/
A GENERAL EQUILIBRIUM ANALYSIS OF THE GAINS FROM TRADE
FOR THE MEXICAN ECONOMY OF A NORTH AMERICAN
FREE TRADE AGREEMENt
Hbracio E. Sobarzo.
Centro de Estudios Economicos
El Coleglo de Mexico
Preliminary Notes
March, 1991
These notes were prepared for use In discussions at the
Federal Reserve Bank of Minneapolis, Minnesota, USA. The
author wants to thank Arturo Perez who has provided very
valuable research assistance, as well as Timothy J. Kehoe
for valuable comments on a previous version of the paper.
O INTRODUCTION
Applied
used
general
instrument
liberalization
resulting
trade
for
and
analyzing
fiscal
resource
has
issues
since
they
movements.
increasingly
as
capture
In
been
it would appear
inmost
analyzing
Wairasian
trade
that
applied
it
such models might
1$
the
particular,
analyzed
now a common
general
liberalization,
small. As a result of this,
in
a
capture an
result
equilibrium models
welfare
effects
are
very
there seems to be concern as to
be misspecified
In
that,
of the assumption of constant returns to scale,
the
trade
equilibrium context.
However,
whether
such
reform
allocation
liberalization
general
that
equilibrium models have become a widely
because
they do not
Important source of gains from trade arising from
presence
competition.
of
This
economies
concern
empirical
evidence
endowments
have
theoretical
side
that
large
a
is
of
scale
reinforced
countries
volumes
growing
of
by
with
trade.
literature
focussing on the Issue of trade and
and
imperfect
the
increasing
similar
Moreover,
has
industrial
factor
on
the
flourished
organization
(Helpman and Krugman [1986]).
Although
not
as
fast
as
the
theory,
equilibrium modelers have started to work
applied
general
in that direction
(see Harris and Cox
[1986],
for
a model
Incorporating
some
sorts of scale economies for Canada).
This
eventual
United
paper
attempts
to
free
trade
agreement
States
wouid
have
modeling
economies
Harris and Cox model
of
the
between
on
presence of scale economies
of
evaluate
the
effects
Mexico.
Mexican
follows
Canada
economy,
in the Mexican
scale
that
in
an
and
the
industry. The way
the
for Canada and focuses
lines
of
the
in detail on the
effects within the Mexican economy.
The
choice
analyzing
the
of
incorporating,
Mexican
economy
economies
responds
of
not
scale
only
to
for
the
recent movement away- fiom Wairasian. models mentioned above,
butaiso
to the fact that the empirical
seems
confirm
to
advantages
of trade.
the
idea
exposition
presents a brief
comments
on
3
theory
of
comparative
is
[1990]).
organized
review of
the
trade
structure
of
Sect ion 2 describes the model
Section
the
In Mexico
is not enough to explain the volume and direction
(see Casar et al
The
that
evidenc!
comments
on
as
policy
follows.
Section
1
in Mexico and some
industrial
organization.
used and present some results.
possible
extensions
of
the
Finally, Section 4 contaIns some concluding remarks.
—2—
model.
it
Is
must be
important
to mention
that
regarded as preliminary
to do
some work
both
model
specification.
on
the
The
the
it
is
estimation
of
hope
since
results
is,
however,
presented
still
required
parameters
and
that
they will
very
long;
motivate the discussion.
1 HISTORiCAL BACKGROUND
1.1 Trade Policy
in Mexico
Mexico’s economic modern history
country
started
its
forties,
particularly
after
import
end until
the eighties.
was
strategy,
however,
which
essentially
characterized
often
second
began.
During
by
on
a
world
in
war
the
when
Such period would
these
based
process
five decades
an
the
a
not
economic
“inward—oriented”
growing
public
sector
levels of protection.1/ This process,
was not uniform,
are
the
substitution
intervention and high
not
industrialization
period of
growth
is
but went
Identified
by
through different
the
degree
of
stages
import
!~ During this period public sector expenditure Increased
permanently, particularly after 1970. Thus, for instance,
the contribution of the public sector to GDP went from 14.6
percent in 1975 to 25.6 In 1983. AS a result, while the
public sector deficit as a proportion of GOP was kept at
relatively low levels before 1970 (it averaged 1,4 percent
from 1966 to 1971), after 1971 it increased sharply; it was
10 percent in 1975 and reached 15.4 percent In 1982. (IMF
[19873).
—3—
substitution
reached by the country
at different
points
in
time 2/
While successful
was
achieved,
such
imbalances which,
unsustainable,
economic
I n that some degree of
at
thus
crisIs
an
the
strategy
the
modern
in
created
beginning of
leading
industrial izat ion
huge
economic
the eighties,
country
history.
in
to
became
Its
worst
particular,
the
externai disequllibr ium became the main obstacle to economic
growth.
Contrary
seventies,
byoil
to
the
of
which was the result of
exports and excessive
characterized by a
fail
“fiesta”
the
second
half
large revenues
foreign borrowing,
of
the
provided
the eighties
lack of economic growth arid a continuous
in the living standards of the population.
We
shal I
not
review
here
the
characteristics
process of economic growth both because
purposes
of
this
paper
and
because
it
is
of
this
goes beyond the
well
documented
2/ it has become almost a standard approach to identify
three periods, each of them with its own peculiarities. A
first period is broadly defined between 1940 and 1954, which
is characterized by erratic economic growth rates, currency
devaluations and price instabIlity. A second period, lasting
from 1955 to the end of the seventies, Is known as the
“stabilIzing development” period and is characterized by low
rates of Inflation and high rates of economic growth. And
finally, a third period, from the beginning of the seventies
onwards, when many of the economic imbalances accumulated in
the previous years started to become obstacles to the
economic growth.
—4—
elsewhere.3/
Instead
characteristics
of
we
the
will
trade
briefly
policy
that
strategy as well as the major changes
place
in trade policy after
comment
on
the
supported
such
that have been taking
1982. At the end of this section
we will also make some comments on the main features of
industrial
organizati9n
that
resulted
from
such
a
in
Mexico
the
long
period of protectionism.
1.1.1
1940—1982.
The
evolution
analyzed
of
with
commercial
reference
industrialIzatIon
process.
policy
to
the
stages
can
of
From the twent les untIl
be
the
the mild
fortIes trade policy was essentially used for tax: coiiéctlon
purposes-.
During
this
account surplus and,
period
therefore,
Mexico
enjoyed
a
current
balance of payments problems
did not constitute an Important element in the objectIves of
commercial
policy.
However,
considerations
roie
in
several
which
quotas
the
by
and
forties,
industrial
balance
promotion
the most
ad
modifIcations
Important were the
valorem
duties,
were
payments
to
levied
play
policies.
carried
on
In
out,
introduction of
3/ See for instance Trejo [1987], Soils
[1970] and Hansen [1971].
-5-
of
started
implementation of commercial
Important
and
the
the
a
1947
among
specific
basis
[1970], OrtizMena
of
“official
trade
prices”,
actually
gaining
that
took
differed
place.
importance,
from
While
the prices
industrial
at
which
promotion
during the forties and until
the middle
of the fifties balance of payments problems determined,
great extent, the course of commercial
was
to a
poi icy. Such problems
led to two currency devaluations.4/
From 1955 until
commercial
the beginning of the seventies,
policy
played
a
key
Industrialization of the country.
role
in
promoting
of trade policy was to create an environment
basically
prdducers
in
compet I t ion.
Unlike
an
by
providing
attempt
-
an
cover
for
umbrella
them
and the role
industrial
for
domestic
against
foreign
where
similar
.
-
other
to
Latin
American
countries
a
process
took place, Mexico was to rely more heavily
use
direct
of
opposed
to
controls,
tarIffs,
the
This period coincided with
the so—cal led 1’stabllizing development” period,
growth,
however,
particularly
although,
formally,
import
on the
permits,
commercial
as
policy
measures were made up of a combination of the two.
indeed,
from the forties direct controls
in the form of
import permits became the cornerstone of protection policy,
and
extended
number
4/
of
throughout
Items.
Thus,
the
for
In 1948 and 1954.
—6—
period
to cover
instance,
while
an
increasing
in
1956
33
percent
of
percent
in
subject to
import
value
categories
terms),
licensing
value terms). This
in
required
1973
Proportion of
(%)
(%)
Free (%)
is
Import
in
1966
1970
1973
1975
50.0
40.0
65.0
35.0
80.0
20.0
100.0
0.0
1977
1978
1979
1980
1981
1982
77.4
43.4
31.1
23.9
26.4
100.0
22.5
55.5
68.9
76.0
73.5
0.0
to
the
800, and Comercio Exterior
note
formally based
permits,
percent
44.0
56.0
important
Mexico was
(64
1
1962
Source: Balassa [1983], p.
It
categories
33.0
67.0
YEAR
Controlled
of
(28
Import Categories Control led
1956
Controlled
Free (%)
80 percent
permits
in Table 1.
TABLE
-
YEAR
the number
represented
is shpwn
import
fact
that
although
trade
on a combination of
that
the
latter
was
£1987]
poi ic~ i-n
tariffs
heavily
and
used
made tariffs superfi uous, as far as the protection effect
is
concerned.
It
is
also
to
Interesting
crIteria
had
be
licence,
in practice,
satisfied
to
1n
consider
order
to
that
although
grant
an
import
two crlter I a were the most relevant:
(a)
is the commodity produced in the country?
(b)
is
It produced in sufficient amounts to supply
national needs?5/
5/ See Kate and Wallace [1980]. pp. 44—45.
—7—
37
These
criteria,
being
the
explicit emphasis placed on the
producers
In
order
industrialization.
concerned
with
certainly not
As
version of
reveal
some
suggests
and
ones,
idea of protecting
achieve
aiso
effIciency
that
domestic
degree
those
opportunity
costs
the
of
criteria
were most
in the mind of policy makers.
expected,
concentrated
It
to
central
on
the
actual
manufactures.
levels
Table
2
of
protection
shows
an
the effective rates of protection
were
aggregated
for
the years
1960 and 1970.
TABLE2
-.
.
-
-
Effective Protect ion.
-
-
1960 and 1970.
Effective Rates of Protection
SECTOR
Primary
—Agriculture, livestock,
forestry and fishing
—Mining
Non—Durable consumer goods
Intermediate goods
Durable consumer and
capital goods
1960
1970
2.7
-.2.7
3.0
—0.3
21.6
13.2
—1.4
—12.3
31.6
16.8
64.6
77.2
Source: Kate and Wallace [1980], p. 135.
Note: Rates based ontariff~, not ORs.
One- of
protection
export
the
was
associated
a
markets.
permanent
Not
costs
loss
of
of
surprisingly,
-8-
these
higtt
levels.of
competitiveness- in
during
this
the
period
manufactured
percent
exports
of
total
commodities
total
a
for
Likewise,
very
poor
more
export
exports
in
exports
the
period
1955—57.
altogether,
25
primary
Thus,
for
for
15 percent
this
proportion
in the period 1970—1972.
Increased
than
of
performance.
non—ferrous metals accounted
shrank to 4 percent
primary
accounted
exports.
showed
instance, while
of
rarely
More generally,
by
only
2
percent
during the sIxties.
While
primary
during
the
concern
domestic
of
“stabilizing
commercial
industry,
in
the
development
policy
was
seventies
balance
considerations
regained
importance,
suggested,
e>eternal
disequilibrIum
the
prevIous
economic
years
growth.
was
surprisingly
the
of
payments
as
since,
the
protect
has
accum ulated
main
during
been
during
constraint
to
seventies
Indeed, during the first half of the seventies
the system
policy was very erratic.
protection
extended
Not
becoming
the
the
commercIal
of
the
to
period
to
was
at I
reinforced.
import
In
1975,
categories.
Import
After
a
permits were
devaluation
of
the currency In 1977 and the oil discoveries that took place
in these years,
however,
an attempt was made to reduce the
ievels of protection since balance of payments problems were
not a serious
that
some
limitation any more,
openness
of
event, the proportion of
the
economy
and somehow
was
it was clear
necessary.
import categories subject to
—9—
in
this
Import
permits
was
percent
in
reduced
were
supposed
eventual ly they would fall
happened
currency
maInly
and
eight I es
to the
77.4
percent
in
1977
the
Thus,
to
be
gradually
because
of
the
Imminence
of
the
by 1982,
all
temporary,
Before moving on
that took place
commercial
Indeed,
overva I uat ion
of
economic
crisis
mechanism of
a
very
important
it
Is
of
the
1).
in trade policy
Important
protection,
the nominal
to mention
together with
per doi I ar and then,
value
changed
hi gher
mai n
economic
the economy was the
exchange rate was kept
fixed for
little.
than
in
commercial
from 1977 until
Obviously,
19 81
since
Infiatlon
the United States,
partner,
the
its nominal
which
r esult
persIstent app reclation of the Mexican peso in real
shows
of
pol icy
from 1954 to 1976, at a parity of 12.5
pesos
very
mechanism of
industrialization of
a period of 23 years,
ratio
the
policy, was the exchange rate.
exchange rate:
the
that
did not
the changes
in the eighties,
used to favour the
p&rmanently
so
in
import categories were subject
to analyze
that a second major
Figure 1
34.1
This, however,
i icensing mechanism once agai n (see Table
country’s
to
1979. These changes were accompanied by a rise
which
tar i ffs,
from
the effective real
domes t i c
to
exchange rate,
foreign
prices
of
is
was
was
the
a
terrns.6/
defined as
main
trade
6/ According to Salassa [1983], in the sixties and seventies
wholesale prices rose by 32 percent in Mexico and by 10
percent in the United States.
-Jo-
Figure
‘1
EFFECTIVE REAL EXEHAHEE RATE IN MEXICO. 1948—82
0)
.4(V
L.
1,200
C)
a’
-c
U
‘C
a)
1,000
C)
0)
>
-4‘-I
C)
‘4-4U)
800
‘a
V
‘0
0,
I-
I-
Year
source; Cardoso and Levy
-11-
(1988)
N
N
0,
-
partners,
years
between
between
1948 and
1955
and
1982.
As can be seen,
1975
the
reai
in twenty
exchange
rate
appreciated siowly but cont i nuous I y.
This exchange
rate policy clearly
and damaged others.
generators
century,
of
external
such
affected,
as
This
Secondly,
since
were
goods
in
goods
were
resources
large
was
In
those
the
and
case
mining,
true
of
reduced
by means
the
5 everely
export
agr culture.
when
the
exchange
the most
intermediates
in contrast,
of
their
of
Mexico
half
were
of
cheaper
imported
large quantities,
first
reductions
become
the
who
largely
in
particularly
imports
overvalues,
groups
sectors which were tradit Ionai ly
agriculture
suffering
volumes.
rate
First,
benefited some groups
favored
and
capital
imports of consumer
of
Import
permits
and
tar I ffs.
Therefore,
the industriai
the aval labi I ity of cheap
goods,
but
competition
also
from
sector not only benefited
from
imported intermediates and capital
protected
domestic
from abroad was ruled out by
markets
the
since
Imposition
of
trade barriers, whenever domestic production existed.
In
Mexican
summary,
the
economy
anal ys is of
over
although to some extent
some degree of
the
the economic growth
past
decades
the country
suggests
succeeded
in
of
the
that,
achieving
industria I Izat ion, efficiency and opportunity
—12—
costs
were
policIes,
taken
not
while
into
successful
consideration.
in promoting
led to a very d istorted scenario
Such
a
set
industrial
in which
of
growth,
prices no
longer
reflected opport unity costs and the relative price structure
Of
the Mexican
economy
became a major
macroeconomic d isequllibrlum.
created
during
relatively
the
seventies,
main
such
a
concentrated
very
as
important,
obstacle
to
picture
a
very
marked
income
in
to the extent that
economic
growth
In
the
in
largest
the eighties changed
foreign debt
dramatically.
With
In the develojiing world and
export revenues going to service this debt, Mexico
domestic
liberalize
distortions
the economy.
This
sect ion.
1.1.2
and
imbalances were
decades
embarked on a programme of economic reform
remove
of micro
the external disequilibrium.
the second
most -oil
Many economic
few hands and, more
became
The
past
diseq ui I ibrlum,.
regional
It
the
source
and,
in an attempt to
more
Is the-topic of
generally
to
the next sub—
- -
1983—1990
In
economic
1983
Mexico
reform
Essentially,
in
initiated
an
attempt
far
to
reaching
modernize
programme
the
of
economy.
the purpose has been to remove th e many sources
of distortions created
domestic
a
producers
to
in
the previous years
foreign
—13—
competition.
and
to expose
Such
set
of
reforms
inc luded not only changes
general ly,
a
reduction
both direct and
Insofar
the
trade
policy
Implemented,
I Iberal ization
from one of
public
Is
after
the
1983,
deep
set of measures that
the most protected
measures were implemented
in the first
administration
the
stage,
started
scheduie,
economies
to
essentially
a
reduction
by official
prices.8/
measure was
the removal of
totai
schedule.
Mexico
to
The
of
second
GATT
In
2.000
in
trade
the economy
In the seventies,
by the nineties. Such
by
of
the De La Madrid
open
a
market
to
simplification
of
the
the
import
the number of
licensing
Items covered
this
stage,
the most
the
import
licensing requirement
categories
stage
1986,
1985,
9raduaiiy
and a reduction of
a
taken
Mexican
in three stages.
requirements
for
a
have
from 1983 to
particIpation,
tarlf.f
intervention
concerned,
to a one of the most opened economies
foreign
sector
indirect.7/
as
government
of
in trade policy but, more
Is
on
marked
which
the
by
significant
Mexican
the
strengthened
tariff
adhesion
the
of
trade
In 1985 the government began a privatization programme to
desincorporate its parastatal sector. By the end of July
1990, the number of Government—owned or control led entities
had fallen to 310 from 1,155 in 1982. (USITC [1991]).
V Official prices were a widely used Instrument of the
Me-xlcan government to combat-dumping or subsidized import
competition. Essentially, thIs instrument permits the
government to determine an “official” price that, usually,
differs from the transaction value. In 1986, for instance,
duties on approximately 1,000 items were calculated on an
official price.
—1 L —
liberalization process by freeing more- Items from the
licensing requirements,
phasing out official
use
of
official
reducing more the tariff
prices.
prices
was
import
level,
Indeed,
by the end of
almost
nonexistent
and
1987 the
and
import
tariffs were reduced from a 0 to 100 percent range
in 1985,
to
December
a
0
to
20
percent
range
by
1987.(USITC [1990]).
As a
Mexican
result of
economy
the
these
moved
measures,
from
a
in only
regime
import
in
three
which
years
the
almost
all
license to a regime
only a few selected sectors required
in which
import permit.9/
in a third stage the government has attempted to
consolidate
these
sectors
and
further
review
in
system
by
more
measures
reducing
detail
commenting
Import
by
the
further
level
the
dismanti Ing
on
the
instruments of protection
government:
of
-
imports were subject to
FInally,
end
liberalizing
of
tariffs.
of
evolutIon
some
Let
us
the
protection
of
the
three
trad~tionaIiy used by the Mexican
tariffs,
Import
-permits
and
official
prices.
9/Oil and oil derivatives, motor vehicles, pharmaceutical
products, footwear, electronic equipment and agriculture.
—15—
1.1.2.1
Import Tariffs
It has been mentioned that
were subject
the
use
to the
of
import
Import
protection effect
of
tariffs
protect ion.
a
process
maximum
subsequent
percent
fell
so as
to maintain
however,
reductions
as
the
1985 many
raised the
level
of
the Mexican government started
immediately
100
percent
to
set
the
maximum
tariff
50
taking
the
percent,
and
level
at
20
the trade weighted average tariff
In 1985 to 10 percent
in 1989.
-
Import Permits
As has already been pointed out,
and
after
from
in 1989. LIkewise,
1.1.2.2
Insofar
an equivalent
reductions,
level
from 25 percent
That made
removed and the authorIties
tariff
tariff
Irrelevant
Is concerned. Nonetheless,
In 1986,
of
import categories
licensing requirement.
tariffs
Import permIts were
ievei
In 1982 aft
large,
the main
Instrument of protection used
throughout
the
Industrialization
have seen,
for
instance,
Import
categories
requirement.
loosing
After
importance
3,064
Import
(from
a
total
items
of
import permits were,
that
In
were
subject
1985,
however,
In favor of
period and
to
Import
import
permits
were
liberalized
5,219
controlled
Thus,
from
this
1982.
licensing
in
have
been
July
1985
requirement
categories).
By
licenses covered approximately 35 percent of Mexican
-16-
We
percent of
the
tariffs.
in Mexico
until
1982 a hundred
by
1986
import
value,
and,
currently,
only
230 categorIes
(out
of
nearly
12,000) are subject to permits.
These
few
230 control led categories belong,
sectors:
products,
agriculture,
petrochemicals,
auto
parts,
apparel,
and
basical ly,
to a
pharmaceutIcal
wood
and
wood
products.10/
Official Prices
1.1.2.3
A thIrd
Instrument
use
official
the
of
items were
prices.
In
subject to official
4.4 percent of total
use of official
only 41
in Mexico’s commercial
their
price
As
a
it has been mentioned,
great
Important
1 ‘353
accounted
for
however,
the
1985,
to diminish so that
by
1987
set with this mechanism and,
prices were eliminated.
Structure
In Mexico has taken place
to
instance,
which
import value. After
by the end of this year official
1.2 IndustrIal
for
prices,
prices started
items had
1983,
polIcy has been
extent,
the
In a relatively
it was .c Iearly
Consequence,
as
IndustrIalizatIon
we will
an
try
short period and,
induced
to
process
process.
explain,
Is
10/ Some 60 percent of US agricultural exports to Mexico
require import license.
—17—
An
that
the
resulting
industrial
ol igopol istic manner, at
indeed,
structure
be easier
In
a
very
least for some sectors.
the conformation of
Mexico might
behaves
the
industrial
to understand wIth
structure
reference
in
to the
eyolutlon of the Import substitution process.
The
goods,
first
was
stage,
roughly
the
consolidated
sectors such as food,
apparel,
some
metallic
percent of the
substitution
in
industries
equipment
as
(spec I a I Iy
By
textiles, wearing
steel,
covered
more
than
the fifties),
for
a drop
these
began,
with
metallic
ra I I road
huge
strengthened
chemicai
machinery,
during
industry,
transport
paper
,
products,
the
sixties,
four
times,
and
This
process
particularly
rubber,-electrical
the production
and
non
In
the
-18-
the manufacturing
sectors
was
the
electrical
Industry. As a result,
of
in the
imports to domestic demand,
registered.
and the automotive
twenty years.
multlpl ied
was
97
Investments
products,
equipment)
In the ratio of
commodities,
as
a process of
and rubber products. A consequence of this was that,
fifties,
1950,
(Ros y Vazquez E1980]).
(middle of
intermediates
such
consumer
forties.
tobacco,
already
internal demand.
of
the
of
printing and publishing, as well
minerals,
In a second stage
substitution
by
beverages,
leather, wood,
non
import
mentioned
in only
industry
above,
altogether,
multiplied
their
production
levels
by
a
factor
of seven.
Whereas
industrial
in
the
sector
manufacturing
reflecting
been
fifties
was
very
industry
balance
suggested,
and
of
stable,
payments
to
economic growth. To a great
itself,
problems
since,
more
dependent
capital
the
it
more
was
concentrates
I ntermed late goods,
As a whole,
decades
production
[1990]).
main
as
it
has
obstacle
to
substitution
of
payments
industry
was,
the
intermediates
and
Instance,
the
of
goods
every
large
,
private
incipient.
-
structure was the result of
growth
ten
however,
in the fifties,
hand,
Is still
explosive
few
up to produce steel
the production of sophisticated
Industrial
The process,
a
It can be said that the Mexican
whereas
duplicated
sectors where
other
the
which,
bal ance
sophisticated
seventies
fluctuations
import
the
the
in the production of consumer and some
Intermed late and capital
three
these
of
goods.
industry
-
the
developed
in a very schemaflc way,
-
I arge
the
extent,
on
the
problems
become
originated
the growth
in
registered
started
process
sixties
since
years
(see
resulted,
firms
were
the
In
volume
Casar
of
et
al
some cases,
In
dominant.
Thus,
for
large public enterprises were set
ra I I road equipment,
firms,
often
-19—
and paper.
associated
with
On
the
foreign
fIrms,
started
machinery,
end of
30
to
produce
metallic
the sixties
percent
products,
foreign
and enjoyed
automotive
electrical
machinery.
addition
to
goods,
in a
a
industry,
consolidated
commodities
and
such as
well
as
electrical
products.
participated
electrical
foreign
In
production
the
beverages,
textiles,
with
In
the
and
Insofar as private national
with
the
non
firms,
firms,
in
they
traditional
construction and,
lesser extent, steel and chemicals.
Casar
1980,
et aI
as
[1990] characterize the Mexican
follows.
concentrated
They
IdentIfy
ol igopol les,
differentIated
oligopolies,
The so called concentrated
what
(b)
(c)
(d) competitive oligopolies,
industry,
they
call
condentrated
differentiated
and (d) competitive
ol igopol les are
to a
goods.
They characterize by high
order
differentiated
value added
durable
of
75
percent
oligopolies
lesser
and
responsible
and
Intermediate and,
(a)
industries.
in the manufacturing
produce
in
oligopolies,
some 20 percent of value added
the
By
establIshed posItion
chemicals,
position
food,
rubber
firms already
collaborate
their
such
extent,
for
industry
capital
levels of concentratIon
11/.
The
concentrated
participate wIth
15
In
and
percent
of
in the manufacturing industry and produce mainly
consumer
goods
consumer goods. The
and
to
a
less
degree,
traditional
levelof concentration Is between 84 and
11/ Estimated as the value of the production of the four
largest firms in the • industry as a proportion of the total
value of production in the industry.
-20-
77
percent.
12
percent
The differentiated
of
value
added
oligopoiles contribute
and
have
an
average
with
level
of
concentration of 40 percent. They produce mainly non durable
consumer
goods.
percent
of
The
value
competitive
added
In
manufacturing
40
percent,
concentration
level
of
production
light
capital
of
for the agroindustry,
some
non
standard
Industries
value
percent.
and
They
process
few
a
inputs
apparel, and shoe
In
capital
have
as well
summary,
generate
and
have
on
goods
goods)
Finally,
approximately
low
level
on
for
of
the
25
the
(inputs
can
be
said
percent
concentration
production
agrolndustries,
industries.
a
as
the competitive
of
of
of
14
some
construction
as some basic consumer goods
it
also
concentrating
intermediate
30
food and textile Industries as well
concentrate
Intermediate
materials
and
particIpate, with
added
ol Igopol les
in the food,
-
that
the
Industrialization
in Mexico generated an oi igopol Istic scenario where
large firms produce the most sophisticated
capItal, and durable consumer goods.
sophisticated the commodity produced
in a sector
That
It seems
is,
intermediate,
that the less
the number of firms
increases (towards a more competitive behavior).
is
nonetheless,
obviously
gives us an
Industrial organization
a
very
idea of
in Mexico.
—21—
superficial
analysis
the characteristics
but,
of the
2 THE MODEL
2.1 OvervIew of the Model
The structure
of
the model
Is outlined
equations underlying
the model
are presented
With
some exceptions,
model
resemble
very
equilibrium models
provide
only
a
much
and
general
poin ts,
with
3.
The
in Appendix A.
introduction of economies
notably the
of scale, and some additional
in Table
the assumptions of the
the
conventional
therefore
in
this
overview
of
the
section
model
,
general
we
will
and
then
proceed to comment on the question of economies of scale.
The model
(SAM)
for
the
mentioned
assumed
is calibrated around a Social
Mexican
in Table 3,
to
be
imperfect
assumption.
production
and
the
present
version
domestic markets and
of
we
(to
the
both
and
export
regions)
transformation
assume
that
specification,
year
modeled
side,
(CET)
the commodities exported
however,
elasticity of transformation
is
As
with
the
domestic
with
functions.
sold
In
in
are the same
The advantage of this
that,
values,
—22—
1985.
are modeled
commodities
(infInIte elasticity of substitution).
CET
the
imported commodities are
substitutes
On
exports
elasticity
for
domestIc and
Armlngton
constant
economy,
Accounting Matrix
by
using
different
it enables us to model
TABLE 3
General Characteristics of the MEGA model
1.-.~LeveI of Aggregation. The model identifIes 27 productIon
sectors, each sector producing a single commodity. Of these
27 commodities, 21 belong to the category of the so called
traded while the remaining 6 commoditIes are non traded.
(See Appendix 8).
2.— DimensIons. There are two factors of production, capital
and -labor, which, In principle, are assumed to be mobile
between sectors.
It
is assumed one consumer, and three
regIons:
Mexico,
North—America
(which
inciudes US
and
Canada), and rest of the world, it Is important to stress
that the model Is not fully general equilibrium In that only
the Mexican economy is explicitly modeled (the other regions
are modeled only in the sense that they buy our exports and
sell to Mexico their exports).
-
3.—
Production.
All
production
activities
combine
Intermediate inputs In fixed coefficients but are allowed
for some degree of substItutIon between domestic and foreign
commodities. At other level, they combine labor and capital
by means of a Cobb—Douglas to generate net output which in
turn
combInes
in
fixed
coefficients
with
intermediate
inputs. -(this specification is modified for sectors in which
economies of scale are assumed, as it Is explained in the
next
sub—section).
-
4.—
Foreign
Trade.
Each sector
produces
a share
for the
domestIc market and exports the remaining share to North—
America
and ROW.
Exported
commodities
face a
downward
slopping demand which depends, among other things, on a
price elasticity of demand (see Appendix A). The model
assumes Constant Elasticities of Transformation (CET) which
enables us to differentiate between domestic and exported
commodities. (in the version presented here It assumed an
infinite elasticity of substitution). On the import side,
the small country assumption is adopted, and domestic and
foreign commodities are assumed to be imperfect substitutes
(in the Armington manner). The exchange rate is assumed to
be flexible, and the balance of payments deficit or surplus
Is assumed fixed. The numeraire Is taken to be a basket of
final consumption goods.
5.— FInal Demand. Linear Expenditure System (because the
parameters are still in the process of estimation,
in the
version
presented
here
we
assumed
a
Cobb—Douglas
specification).
Likewise,
government
and
Investment
expenditures
are specified In fixed quantity shares.
—23—
4.
some
sort
of
price
discrimination
between
domestic
and
foreign markets.
Producers
buy
composite
fixed
coefficients
while
labor
combine
a
in
intermediates
Private
and
consumers
commodities
in
the factor markets
Cobb—Douglas
net
buy
combining
way.
output
combine
also
composite
At
in
them
in
capital
and
a
higher :le’~’eI
fix
proportions.
goods
and
consume
according to a Linear Expenditure System.12/
2.2 Modeling Economies of Scale and
In
-
modeling
economIes
of
scale
assumptions of the Harris and Ccx
assumed
that
behave as
In
the
firms,
non competItive.
industries.
to scale
some
In
the
in
some
industries
industrIes,
Is thus
involved and,
constant
and
average
Therefore,
as the
level
in the
cost
the
Is, we
activities,
we have two types
constant
product Ion
firms,
returns
number
of production
is
labor. A fixed
long run, marginal cost
Is
of
are mobile.
whose
endogenous, use a fixed bundle of capital and
cost
followed
IndustrIal
and factors of
non competitive
we
(1986] model. That
Therefore,
competitive
are assumed
Imperfect Competition
declInIng
increases,
Is
everywhere.
there
is a
12/ In the version presented here we assumed a Cobb—Douglas
specification since the valueof the parameters are still In
process of estimation.
—21+—
gain
in
marginal
efficiency
since
costs).
it will
As
average
decline
costs
later
be -explained
the degree of unexpio ited economies of sca ie,
to average
the ratio of marginal
(towards
in
detail,
is measured as
costs
Following Harris and Cox [op. cit..], a modified Cournot—
Chamberlain
where
firms
perceived
over
equilibrium
set
at
prices
cost.
industry
conditional
demand curve,
marginai
the
which
Freedom
zero economic profits in all
on
level
an
determines
of
entry
is
assumed,
elasticity
a markup of
and
exit
of
a
price
guarantees
industries so that price equals
average cost.
2.3 Parameter Values
Three set of parameter values are required
model
.
They
domestic
elasticities
are,
and
elasticities
imported
(a
and
of
commoditl es
the
inverse
Table 4 reports t hese values, which,
substitution
(e),
scale
export
elasticities
low.
—25—
between
demand
(k).
The purpose of
with these two dlf ferent sets
out some sensltiv ity analysis.
the
for the case of e and a
two set of values are reported: high and
running the model
to soive
is to carry
it
trade
should
be said
elasticities,
estimates,
that
as
for
the purposes of
reported
In
Table
this paper,
4,
are
guess
since estimation of these parameters are still
in
process.
TABLE
4
Elasticity Values
a
e
k
Low
High
Low
High
3.0
0.5
0.5
1.125
1.125
6.0
1.0
1.0
2.5
2.5
Construct ion
E I ectr I ci ty
Commerce, Hotels
Transp. & comm.
2.0
2.0
3.0
2.0
2.0
2.0
2.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
2.0
2.0
2.0
2.0
4.0
4.0
6.0
4.0
4.0
4.0
4.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
4.0
4.0
4.0
Financial
serv.
2.0
4.0
Other services
2.0
4.0
Agr Icu I ture
Mining
Petroleum
Food
Beverages
Tobacco
Textiles
Wearing apparei
Leather
Paper
Chemis
-
Rubber
Non—metal I Ic prod
iron and Steel
Non ferrous met
Metallic prods.
Non elect. mach.
Elect. mach.
Transp. equip.
Other manufac.
e
=
a
=
k
=
1.125
1.125
2.5
2.5
2.5
0.5~
0.5_
0.5
0.5
0.5
0.5
0.5
0.375
0.375
0.375
0.375
1.0
~1.0
1.0
1.0
1.0
1.0
1.0
0.75
0.75
0.75
0.75
1.125
-
-
4.0
Elasticity of substi tution (domestic—imported)
Export demand elasti city
inverse scale elasti cit
—26—
none
none
none
0.84
0.90
none
none
none
none
0.84
0.84
0.84
0.73
0.84
0.73
0.84
0.84
0.84
0.71
0.95
none
none
nOne
none
none
none
Insofar as the values of
were approached
et
ai
[1990J
inverse scale elasticities they
following calculations
for
the Mexican
index measuring the efficiency
carried out by Casar
industry.
They
estimated
an
in the use of scale economies
for the Mexican manufacturing sector for the year 1980.13/
ThIs
index measures
the average size of a
to a minimum efficient
estimations-
were
disaggregatlon
size of a
carried
than
ours,
out
so
firm.
at
a
that
firm
in
reiatlon
Unfortunately
different
it
was
their
level
of
necessary
to
establish a somewhat arbitrary mappIng to get an idea of the
degree
of
Identified
unexploited
scale
economies
in
the
sectors
in our model.
2.4 Results
-
In order to make the presentation as simple as possible,
we simulated a 100 percent tariff
and
bilateral
under
different
reduction both uni lateral
trade
elasticity
values,
reported In Table 4. Before commenting on the results,
important to mention
that a version of the model
sectors are competitive was also run. We will
these
results
fully
but,
presentation we will
13/ Based on the 1975
instead,
during
It
-27—
is
where all
not report on
the course of
refer them for purposes comparison.
Industrial census.
as
the
2.4.1 Unilateral
trade
liberalization
Our first p01 Icy experiment was to simulate a 100 percent
tariff reduction on
are reported
aggregates
in Tables 6 to
while
effects.
As
reported
for
imports from North America.
Tables
can
be
7
seen,
the two sets
The results
12. Table 6 summarizes
the main
to
12
report
detailed
sector lal
in
all
this
tables
results
are
of
trade elasticity
values:
low
and high. For presentation purposes we will comment here and
In the next sub—section the results of trade
both
unIlateral
and
bilateral
for
the
liberalization
case
of
low
trade
elasticities and then we will move on to make some comments
on the issue of sensitivity analysis.
Table
6
summarizes
experiments
and
can be seen
than
3.0
that
in
liberalization
increase
as
the
two
sets of
income goes up
a
proportion
extreme
with
varies
employment
the
real
percent
percent
percent
for
the main aggregate
high
between
of
case
trade
4.70
variables of
elasticity
in all
GOP
of
bilateral
6.10
increase
Increase
In
exchange
rate
the
in the
4.09
trade
Real
percent
In the non competitive sectors moves
It
In more
reaches
elasticities.
and
values.
cases
and
both
wage
while
from a 3.82
16w—unilateral case to 5.62 percent
high—bi lateral
depreciates
in
all
scenario.
cases
adjustment decreasing when liberalIzatIon
—28—
with
Finally,
the
rate
is bilateral.
the
of
TABLE S
AD VALOREM TARIFFS (%)
(BENCHMARK EQUILIBRIUM)
Sector
Tariff
PETROLEUM
13.2
17.2
6.0
FOOD
32.7
BEVERAGES
85.4
43.4
51.0
42.0
AGRIcULTURE
MINING
TEXTILES
WEARING APPAREL
LEATHER
42.1
wooo
PAPER
22.1
34.2
40.8
40.6
21.2
26.0
CHEMICALS
RUBBER
NON MET MINERALS
IRON AND STEEL
-
NON FER METALS
METALLIC PRODUCTS
N0NELECMACH
38.9
31.6
42.4
41.3
53.1
ELECTRICAL MACH
TRANSPORT EQUI
OTHER MANUF
—29—
TABLE
6
CHANGES IN SOME IMPORTANT VARIABLES (%)
UNILATERAL
Low
High
(1)
(2)
GDPATFACTORCOST
REAL WAGE
3.43
4.70
BILATERAL
Low
High
(3)
(4)
3.79
5.70
3.66
5.10
4.09
6.10
4.30
4.50
3.40
0.10
0.73
0.60
0.73
0.10
0.92
4.4-8
4.44
RATE OF EXCHANGE WITH
USAAND CANADA
RATE OF EXCHANGE WITH
-Row
TOTAL EMPLOYMENT
EMPLOYMENT IN THE NON
COMPETITIVE SECTORS
5.60
-
o.so
0.63
3.82
-
30-
-
-
5.62
TABLE 7
CHANGES IN GDP (%)
UNILATERAL
Low
High
(1)
(2)
AGRICULTURE
MINING
PETROLEUM
FOOD
BEVERAGES
TOBACCO
TEXTILES
WEARING APPAREL
LEATHER
WOOl)
-~
PAPER
CHEMICALS
RUBBER
NON METMINERALS
IRONANDSTEEL
NON FER METALS
METALLIC PR0DUCrS
NONELECMACH
-
ELECTRICAL MACH
TRANSPORTEQUI
OTHER MANUF
CONSTRUCTION
ELECTRICITY
COMMERCE
TRANSPORT
FINANCIAL SERV
OTHER SERV
2.67
3.10
6.23
3.64
4.02
4.47
2.90
2.98
3.90
2.93
2.75
2.61
3.42
3.87
3.18
2.04
2.52
2.93
4.57
7.57
2.21
2.72
3.22
4.75
4.44
3.76
1.02
0.38
3.20
8.38
3.04
3.60
5.09
1.31
1.26
3.92
136
2.67
1.80
3.37
5.29
4.15
1.12
2.17
3.65
6.34
12.81
0.53
4.04
3.79
5.80
5.38
4.46
1.76
-31-
BILATERAL
Low
High
(3)
(4)
-
2.96
3.28
5.73
4.15
4.47
5.05
4.07
4.67
4.70
3.36
2.99
3.15
4.00
4.82
3.79
2.66
3.19
3.93
6.25
7.49
3.77
3.26
3.52
4.79
4.53
3.98
1.11
-
-
0.71
3.42
7.46
3.91
4.28
6.10
3.75
5.28
5.48
2.93
3.01
2.78
4.48
7.09
5.09
2.23
3.35
5.66
10.02
12.48
3.97
4.55
4.24
5.73
5.39
4.70
1.81
TABLE 8
CHANGES TN EXPORTS TO USA AND CANADA (%)
UNILATERAL
Low
High
(1)
(2)
AGRICULTURE
MINING
PETROLEUM
FOOD
BEVERAGES
TOBACCO
TEXTILES
WEARING APPAREL
LEATHER
WOOD
-
PAPER
CHEMICALS
RUBBER
NON METMINERALS
IRON AND STEEL
NON FER METALS
METALLIC PRODUCTS
NON ELECMACH
ELECTRICAL MACH
TRANSPORTEQUI
OTHER MANUF
ELECTRICITY
COMMERCE
TRANSPORT
FINANCIAL SERV
OTHER SERV
-
10.32
9.81
15.87
11.53
12.06
10.35
11.07
17.10
15.42
16.42
20.55
19.OT
20.26
18.87
22.44
21.02
21.66
24.49
21.58
26.80
19.46
8.83
9.59
9.50
9.13
1.41
—32-
15.41
13.95
24.32
18.66
19.82
15.38
17.16
27.05
22.79
25.49
35.78
32.29
35.08
31.47
40.70
36.67
38.57
45.52
38.21
51.40
33.01
11.84
13.55
13.27
12.42
8.09
BILATERAL
Low
High
(3)
(4)
12.82
8.12
13.72
17.10
17.66
30.98
25.23
62.00
40.41
17.63
20.27
23.41
48.72
25.67
27.08
25.50
29.92
30.34
31.67
25.15
28.54
6.51
7.25
7.15
6.77
4.95
21.42
11.12
20.79
31.63
32.87
63.50
49.82
145.33
83.37
29.28
36.33
43.35
108.40
48.22
52.87
48.22
59.39
60.87
63.52
48.75
55.36
7.74
9.39
9.11
8.25
3.82
TABLE 9
CHANGES IN EXPORTS TO ROW (%)
UNILATERAL
Low
High
(1)
(2)
AGRICULTURE
MINING
PETROLEUM
FOOD
BEVERAGES
TOBACCO
TEXTILES
WEARING APPAREL
LEATHER
wooo
PAPER
-
CHEMICALS
RUBBER
NONMETMINERALS
IRONANDSTEEL
NONFERMETALS
METALLIC PRODUCTS
NON ELECMACH
ELECTRICAL MACH
TRANSPORT EQUI
OTHER MANUF
-
-
0.10
-0.37
0.14
1.19
1.68
0.13
0.78
1.21
-0.25
0.62
4.18
2.90
3.93
2.73
5.82
4.59
5.14
7.59
5.08
9.58
3.24
—33—
-1.97
-3.20
-2.67
0.80
1.78
-1.99
-0.48
-0.53
-3.86
-1.75
6.30
3.57
5.76
2.93
10.16
7.00
8.49
13.93
8.21
18.53
4.13
BILATERAL
Low
High
(3)
(4)
0.22
-0.28
0.43
1.43
1.91
0.25
0.92
1.42
-0.100.84
4.64
3.32
4.35
3.08
6.40
5.08
5.64
8.17
5.53
10.19
3.62
-1.93
-3.25
-2.46
1.07
2.03
-1.96
-0.41
-0.44
-3.90
-1.63
6.86
4.05
6.23
3.27
10.96
7.58
9.13
14.73
8.76
19.40
4.53
TABLE 10
CHANGES IN IMPORTS FROM USA AND CAN (%)
UNILATERAL
Low
High
(2)
(1)
-
AGRICULTURE
MINING
PETROLEUM
FOOD
BEVERAGES
TEXTILES
WEARING APPAREL
LEATHER
WOOD
PAPER
CHEMICALS
RUBBER
- -
NONMETMINERALS
IRON AND STEEL
NON FER METALS
METALLICPRODUCTS
NON ELECMACH
ELECrRtCAL MACH
TRANSPORT EQUI
OTHERMANUF
ELECTRICITY
COMMERCE
TRANSPORT
FINANCIAL SERV
OTHERSERV
28.28
8.42
1.57
33.62
9496
45.10
53.04
45.76
43.66
9.76
14.87
18.78
18.23
9.21
10.41
16.20
7.91
13.36
12.91
19.05
3.22
4.06
3.98
3.68
0.88
69.71
16.12
1.57
75.85
273.67
107.35
130.28
111.04
105.48
18.51
29.10
37.91
38.50
17.99
19.78
32.77
14.98
26.34
25.27
38.14
3.79
4.71
4.65
4.35
1.62
—34—
BILATERAL
Low
High
(3)
(4)
-
32.71
9.53
2.09
35.55
97.77
47.81
55.26
48.07
45.94
10.56
15.91
19.72
19.38
10.26
11.53
17.24
8.71
14.27
13.61
19.98
3.52
4.43
4.28
3.94
1.03
-
79.52
18.07
2.40
79.91
282.22
114.37
135.56
116.58
110.62
19.89
31.06
39.6440.51
19.66
21.84
34.56
16.02
27.80
26.24
39.64
4.24
5.21
5.05
4.65
1.76
-
TABLE
11
CHANGES IN IMPORTS FROM ROW (%)
0
RAL
High
(2)
3.02
3.29
5.27
1.98
2.14
1.01
0.62
2.32
1.18
(120
2.10
2.68
1.40
-0.98
-0.43
-3.52
-0.07
-0.34
-6.02
—35—
BILATERAL
High
Low
(3)
ç4)
-.
2.36
3.13
3.76
2.84
3.01
2.78
2.24
2.60
1.99
1.95
2.83
2.62
2.04
1.23
1.36
-0.54
1.50
1.21
-1.20
3.15
4.07
5.16
2.22
2.35
2.30
0.83
2.75
1.43
0;80
2.44
3.22
1.90
-0.19
-0.01
-3.31
0.39
-0.25
-5.86
TABLE 12
CHANGES IN PRICES OF THE COMPOSITE COMMODITY
UNILATERAL
Low
High
(1)
(2)
-
AGRICULTURE
MINING
PETROLEUM
FOOD
BEVERAGES
TOBACCO
TEXTILES
WEARING APPAREL
LEAThER
WOOD
PAPER
-
CHEMICALS
RUBBER
NON METMINERALS
IRON AND STEEL
NONFERMETALS
NON ELECMACH
ELECTRICAL MACH
TRANSPORT EQUI
OTHER MANUF
CONSTRUCTION
ELECTRICITY
-
TRANSPORT
FINANCIALSERV
OTHER SERV
.
-
0.1
-0.2
0.8
-0.8
-0.8
0.5
-0.8
-1.4
0.3
-0.5
-2.0
-2.5
-2.3
-1.1
-2.6
-4.7
-3.9
-8.7
-5.1
-7.0
-8.9
0.6
1.2
0.9
1.2
1.1
1.9
-
-
-
-36-
0.0
-0.2
0.7
-1.0
-1.1
0.6
-1.0
-1.8
0.3
-0.7
-2.3
-2.8
-2.6
-1.3
-2.9
-5.2
-4.4
-9.5
-5.6
-7.6
-9.9
0.8
1.4
1.0
1.3
1.3
2.3
BILATERAL
Low
High
(3)
(4)
-
0.1
-0.3
0.7
-0.8
-0.9
0.5
-0.8
-1.4
0.3
-0.5
-2.2
-2.6
-2.4
-1.2
-2.7
-4.9
-4.1
-9.1
-5.2
-7.2
-9.1
0.7
1.2
0.9
1.1
1.1
2.0
-
0.0
-0.2
0.7
-1.0
-1.2
0.6
-1.0
-1.8
0.3
-0.7
-2.4
-2.9
-2.6
-1.3
-3.1
-5.4
-4.5
-9.8
-5.7
-7.8
-10.1
0.9
1.4
1.1
1.3
1.3
2.4
(%)
Moving now to
Table
7
that
partIcularly
the sectorial
all
results,
sectors
expand,
It
and
pronounced
in
activIties
equipment
and petroleum.
In
Iookin~ at
important
to
simulated
under
balance
comes
is
have
fixed
from
a
in
mind
the
that
the
constraint
so that,
of
Increase
such
as
these
that
the
the
the
It
experiment
current
extent,
real
Is
transport
results,
policy
to a great
depreciation
can be seen from
is
was
account
the adjustment
exchange
rate
(see
which
raises
Table 8).
The
wage
increases
rate
cap I ta—labor
ratIo
competitive
industries,
on
suggests
that
occur
which
in
industry use capital
within
other
to
scale
equal,
are
percent
the
other
the
Table
ferrous
8.
industries
of
electrical
of export
less
would
indeed,
growth
contributes
that
soften
for
exports
the
the
as
iron
The
presence
adjustment
—37—
no
at
and
same
on
export
column
one
steel,
non
electrical
and
register
rates
story,
ROW (see
of
that,
returns
easily
equipment
to
appear
looking
products,
and transport
goes
then,
to
such
above 20 percent.
pronounced,
seem,
sectors
the
In
Increasing
more
by
firms
firms do better
would
with
accessing
metallic
machinery
It
of
firms
Which
the
In the non
exit
remaining
industries?
those
capable
metals,
hand,
more efficiently.
markets. This can be corroborated
in
industries.
the competItIve
the manufacturing
things
4.7
Table
economies
the
although
real
Of
9).
It
scale
exchange
rate
necessary
to
maintain
the
current
account
(surplus)
unchanged.
To
complete
structure of
(see
Table
main
demand
stronger
the
story,
12).
it
is
evident
component
drop
in
manufactures,
is
use is final
and
electrical
occur
structure
there
an
in
in
demand. This
also
the
is
at
commodities
the
case
transport
those
the
tariffs
gain
In contrast,
whose
those sectors
the
non
producing
other
lower
main
in part
(see Table 5)
since
an
commodities
equipment,
is explained
whose
register
of
commodities
result
of
look
demand
machinery.
efficiency
are precisely
that
This
to
the composite commodities
machinery,
base solution
sectors
necessary
intermediate
pr-ices.
reductions
is
is
price reduction of
such as non electrical
price
it
end
by the
but surely
competitive
intermediates
large volumes.
2.4.2
Bilateral
A second
reduction
trade liberalization
policy
in tarIffs,
domestic
tariffs
In
American
North
the world
demand
for
comparing
from a
price
experiment
that
and North
of
Mexican
tariffs
the
was
is,
American
was
simulated
Increase.
to a
—38-
The
as an
commodity
As
can
of our report
bilateral
a bilateral
reduction
tariffs.
corresponding
exports
simulate
100 percent
columns one and three
unilateral
to
in both
reduction
Increase- in
so
that
be
tables,
scenario does
not
seen
the
by
moving
change
results
significantly.
exports
increase and the adjustment of the exchange rate is
also
lower.
economy
With
main•ly
the
domestic
inability to get access
should
explicitly
Mexican
be
taken
We
protection
carefully
possible
shall
sInce
more
than the
are
no
restrictions
to
on
we
the
issue
In the last section.
We carried
doubling
notice
out
trade
unilateral
is
.
some
-
sensitivity
analysis
values;
liberalization
scenario,
the
commodity
prices
that
the
composite
in
case
there
is mo re scope
of
high
for
reduction
further
trade
is
agr I cu I ture,
not
costs
ge neral
whi ch,
contraction.
In
2.67
increase
percent
percent
in
the
parti cular,
high
is explaIned
substitution
In
the
trade
by
elasticity
GDP
in
low case
scenario.
point
to
naturally
since
generates
some
cases
This picture,
sectors
such
scenario
To
as
suffer a relative
some
high
to
from
a
0.38
extent
this
level
agriculture which
-39-
the
values
-
by
on
agr iculture moves
the reiatlvely
in
In
levels.
and wearing appare I
textiles
are
This effect
Exporter
.
first
elasticity
subst i tut ion.
In
basically
Focusing
contr i butes to further expand activity
however
of
-
elasticity
lower
result
petroleum,
This suggestion,
quota
comment
2.4.3sensitivityAnaiysls
a
of
rather
to export markets.
considering
exports.
quotas
exception
it would appear that what really constraints the
Is
however,
the
of
import
shifts
demand
towards
imported
however
do not seem to be very
trade
agricultural
elasticity
scale,
The remaining
sensitive
to
it
by
can
be
said
that
trade
some
sort
real
income
and,
more
of
economies
of
could
important
of
course
effects
arise
higher
not
reported
a
it
here,
Increase
was
that
the
case.
prevailed
in
almost
variabies
least
for
of
the
run
that
and
the
the
to
of
relatively
tariffs
incidentally,
same poi icy
and
another
Cox
given the high
Mexican
economy
are very
in
strong.
this presentation,
pricing behavior
level
model,
makes
sectors
Nonetheless,
incorporating
Harris
However,
the
it
of
the
-
In
were
although
experiment
results
in
in GOP are very small.
Canadian
all
eve-is.
economies
some
that
which,
the
of
markets.
high
solution
to be mentioned
model
assumption
the
we conducted
version
has also
present
at
allows
argued
than the current
Wairasian
terms of
be
from
the be.nchmark equilibrium
much
in
izat ion
In particular,
economies of scale on the export
it
in
scale
liberal
generally,
the economy, as a whole, more efficient.
realize
changes
-
the existence of
increaSes
assumption
the
sectors,
values.
Overall,
accompanied
goods.
the
model
version
of
the
Eastman—Stykoit
adopt
for
)evei
of tariffs
1985.
the
effects
We therefore
to concentrate on
the
that
on
decided,
just one
(Cournot—Chamberlain). Obviously we want to
-40-
incorporate
further
and
policy
incorporate
test
this
experiments
into
our data
second
but
it
behavior
pricing
would
be
for
necessary
to
levels of
protect on
has concentrated,
basically,
the current
of the Mexican economy.
Finaiiy,
this presentation
on the results under
(surplus)
that,
no
is
at
for
long
fixed.
the time
feasible
borrowing
the
maintained
least
other
the assumption
that balance of payment
In
doing
being,
mechanism
of
that
we
the Mexican
adjustment
assumed
economy
since
has
foreign
In the past decade has practically been frozen.
run,
however,
might
investment
this
fill
versions of our model
more simulations
additional
sources,
gap.
In
such as foreign
Fortunately
different
can easily been handled and no doubt
changing the model specification are needed
to get more certainty
as to how accurate
the fresults
are.
3 EXTENSIONS TO THE MODEL
The results presented
here should of course be regarded
as preliminary since more work
level as well
Insofar
to adjust
the
current
ser ious
as the level of model
as the data
Is
is required both at
the
levels of
protection
problem.
is concerned,
specification.
Immedi ate task
the most
protection of our
I eveis.
Perhaps more
the data
Fortunately
difficult
base year to
this
is to
get
i 5 -not
a
reliable
values
On
of
parameters,
this
particulariy
particular
point
a
trade
elasticity
research
is
values.
already
being
conducted
in Mexico and the estimat-ions of the Department of
Labor
Clinton
contribute
to
alleviate this problem. Finally, ascoul d be appreciated
the
by
results
tariff
IL
SMells
do
presented
restrictions.
the
tariff
the
price
not
the
method we choose wi I I
is.
of
The important
QRs
since,
tariffs
that
both
an
in
direction
of
it
the
is
however,
Mexico
free
and
the
North
trade
effects
through
to explicitly
mechanism.
Whatever
we believe
current
is
wi I
it
the effects
ow
America,
agreement
non
estimate
is to consider
given
of
to
Ity is
possibil
rat Ion i ng
present,
eventual
effects
depend on how accurate
thIng,
at
0f
and model
The other
quantity
the
way out
level
mechanism.
incorporate
incorporate
A usuai
equivalent
hope fully
will
I evei
very
move
of
i ikely
in
th
removing these barriers.
In relation
to the
issue of model
specif Ication
it seems
that more sensitivity analysis
is required,
particularly
the
question
Likewise
is desirable to
do
some
Stykoit
the
closure
sensitivity
assumption
preseflted
in
of
In this
year
assumption
rules.
analysis
which.
incorporati ng
as we already
paper because of
1985.
At
the
current
seem more sensible
it
—42—
Eastman—
me ntioned,
the high
ievels,
In the context
economy.
the
I
evei
on
was
not
of tariffs
however,
this
of the Mexican
The use of CET functions,
with
infinite
possibi I Ity
which
eiasticities
of
model ing
of
some
in this version were used
transformation,
sort
of
price
opens
the
discrimination
between domestic and export markets
Finally,
possibility
quantity
price
corni ng
and
to
model
imported
importers
wiNing
to
calibrate
pay;
the
them
is
to
treat
and
can
as
back to
b uy
a
export
side,
quotas
are
subject
to a QR5 shouid
in
the
That,
of
which
one
on
the
between
the
the
course,
these
to model
case
QR5,
restriction
price
estimate
ORs may be easier
binding
a
of
the- difference
and
rent.
to
question
impose
at
base yea r
the
if
market
is
requires
to
rents.
one assumes
export
of
the
On
that
commodi t I es
be fixed.
4 CONCLUDING REMARKS
The mode I
form
of
I
preliminary,
present.
Canada,
mperfect
suggest
here
has attempted
competition.
that
The
additional
to
incorporate
results,
gains
from
a
however
trade
are
Whi le the magnitudes are nOt very strong they are,
nevertheless
We
presented
more signiflcantthan
foiiowed
the
although,
lines
in
of
the
the Wairasian models.
the Harris
version
presented results of only one form of
and Cox modei
presented
here,
for
we
imperfect competit ion.
Additional
specification
be
considered
discuss ion.
work
both
at
the
data
is required and therefore
as
points
attempting
-
—44—
level
and
these results
to
motivate
model
should
the
APPENDIX A
—
MODEL EQUATIONS
A) PRICES
-Price of imports from United States (US)
PMEUj
-
PEUj~ (~tineui) TCEU
=
(1)
where PEUi is the price commodity i in dollars from US,
tmeui is the tariff rate on the commodity i imported from
US, and TCEU is the exchange rate- between pesos and US
dollars.
-Price of imports from the rest of the world (ROW)
PNRN~
PRNi (l+tmni) TCRM
=
(2)
where
PEN1 is the price of commodity i in foreign exchange
imported from ROW, tm~i is the tariff rate on commodity i
imported from ROW, and TCRM is the exchange rate between
pesos and foreign currency.
-Price of exports to US
PWEEU1
-
PDi/(l+teeui) TCEU
(3)
where PD~ is the price of domestic conmodity i, and teeui is
the subsidy rate on exports to US.
-—Price of exports to ROW
PWERMj~ =
PDi/(l+teni)
-
(4)
TCRM
‘~terat~j, is the subsidy rate on exports
to ROW
-Price ot the composite commodity
~pfs~1/C
+
(PDl(al+P~(al.PNEUl/$lPDl)°/(~fl
+
ri(ai.PNEUj/ri.PDi)d/(a’~.))~/0
+
+ Pr
U~[aj(fl1’PD~/a1.PMEU~)°/(”~)
+ Ti(fli.P1
Ni/ri.PNUi)d/(0~J]_u/0’
+
P1141[ajjTl.PDI/aI.PMRMI)0/(01)
+
$1(r~.PNEU1/fl1.PMRN~j0/(~’l)
+
where ~
~1 ÷
+
+
+
}
(5)
the scale parameter in the CES function from which
the previous equation is obtained, and ~
—LC—
is defined as
gtc_ (l+cesjj/cesj
(6)
w~en~
cesi is the elasticity of substitution, a~, fl~ and- ~i
are ~the associated domestic, imported from US and imported
frcrn-ROW parameters respectively, in the CES function.
—Price level
-
P=EfliPi
(7)
-
-Net price equations (P14)
PN1
=
PDjjl~tdi)
—
-
-
-
ta1~P~
(8)
where td1 is a production tax on commodity i and au
input-output coefficient.
the
B) PRODUCTION
-Value added functions
=
-
øutruLi” + (l_7r~)X16~)l/~
-
(9)
-
where L1 y Kj are the quantities of labSr and
respectively, in sector i, and j~ is defined as
=
(Ti
—
l)/r~
capital
(10)
where ~i is the elasticity of substitution between capital
and labor •in sector i.
-Intermediate demand
It~j= ~
XOj~
(11)
-
t#.hore XOj~ is gross product in sector i.
-Input aggregation functions
AI~ = mm
(IIu~/au~)
(12)
—Gross product aggregation functions
XOj~ = mm
where
(Au
vj~ is
,
Xu/v~)
the
value
(13)
added
commodity i.
—i~~—
coefficient
per
produced
t
—
C) FACTOR MARKETS
—Labor demand by sector
Li=(Xij~i){wi+[l_,ri)(rir/(w_w7j)]d/(6)}~/E
where r y w are prices
of capital
-Labor supply
LL
(14)
and labor
respectively
~-
.
-
(15)
-
-Capital demand by sector
(16)
-Capital
supply
KK
(17)
D) INCOME EQUATIONS
—Net private income
RP
-
-
-
(I Li-v + E K1~r)(1—dir)
where —dir— is the tax rate on income
-
(18)
=
-
—Net government income
RG
=
EPEUi’tmeum’TCEThMEUi +
EPDi~teeui’TCEU’EEUi
EPDj, tenj, ‘-TCRM ERMi t~EPDi~tdi ~
(ZLm’w
+
ZKm’r) ‘dir
+
+ EPRNi’tmni~TCRN~MRNi
-
-
-
-
(19)
where
NEUi
and
MEN1
are
imports
from
US
and
ROW
respectively,
and EEUi and ERNj, are exports to US and ROW
respectively.
E) INVESTMENT EQUATIONS
-Equality between savings and investment
TINy
spRP + sg’RG
=
-
(20)
+ FEU’TCEU + FRM~TCRM
wheie sp y sg are the income shares that households and
government save, FEU and FRI-I are the US and ROW external
savings, expressed in dollars.
—Investment by sector
=
where
of destination
par1~TINV
par1
is
(21)
the
share
of
demand.
-47-
sector
i.
in
total
investment
F) CONSUMPTION EQUATIONS
—Private consumption
CP1
=
of commodity i
parp1~ (1—sp) ‘PP/pj
-
where parp1 is the parameter
the utility
function.
—Government consumption
CGi
the government
the
-Intermediate
-m
to
commodity
i
in
function.
demand
(24)
-
-
-Export demand functions
EEUFi
associated
DEMAND
E au~.XO~
=
in
(23)
parameter
H) EXTERNAL SECTOR
EEU1
commodity
of commodity i
consumption
INTERMEDIATE
=
to
parg~• (l—sg) RG/Pi
=
•where parg~ is
G)
associated
(22)
-
-
to US
(PJ1/P~EU)eThehh1
(25)
where EEUF~ is US demand for commodity I if US and Mexican
export prices were equal, and elaeuj, is the US price
elasticity of demand for commodity i produced domestically.
-Export demand functions to ROW
ERN1
=
EEl-IF1
(PRMm/P~RMi)~~’~
(26)
where ERNF~is ROW demand for commodity i if ROW and Mexican
export prices were equal, and elarm1 is the ROW price
elasticity
of demand for commodity i produced domestically.
-Denand functions
Mfl11
where
=
for imports from US
[(fl~.PDI)/(a1.PMtU~)]0~-.Dm
D~::~.
is the internal
-Demand functions
demand for domestic
for imports
commodity i.
from ROW
xi~rq = {(ri.PDi)/(ai.Pt~I-1i)J0LDi
-48-
(27)
-
(28)
I)
DEMAND EQUATIONS
-jnternal
Dj
demand for domestic commodity i
RU~(Yj, + C?j + CG1 + V1)
(29)
where RUi is the ratio of domestic use. It indicates
the
share of domestic demand of composite commodity i in total
demand of composite commodity i.
=
-
RUI=Sm~/°[am+fll(a~PMEUj%fi’
.VDid/(0”P
+
+
ri(am.Pl-mNi/ri.PDj)du/t)]~~/di
(30)
—Total demand for domestic commodities
XDj,
Di + EEU1 + ERM1
(31)
J) EQUILIBRIUM CONDITIONS
-Equilibrium
in the labor market
L=ZLi
-
-Equilibrium
-
in the capital
market
-
-(33)
-
-Equilibrium
XOj,
=
XDi
in the commodity markets
-
-
—External equilibrium
flU
=
(32)
-
(34)
with US
S PEUi.MEUi~ S PWEEUpEEUi~
-
-External equilibrium with ROW
FRM
=
S PRNJ..NRMi
-
I
PWERNi.ERN1
—lia_
(36)
APPENDIX B
AGRICULTURE
1.
Agr icuiture
Livestock
Forestry
Fishing and hunting
2.
MINING
Coal products
Metal ore mining
Other mining
Quarrying
Other metal
ore mining
3; PETROLEUM
Petroleum extraction
Petroleum products
Basic petrochemicals
4.
natural
Meat and dairy products
Processed fruits and vegetables
Milling
of wheat and their products
Milling of corn and their products
Processing
of coffee
Sugar and products
Oils and fats
Food for animals
Other processed food
BEVERAGES
Alcohol Ic beverages
Beer
Soft beverages
6.
gas
FOOD PROCESSING
-
5.
&
TOBACCO
Tobacco and products
7. TEXTILES
Soft fiber textiles
Hard fiber textiles
Other textiles
-50-
8. WEARiNG APPAREL
Wearing apparel
9.
LEATHER
Leather
and products
10. WOOD
Manufacturing
Other
11.
wood
wood Industries
PAPER
Paper products
Prlntingand
12.
publishing
CHEMICALS
Basic chemicals
Fertilizers
Synthetic fibers
Drugs and medicines
Soaps and detergents
Other chemical tndustrres
13. RUBBER
-
Rubber products
Plastic products
-
14. NON METALLIC MINERAL PRODUCTS
Glass products
Cement
Other non metal I Ic m(neral products
15.
IRON AND STEEL
Steel
-
mills
16. NON FERROUS METALS
-
17.
Non ferrous basic
METALLIC
industries
PRODUCTS
Metallic furniture
Metallic
structures
Other metal lie products
—Cl
—
18.
NON ELECTRICAL MACHINERY
Machinery and non electrical
equipment
19. ELECTRICAL MACHINERY
Electrical
machinery
Electrical
appl
Electronic
equipment
Other electrical
20.
lances
products
TRANSPORT EQUIPMENT
Motor vehicles
Motor parts
Other transport equipment
21. OTHER MANUFACTURES
Other manufacturing
industries
22. CONSTRUCTION
-
Construction
23. ELECTRICITY
Electricity,
24.
COMMERCE,
gas and water
RESTAURANTS
AND HOTELS
Commerce
Restaurants and hotels
25.
TRANSPORT
AND COMMUNICATIONS
Transport
Communications
26.
FINANCiAL SERVICES AND
INSURANCE SERVICES
Financial services
DweI I Ings
27. OTHER SERVICES
Professional
Educational
services
services
Medical services
Recreational and cultural
Other services.
services
-52—
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