liberalization has contributed to the decomposition of the manufacturing belt in and around Mexico City and the formation of broadly specialized industry centers located in northern Mexico, relatively close to the United States. The North American Free Trade Agreement is likely to reinforce these movements.
Keywords: Trade Liberalization; Regional Adjustment; Employment Growth; Agglomeration Economies
JEL Codes: F1; R1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | Higher employment growth in state industries located closer to the United States (J68) |
| Reduced transport costs (R49) | Higher employment growth (O49) |
| Agglomeration in related industries (R32) | Higher employment growth (O49) |
| Within-industry agglomeration (R32) | Employment growth (J23) |
| Trade liberalization (F13) | Decomposition of the manufacturing belt around Mexico City (L23) |
| Decomposition of the manufacturing belt around Mexico City (L23) | Emergence of specialized industry centers in northern Mexico (L69) |