Working Paper: NBER ID: w4744
Authors: Gordon H. Hanson
Abstract: This paper develops a model of regional production networks based on localization economies. I consider an industry with two activities: one with location-specific external economies, the other with constant returns. Under autarky, localization economies imply the formation of an industry center. Agglomeration drives up wages in the center, causing the constant returns activity to disperse to outlying regions. Trade recreates the regional production network on a global scale. I apply the model to data from the Mexican apparel industry. Estimation results on Mexico's pre- and post-trade regional apparel wage structure are consistent with localization economies. Implications for the North American Free Trade Agreement (NAFTA) are discussed.
Keywords: Localization Economies; Vertical Organization; Trade; NAFTA; Mexican Apparel Industry
JEL Codes: F10; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| localization economies (R32) | formation of industry centers (R32) |
| formation of industry centers (R32) | increased wages in these centers (J39) |
| localization economies (R32) | geographical distribution of production activities (F61) |
| trade liberalization (F13) | reorganization of production (L23) |
| post-trade (F19) | decrease in wages in Mexico City (F66) |
| post-trade (F19) | shift in production patterns (L23) |