Mexico as a Production Site for the Usa

Regional Integration in North America:

Mexico as Production Site for the U.S. Market

World Economic Issues: New Regionalism

Hochschule Mainz – University of Applied Sciences

[pic 1]

Editor:         Franz Liening-Ewert
24.06.94 in Mexico City
Lucy-Hillebrand-Straße 10

        55128 Mainz

Matriculation no.:        913637

Lecturers:         Ludmila Sterbova (VSE)

        Viviana Kluger (UCES)

        Ulrich Schüle

Module:        World Economic Issues: New Regionalism

Date:        30.05.2016

Table of contents

1.        Introduction        1

2.        Theoretical Background        1

3.        Regional Integration in North America – Mexico and USA        5

4.        Research Results        8

5.        Conclusion        14

Table of figures

Figure 1: Types of Regional Economic Integration        6

Figure 2: USA Participation in Regional Trade Agreements        7

Figure 3: Mexico Participation in Regional Trade Agreements        7

Figure 4: U.S.-Mexican Foreign Direct Investment        9

Figure 5: Total Trade of Mexico and U.S.        9

Figure 6: GDP per Sector of NAFTA countries        12

Figure 7: GDP Growth Rates for the United States and Mexico        14

1. Introduction

North America consists of three countries: Canada, USA and Mexico. This elaboration concentrates on the bilateral trade between Mexico and the United States. A gross domestic product (GDP) of about 1,294 Billion US Dollar in 2014 makes Mexico the 15th largest economy and a GDP of 17,419 Billion US Dollar in 2014 makes the USA the largest economy of the world.^[1]

The United States imported goods of 316.4 billion dollars from Mexico and exported goods of 267.2 billion dollars to Mexico in 2015. Taking these figures into account it becomes obvious that the relation of Mexico and the United States is very important for their economy. While the United States are considered to be an industrialized economy, Mexico still counts as an emerging market. A lower GDP per capita and lower labor costs than in the United States are characteristics of Mexican economy. This, in combination with the North American Free Trade Area, influences trade and investments between Mexico and USA.^[2]

The aim of this paper is to find out whether the U.S. market uses Mexico as a production site and how regional integration influences this issue. In order to give answer to this questions the paper explains relevant theories and analyzes corresponding empirical studies. The paper does not conduct own empirical study but refers to other secondary sources.

To answer the research question it will be examined which conditions have to be fulfilled for the scenario: Mexico is a production site for the USA. Therefore, a theoretical background will be provided to explain the issue in general. Empirical data will check the derived theory and the core results will be described and explained. Finally, a conclusion will be drawn and the limitations of the study will be stated. The elaboration uses a macroeconomic approach to clarify the relation between Mexico and the USA.

1. Theoretical Background

Arguing that Mexico is a production site for the U.S market concurrently assumes that there have to be reasons and premises for this specific situation. These premises induce the dynamic of one country being the production site of another country. The theoretical background shall outline the previously mentioned causal connection with the help of economic theory.

Globalization

Globalization occurs when the markets of different countries become more integrated and interconnected through economic transactions that cross national boundaries. It is the result of two major factors: technological advances and liberalization. Technological advances have lowered the costs of transportation, communication, and computation.^[3] It is to say that this kind of progress is a requirement for international trade because without the technical feasibility to trade across boarders each country would be forced to be settled with their domestic market and not able to access foreign markets for any economic transaction.

Trade liberalization involves removing barriers to trade between different countries and encouraging free trade. Liberalization includes reducing tariffs, eliminating quotas and reducing non-tariff barriers. Non-tariff barriers are for example specific regulations that grant advantages to domestic producers.^[4] It is essential not only to have the technical feasibility to trade internationally but also the political possibilities. The less trade barriers there are between two countries the more probable and profitable becomes trade between them.

Comparative Cost Advantages

If there are proper conditions for trade as for instance the political and technical requirements, then there also have to be goods that rather will be produced in one country than in another. Countries focus on the goods with least opportunity costs. They have different endowments of factors of production because they differ in population density, labor skills, climate etc. These differences tend to persist because factors are relatively immobile between countries. That is why the ability to supply goods differs between countries. What this means is that the relative costs of producing goods will vary from country to country. But instead of comparing the monetary cost of production or resource cost the opportunity cost across countries will be opposed to each other. Trading partners can gain from mutual trade if they specialize in producing and exporting those products with relatively low opportunity costs compared with the other country.^[5]