H M NAFTA INCREASED TRADE BETWEEN CANADA AND MEXICO?
Oscar R. Rodriguez Salinas
Submitted in partial fulfillment of the requirements f o r the
degree of Master of Development Economics
Dalhousie University
Halifax, Nova Scotia
Canada
April 1999
@ Copyright by Oscar R. Rodrzguez Salinas
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Dedication
To my Parents
Table of Contents
Tableofcontents
..,.,
L i s t of Figures and Tables . .
~ s t r a ~ t . . . . .
Abbreviations and Symbols used
Acknowledgements . . .
..,
. . . . . . . . . . . vi
. . . . . . . . viii
. ~ . , . . . . . i
.x .
. . . . . , - . .
x
. . . . . . . . . - xi
,
,
Chapter 1
. ..... .
....,.
1.3ObjectiveoftheThesis . .
..,
1 . 4 Organization . . . . . , . . . .
.
1.5Lirnitations , . . . , . . , . . , .
.
1.1 Introduction . ,
,
1 . 2 NAFTA, Mexico and Canada
.. . .
.. , .
, . , .
.
, , ,
..
, ,
1
6
9
11
12
Chapter
. ..
.
. .. . . . .
.
. ...- ...
2 . 2 . 2 Free Trade Areas . . . . , . . . - .
.
2.3 Principles of Trade Negotiations . . . .
.
2 . 4 Background on NAETA . . .
..,...
2.5 Sumary and Conclusions .
.- .. , - - .
2.1 Theory of Economic Integration
2 - 2 Forms of Integration
... .
2.2.1 Customs Unions ,
... .
.
,
13
15
16
21,
25
27
34
Chapter III
3.1 Trade and Economic Performance
.
3.2 H i s t o r i c a l Trade Analysis
3 -2.1 Mexico's Closed Economy (1980
...
.. ...
-
1985)
,
- 1994)
3 . 3 TradeandEconometrics
.
. .
3.4 Evolution of T h e Mexican Economy:
The F i r s t Y e a r s of NAFTA ( 1 9 9 4 - 1997)
3.2-2 Mexico's Trade Liberalization(1986
..
-
. ...
.-
3.5 Trade and Development After NAFTA . . .
3.6 Evaluating NAFPA at t h e Sectoral Level:
Trade Creation vs Trade Diversion
,
.
3.6.1 Trade Analysis ,
. .
3.6.2 Overall Conclusions
,
. .. ,
3.6-3 Revlew of Canada's C u s t o m Tariff Schedule,
.....
. ...
. ..
....
38
39
40
43
48
59
63
68
70
73
74
~
.
Chapter IV
... .....- - .. . .. .
83
Appendix 1 Mexicors Major Trading Partners (Exports1
Appendix 2 Mexicors Major Trading Partners (Imports)
Appendix 3 Trade between Canada and Mexico
. .. *
Appendix 4 Canada importn from Mexico by Chapter . .
Appendix 5 Canada imports from Mexico by Products .
Appendix 6 Canada exports to Mexico by Chapter . . .
Appendix 7 Canada exports to Mexico by Products . .
Appendix 8 Canada's Export - Import P r i c e Index . .
.,* . * - - ,,.
Appendix 9 Econometrics
Appendix 10 Total Canadian D i r e c t Investment . . . .
Appendix 11 Canadian Maquiladoras in Mexico
. - - .
99
101
103
104
105
107
108
110
111
116
117
4 - 1 Investments
4.2
-
,
.
,
,
Pattern of Investment
=
84
Chapter V
Conclusions , . ,
Concluding Remarks
...
References
.....
, , , ,
.
, , ,
.
,
.
, ,
. . . 119
L i s t of Figures and Tables
1,- Canada's
Trade with Mexico
, , , , , ,
-
,
2,- Share of Canadian Imports f r o m the World
3.-
Canadian Investment in Mexico
4,- Mexican Investment in Canada
5.-
,
-
, ,
,
.
,
,
,
,
,
,
.
40
- .
80
86
87
,
Employment of Canadian Maquiladoras in Mexico by Main
Sector
.
-
, ,
.
, ,
.
, , , , , , , ,
. .
,
.
90
1994 marked t h e year of an economic and historical change of
approach on trade issues in N o r t h America. Mexico, Canada
and the United States implemented the North American Free
Trade Agreement (NAFTA) which was the first trade agreement
negotiated
between
countries
at
such d i v e r s e
stages
of
development. T h i s thesis is an exploratory analysis of trade
and economic integration issues in N o r t h America. Because
Mexico and Canada did not trade much w i t h each other before
the implementation of the Trade Agreement, the review of the
trade results a f t e r f o u r years of NAFTA is undertaken in
order to evaluate the effects of the Trade Agreement on
trade f l o w s after 1 9 9 4 .
List of Abbreviations and Symbols Used
El:
ETB
EU
FTA
GATT
GDF
HS
LA
LDC
MA
Mm
NA
NAFTA
OECD
OLS
PTA
ROW
R~
RTA
SECOFI
TSP
TA
US
USITC
Autoregsessive Correction
Custom U n i o n
Canada - United States Free Trade Agreement
Developed Country
D e p a r t m e n t of Foreign Affairs and International
Trade
Economic Integration
Economic Trading Bloc
European Union
Free Trade Area
General Agreement on Tariffs and Trade
Gross Domestic Product
Harmonized S y s t e m
Latin America
Less Developed Countryr
Maquiladora Programme
Most Favored Nat ion
N o r t h America
North American Free Trade Agreement
Organization for Economic Cooperation and Development
Ordinary Least Squares
Preferential Trade Agreement
Rest of The World
Coefficient of D e t e d n a t i o n
Regional Trade Agreement
Secretaria de Comercio y Fomento Industrial
Time Series Processor
Trade Agreement
United States of America
United States International Trade Conunission
Acknowledgements
to express my sincere gratitude to all the
people that helped m e throughout this p r o j e c t . Ta my
supervisor Dr. Tom Pinfold, ta my two readers Dr. Barry
Lesser and D r . Alasdair Sinclair. To my friends i n Mexico
and Canada, Maripi, Daniela, B r i g i t , Tanja, Miss. Elizabeth
Harlock, my uncle D r . Esteban Herrera, my aunt Marilu
Salinas, Prof. Ian M a l i s t e r , J e s h Rojas, Humberto Zapata
and everybody else, that with ideas and friendship , helped
to make these two years and a half of studies in Canada a
remarkable and worthwhile experience.
1 want
1.1 I m O D U C T I O N
This thesis is a study on issues related to Mexico's
economic trade policy and its integration process with North
America,
The 1990's
characterized by the formation and
were
implementation of Economic Trading Blocs (ETBç) and Regional
Trade Agreements (RTAs) al1 over the world. This process has
alao
led
to
the
intensification
of
existing
trade
arrangements, but the motivation to enhance the formation of
Ems
varies from region to region and
country.
For example,
f r o m country to
in 1992, the European Union
(EU)
established and implemented the Single Market P r o g r a m ( S m )
which served as a stimulus f o r increasing trade between the
members and as a path for growth. This means that through
Economic
advantage
Integration
.
(EI)
firms in Europe
of the abolition of
restrictions that had
have
taken
tariffs and quantitative
restricted interchange before the
integration process, which began in 1957, with the Treaty of
Rome. 1
The idea of EI in North America (NA) was influenced by
the success in Europe and was seen as a stepping-stone to
increase the competitiveness of NA vis-à-vis other regions.
The free trade approach of NA is intended to make firms more
competitive not only in NA, but also in world markets. More
productive campanies are able to take advantage of increased
trade opportunities; more trade can increase prosperity and
raise the standard of living in the mernber countries of
W T A . Therefore, the economic integration process in NA can
be seen as a major instrument to promote growth in the
region in the medium and long run. The enhanced economic
integration of NA could also be seen as a mechanism of
economic cooperation between two Developed Countries (DC)
.
and a Less Developed one ( L X )
The developrnent, implementation and evaluation of an
ETB
f
is not
an easy task.
For
example, Balassa
(1969)
Shiells, Clinton, "Regional T a d e B l o c s : Trade C r e a t ing or
Divertkg? in E i n a n c e a n d n v d o Vol. 3 2
.
established that it is d i f f i c u l t to estimate the outcome of
an ETB because there are many factors to consider, such as
the
size
of
the
economies
involved,
their
stage
of
development, etc. However, one tendency i n order to estimate
the outcome of an EI has been to analyze the changes i n
trade patterns. If trade patterns have been positive then
the EI has been successful; otherwise, it has not,2 An
enhanced change in the trade patterns rneans that there has
A
been a significant increase in the amount of trade flowing
between members of the ETB.
In this context, the EI of
Europe has been successful.
There are some other issues that have to be adàressed
I
in the development of an ETB. For example, De Me10 and
Panagariya (1992) pointed out that traditionally, RTAs have
existed either among developing countries only, or arnong
a
developed countries only, Balassa
(1969) established that
the ciifference i n the industrial stages of countries is a
factor
that makes the establishment of
trade agreements
a
2
Balassa, B e l a ,
Th~ory of -tio&
(London: Taylor G a r n e t E k s , 1969. )
-1
a
difficult between LDCs and D C s . Latin America (LA) is a case
i n point,
Throughout
for
difficult
a
the
a
and
1980' s,
it
was
Arnerican
country
to
integrate
1970's
Latin
very
economically w i t h a DC because of many existing obstacles.
Therefore,
it
was
difficult
to
realize
the
potential
benefits of their comparative advantages because of the
trade barriers that were i n place. Moreover, many of these
economies had a policy of irnport substitution. In this
context ,
was difficult and almost impossible to establish
a free trade agreement with a DC.
In
addition,
Latin
American
countries
were
also
A
characterized by low levels of economic development. This
made
them
less
attractive
for
trade
and
investment
agreements. F o r example, during the 70 's and 8 0 's, a high
I
concentration of trade in primary products was typical of
Latin A m e r i c a n countries. Today, the situation has changed
as a result of the regionfs search for new markets, the
diversification of its exports, and the implementation of a
series of economic policies such as trade liberalization.
Overall LA now exports more manuf actured products
than
before. 3 This is particularly true for Mexico which started
to open its economy ta foreign cornpetition i n the mid-1980's
after decades of protectionism.
The process of the opening of the Mexican economy had a
significant impact on its external sector over a 10 year
period. For example, in 1980 the exports of o i l and natural
gas represented 63.8% of
Mexico's
total exports.
B y 1996
these products represented o n l y 18 -2% of total exports.4 In
1980, exports of manufactured products represented 23% of
total exports. I n 1992 they represented 47.6% of t h e t o t a l ,
and by 1996, had grown to 74 -7% of total exports.S In world
exports , Mexican merchandise exports represented 0 -95% in
1980, L 2 2 % in 1990 and L 8 4 % in 1 9 9 6 -
Economic Commission f o r Latin America and the Caribbean.
. .es t o
ICT
(Santiago, Chile: U n t t e d Nations, 1995. )
4
Banco de Mexico, The M
1997. )
s
Ibid *
h
(Mexico, DF:
M e x i c a n trade policy has been a significant factor in
these developments and has promoted the competitiveness of
the Mexican industrial plant. Edwards (1992) contends that
from a growth perspective, the main objective of
trade
refoms is to transform international trade into an engine
of growth. For Mexico, these reforms meant that the country
could
use
its
comparative
advantages
to
more
become
productive. Therefore, Mexico was, at the begiming of the
4
1990's,
at
a
of
stage
industrialization where
it
was
feasible to start a process of economic integration w i t h its
northern trade partners (the United States of America (US)
and
Canada) .
Zn
1994,
The
North
American
Free
Trade
Agreement (NAFTA), became the first Trade Agreement (TA) to
be negotiated and implemented between a LDC (Mexico) and two
DCs (the US and Canada)
.
1.2 NAFTA, MEXICO AND CANADA
Much has been written about the impact of NAFTA on
bilateral trade relations between Canada and the US, and
Mexico
and the US.
However,
few
have
investigated t h e
potential consequences of NAFTA on bilateral trade relations
between the two of the three countries that had the least
trade with each other befare the TA. Some commentators, such
as Hart (1990) argued that trade between Mexico and Canada
would
tend
to expand due
to
NAFTA,
because
the
trade
agreement provided an opportunity to increase trade and
investment ties between both economies. According to Hart
(1990, 67), "The absence of historic trade and investment
between Mexico and Canada and weak institutional links have
deterred more trade." NAFTA can therefore be seen as an
institutional framework established to promote and improve
economic relationships between the parties and to promote
economic growth in the region.
Lipsey, Schwanen and Wonnacott (1994) also predicted an
increase in trade between Mexico and Canada after =TA,
although they concluded that the increase would be rnodest.
They suggested that Mexico ' s competitiveness would
grow
through free trade with the US, and its exports to Canada
would consequently increase
.
According to them, however,
these exports would be minimal because oniy a few sectors of
M e x i c a n industry were competitive enough to penetrate the
B
C a n a d i a n market. They pointed out that before NAFTA, the
Canadian market was already relatively open with low tariffs
on
Mexican
Mexicors
products.
relatively
By
contrast,
protected
according
economy
and
thern,
to
the
minimal
D
interest shown by Canadian firms have been the main reasons
that Canada has not exported heavily to Mexico. The fact
that NAFTA
eliminates trade barriers and non-trade barriers
for both countries may promote exports from Canada to Mexico
*
and vice versa by creating a link between both economies.
Consistent with this view, Watson
(1991) forecasted that
with a more open Mexican market, C a n a d i a n exports to Mexico
a
would increase more than Mexican exports to C a n a d a , although
Canadian imports from Mexico would also increase. Hufbauer
and Schott (1992) argue that, with NAFTA, Canada would be in
a position to increase its exports to Mexico in financial
services,
example,
automobiles
with
NAFTA,
and
governent
Canadian
firms
procurement.
For
bid
some
can
development projects i n Mexico sponsored by
on
the M e x i c a n
Governrnent; in this context, government procurement exports
cari
be reached if a C a n a d i a n firm wins a contract to sel1
its products or services ta Mexico.
1.3 OBJECTIVE OF THE THESIS
In this study 1 examine trade relations between Canada
and Mexico
in the context of the 1994 MLFTA agreement.
Before the implementation of NAFTA, bilateral trade between
Canada and Mexico was small, at less than CanS3billion in
1990 of total Canadian trade of CanS285.2billion. This study
seeks t o establish i f the TA has helped t o change the trade
patterns between the LDC
(Mexico), and one of the DCs
(Canada). Much of this analysis is focused on issues related
t o t h e performance of t h e Mexican economy between 1980 and
1997 as a t o o l to analyze its trade relations with Canada
befoxe and after the TA.
NAPTA was negotiated in pursuit of highîy ambitious
objectives:
the
elimination
of
barriers
to
trade
in
manufacturing , agriculture and services; the increase of
investment opportunities; the creation of jobs ; and the
improvement of cornpetition between firms in NA.
"NAFTA was
based on the assumption that an open trading environment
would foster growth i n al1 the economies involved. " ( B u l m e r
1994) .
This provides
the
context
i n which to examine the
effects of NAFTA and to establish if there have been any
trends in the short
nin
that show that NAFTA is working.
This study will focus only on Canada
-
Mexico international
trade flows from 1980 to 1997. This period is sufficient
enough to demonstrate whether or not, a f t e r NAFTA, there has
been an increase in Mexico - Canada trade. If bilateral
trade
flows
between
significantly after
Canada
and
Mexico
have
1994, then MLFTA m a y have
changed
been
an
important causal factor. It may also have contributed to the
economic
integration process
in NA.
For
this,
it
is
essential ta take into consideration Mexico's trade profile
and to evaluate trade relations between these two countries
a
since Mexico's
trade liberalization. This will
understand the overall impact of NAFTA.
help
to
1.4 ORGANZZATION
This thesis is divided into f i v e chapters. In Chapter
Two, theories of Economic Integration will be discussed,
specif ical ly , customs unions and free trade areas, because
these theories are basically related to the framework of
NAFTA. In this chapter, I also review the basic p r i n c i p l e s
of trade negotiations, notably those applied in practice and
implemented in NAFTA. 1 will also make a brief introduction
to NAFTA in order to provide a better understanding of the
trade flows after 1 9 9 4 . Châpter Three provides an analysis
of bilaterai economic relations between Canada and Mexico
from 1980 until 1997. It alsu makes use of an econometric
mode1 to analyze the impact of NAFTA. A brief discussion of
the Peso C r i s i s of December 1994 and its implications for
trade patterns is also presented. Chapter Four presents an
analysis of Canadian fixed direct uivestment in M e x i c o from
1983 to 1 9 9 6 and its possible implications for overall trade
between these two couritries. Chapter Five concludes this
study ,
1.5 LIMITATIONS
The trade analysis conducted in this thesis will focus
on trade in goods only; trade in services between Canada and
Mexico is l e f t f o r f u r t h e r research,
2.1 m O R Y OF ECONOMIC INTEGRATION
NAFTA
is
an
Economic
Integration
(EI)
of
three
s context NAFTA is an ETB. In economic
countries; in t
theory, EI can be defined as ma process which involves the
.
amalgamation of separate states into larger regions " (ElAgraa
1983,
chapter,
I
128)
.
EI
cm
take several forms;
first explain what
constitutes ET
in this
and
then
explain the f o m of EI related to the framework of NAFTA.
F i n a l l y , the principles
of
trade
negotiation that were
implemented and used in t h e TA are discussed.
The process of international trade liberalization has
two approaches :
1.-
The rnultilateral approach whose purpose
is to
reduce tariffs and non-tariff barriers in world trade; and,
2.-
The
regional
approach
which
takes
into
consideration agreements among a small number of nations,
and whose main purpose is to establish free trade between
them, while keeping barriers to trade with other nations.
I will discuss the second approach and its theory,
because it is the most relevant for an analysis of NAFTA.
Economic
integration
involves
trade
negotiations
between sovereign nations and the removal of major trade
impediments
between
participating
countries
after
the
establishment of a time schedule. It is also concerned with
the set-up of certain elements of cooperation between the
countries
involved.
(1969), freeing
For
barriers
example,
to
trade
according
and
to
Balassa
coordination of
policies constitute important elements of integration and
cooperation.
EI creates both opportunities and challenges for the
nations involved, with economic costs and benefits which
have to be carefully considered. Enhanced economic costs
m e a n that some sectors of the economies involved will lose
within the HI, while other sectors will benefit. Therefore,
the principle should be that the economic benefits should
outweigh the costs. In essence, the ultimate objective of EI
6
El-Agraa, A l i M., m o f e - t i o m
B r i t a i n : B i d d l e s L t d . , 1983,)
Trade (Great
is to increase the wealth within the member s t a t e s ,
7
Fox
example, economic growth can be achieved by the productivity
and
economies
of
scale
obtained
by
firms
in
a
more
competitive environment and in a larger market of fered by
Er,
2 - 2 FORMS OF INTEGRATION
Economîc integration cari take several forms: a customs
union (CU), a free trade area (FTA), a common market, an
economic union or complete economic integration.8
1 will analyze only the first two of the above. They
are
the most
relevant to NAFTA.
hurthermore,
the main
purpose of this thesis is to analyze the framework of NAFTA
in order to understand the patterns of trade between Canada
and Mexico after 1 9 9 4 ,
7
Bela, The T h e o y o f I n t e - t î a
( G r e a t Britain: Taylor Garnett Evans, 1969.)
Balassa,
I~tearatjon
2.2.1 CUSTOMS UNIONS
Viner (1961) was the first who attempted to provide a
theory of CU. Viner defines a CU as a group of countries
that agree to
lower theix respective tariff rates and
quantitative restrictions on imports from each other. At the
same tirne, this group of countries agrees to establish a
common external tariff on imports
from the rest of t h e
world,
Viner (1961, 5) argues that a' perfect CU must meet the
follawing conditions:
1. -
A
complete elimination of
tariffs between the
members.
2 . - The establishment
tariff
imports
from outside the union.
3.-
An
apportionment of the customs revenues between
the members in accordance with an agreed formula."
Viner a l s o establishes that countries could gain if
they join or form a CU. For example, one a£ the key factors
to establish a CU is to increase the s i z e of the market, In
this contact, competitive countries would be in a better
position to export their products ta other members of the
CU* Therefore, one of the main economic ben& its of the CU
cornes
through
the
achievement
of
a
better
production
structure; thus, "the CU is economically efficient because
it establishes a movement in t h e direct ion of international
specialization in production in accordance with comparative
costs.
(Viner 1961, 51)
Lipsey
(1970) also
defines a
CU
as
a
theory
of
geographically discriminatory reductions in tariffs that
entails a change in the tariff system of the member states.
In a CU, countries are expected to import and export a
larger quantity of the goods already imported and exported
from each other, and t o l o w e r the volume of imports and
exports from countries outside the union. 9 This change in
the composition of the f l o w of trade has an impact on the
welfare of the countries concerned. It is very difficult to
know a priori,
if the Cü will improve welfare or not.
Shiells (1995, 31) argues that "economic theory does not
9
Lipsey, Richard G.,
. . .
-sis
1970 ,)
mtoUnions: A
(London: Lewis Reprints Ltd.,
Thenyv of
state
precisely
whether
the
CU
will
mean
a
welfare
improvement for its members or for the world as a whole."
However, the prediction is that the CU will tend to lead to
an expansion in the volume of trade between the rnembers.
Viner
(19611, in
his
classic
Custom
Union
Issue,
established an analytical framework to determine if a CU
produces welfare improvement or not. This framework is based
on two key concepts: trade creation and trade diversion.
(These concepts are defined and discussed further below.)
According to Viner, if the CU creates trade on a net basis,
then it can be seen as welfare improving for t h e members and
for the world a s a whole. O n the other hand, if the CU
diverts
trade,
it
would
not
necessarily
be
welfare
improving. This depends on the specific circumstances of the
CU once it is implemented. In essence, CU can be free trade
oriented o r it can be a protectionist bloc.
The results of fol-ming a CU depend on the extent of
trade creation and trade diversion.
countries join a
For example,
if two
(country I and country 2) , there w i l l be
both trade c r e a t i o n and t r a d e diversion. This can be seen
as follows,
1.-
Trade creation,
i n t h i s context, means that new
trade is c a r r i e d out between the two countries after they
lower tariffs between them. A s t h e p r i c e s of imports become
cheaper because of t h e reduction i n t a r i f f s , country I w i l l
tend t o import more from country 2. At t h e same t i m e country
1
will
tend
to
reduce
its
(more
expensive)
domestic
production of t h e goods that it imports from country 2 . T h i s
suggests that the CU is a movement i n the d i r e c t i o n of goods
being supplied from the lower c o s t source t o t h e h i g h e r cost
member country. In this case, the CU is f r e e trade oriented.
2 -- Trade Diversion, is considered t o b e the effect of
buying from a higher cost source than before. In this case,
country
1
displaces
imports
from
a
nonmember
partner
(country 3 ) w i t h imports from t h e member p a r t n e r (country
2),
even though production costs are lower i n country 3 than
i n country 2 .
In this situation the CU has the effect of
diverting purchases from t h e lower cost source (country 3 )
towards the higher money-cost source (country 2). Therefore,
the CU becomes a protectionist trading bloc. In essence, the
CU
becomes a device
for making
tariff
protection more
e f f e c t i v e for its members and free trade occurs o n l y inside
the union.
The main purpose of a CU is to s h i f t sources of supply.
Enhanced sources of supply refer to the country where the
goods are produced (the country source) . The shift of the
supply source w i l l occur regardless of whether the CU i s
f r e e trade oriented or not. For example, i f the CU is free
trade oriented, then t h e supply of goods should increase and
continue to corne from the lower cost source, In this case
and according to BI theory, the CU could benefit at least
one of the members, although both may benefit, or the two
combined could have a net benefit. This can only be proved
a f t e r the implementation of the CU. O n the other hand, if
the trade diverting e f f e c t is dominant, then the area would
have become a protectionist trading bloc. In this case, the
outside world loses in the short run as trade is diverted to
CU countries. In the long run, the outside w o r l d may benefit
from t h e slow diffusion of the increased prosperity of the
CU toward o t h e r regiondo This could be
the
result of
either increased purchases of imports by the CU £ r o m non-CU
countries, or the exports of capital from the CU to other
countries, or a combination of the two.
The
theory of
and
effect
the
EI suggests that the trade creation
trade
diversion
effect
result
differentials in production costs. In practice, t
from
is not
very easy to determine the size of each effect in a CU or
any kind of economic
integration. However,
possible t o examine the trade c r e a t i o n
-
it
should be
trade diversion
a
e f f e c t s by analyzing trade data at the commodity level.
2.2.2
FREE TRADE AREAS
Free Trade Areas
(FTAs) are largely based on the
CU
theory. T h e main difference is that the countries that form
a
FTA
maintain
their
own
trade
poli-
and
tariff
r e s t r i c t i o n s for outside members. T h i s means t h a t i n an FTA
#
there is neither a common external tariff nor a common trade
policy f o r the countries involved, as i n the case of a CU.
Viner, Jacob, me -tom
Uaion
Anderson m e r Associates., 1961,)
IO
Issrie,
(Washington DC:
However,
in establishing an FTA, the countries involved
typically first negotiate a Preferential Trade Agreement
(PTA). In this PTA, they consider the time-path of the
reduction of the tariffs, determine the sectors and the
standards involved, and establish the rules to be followed.
As
such, a FTA irnplies
a cooperative agreement between
sovereign nations.
Countries tend to have more trade w i t h t h e i r neighbors
than
with
other
countries,
due
in
part
to
lower
txansportation costs. Therefore, ETBs and FTAts tend to be
formed between countries that are natural trading partners .
Enhanced natural trade partners are countries that trade
heavily w i t h each other before the creation of a FTA. In
this context, Wonnacott and Lutz (1989) developed a rnodel in
which, by forming a FTA, countries that are natural trading
partners
would
achieve
welfare. This is because,
an
inclrease
in
their
economic
according to Womacott and Lutz
(1989), the trade creation effect will tend to be higher
than that of trade diversion. This is because the reduction
of trade and non-trade barriers negotiated in the FTA leads
t o an increase i n the total amount of trade between these
countries,
Bhagwat i and Pangariya (1996), however , crit icize this
theory arguing that trade diversion does not necesçarily
depend on the initial volume of trade. They suggest that it
can also depend on country preferences .
It is
important to point out that FTAs are a move
toward free trade in a specific ETB. The formation of a FTA
is more likely to increase economic welfare for the members
independently i f trade is created or diverted because of the
increase i n
becorning
trade inside the area.
more
regional,
the
As
formation
world
of
trade is
FTAs
could
facilitate a move toward woridwide free trade. For example,
i f the world becomes divided into a few E m s , negotiations
to reduce barriers to trade might have a better chance to
succeed than negotiations between 50 or more countries. Some
authors like Krugman,
Helpman and Razin
(1991), however,
have portrayed FTAs as a threat to world trade. They have
argued
that
countries
in
an
ETB
can
becorne
more
protectionist toward countries outside the area.11 If ETBs
fail to cooperate, then the world could become divided by
trade blocs, with free trade within the ETBs, but with
higher barriers to trade between blocs. However , according
t o Bergsten (1997) , globalization has gained m o m e n t u m .
He
States that E T B r s are establishing greater cooperation with
non-members. In this context, if E T B rs keep moving towards
global free trade, then the risk of increased protectionism
between the blocs is diminished,
The issue relating to negotiations between countries
that form an ETB goes beyond the analysis of this thesis,
although
it
relevance of
is
important
this
to
discuss
it
briefly.
issue for this study is
that
The
trade
negotiations establish a framework to demonstrate whether an
ETB is free trade oriented or not ,
11
Kirugman, P a u l R., U B i u p r a L i g r n bad;l in Elhanan Helpman
and Assaf Razin, I n t e r n a t i o a m a d e and Trade Policy
(Cambridge: The MIT P r e s s , 1991,)
2 - 3 PRINCIPLES OF TRADE NEGûTïATIONS
Countries, like individuals, want to pursue their own
interests; when countries believe
in
free trade
it
is
because it is in their own interest, independent of what
other countries do. 12
The purpose of the PTA is tu obtain benefits while
maintaining, as sovereign nations, the right to define their
own national goals. At the beginning of trade negotiations,
i n i t i a l t a r i f f s are typically much higher than the optimal.
Therefore, trade negotiations refer to cooperation between
the countries t a establish a mutual reduction in tariffs,
non-trade barriers and quantitative restrictions.13
Reciprocity is an important issue in a PTA. The General
Agreement
on
Tariffs
and
Trade
(GATT) gives
a
clear
definition of reciprocity, and it refers to "the ideal of
mutual changes in trade policy which bring about equal
changes
U
in
import
volumes
between
trading
partners."
Bagwell, Kyle and Robert Staiger. "An Economic Theory of
GATT" in n
i
c Rese(Fiorking Paper
No. 6049, May 1997.)
(~agwell 1997,
17)
Reciprocity
is
a
movement
to
open
markets, which is the main purpose of a reciprocal trade
agreement.
In the PTA, governments want to increase welfare, so
they
look through al1
the possibilities that
exist
increase the benefits that they can achieve by
to
lowering
t a r i f fs with their trade partners. The gains f r o m lowering
tariffs are basically the opening of new markets; which
clearly are economic benefits for the countries involved. As
a general result, exports tend to increase due to their
relatively lower prices and consequently higher foreign
demand in the new market. "A tariff causes domestic market
prices
in the import country to exceed real
prices of
imports, and the removal of the tariff consequent on the
formation of the CU will cause domestic prices to fall."
(Lipsey 1970, 15)
The nondiscrimination principle of GATT also has to be
considered when establishing a PTA.
nondiscrimination
as
the
Pomfret (1991) defines
elimination
of
discriminatory
treatment in international commerce. Hlith this principle, a
reduction of a tariff on imports from one source produces,
at the same time, a reduction in tariffs from al1 other
sources. Nondiscrimination means that a country t h a t gives a
tariff concession ta another one, will have to give it to
all the member countries of the GATT. For t h e case of an
FTA, GATT establishes that the countries involved could
a
negotiate and implement lower tariffs inside the area but
would not be allowed to impose higher tariffs than the
actual ones for non-members. Therefore,
the tariff of the
Most Favored Nation (MFN) of GATT is granted for countries
that are not members of an FTA,
2 - 4 BACKGROUND
ON NAFTA
NAFTA is based on the theory of FTAs.
In this case,
Canada, Mexico and the US maintain their own externa1 trade
policy and do not have a common one as in the case of the
EU. For example, Desmond (1996, 1) notes that "NAFTA does
a
not dictate any particular set of macroeconomic policies to
any of F t s members. NAFTA was intended to protect national
sovereignty
in
certain
areas-"
Moreover,
NAFTA
was
negotiated at a reciprocal level; this is one of the reasons
that NAFTA can be seen at the international level, as an
economic caoperation agreement between one LDC and two DCs.
In the spring of 1990 the Mexican Govemrnent made a
proposal to the United States for the creation of a FTA. The
Mexican Governent wanted t o guarantee access of Mexican
goods
to
the US
market;
it wanted
to promote
foreign
investment in order to help modernize the Mexican economy,
and to achieve sustained economic growth. At the beginning
of the negotiations, the Government of Canada asked t o
1
participate. The US and the Mexican Governments agreed to
include Canada as a full member in the negotiations and with
this, NAFTA became a trilateral agreement.
On June 12, 1991, Mexico, Canada and the US started the
negotiations for NAFTA; it was signed in December 17, 1992,
and approved in 1993 by the three countries' legislatues.
Also in that year, supplemental side agreements on labor and
environment were negotiated. NAFTA w a s in place on January
1, 1994.
For Mexico, NAFTA represents the reinforcement of the
extensive market -oriented
1985.
14
These reforms
policy reforms
initiated after
were initiated to
foster economic
growth by relying on markets rather than industriai policy.
NAFTA attempts to anchor achievements already made in Mexico
and to reinforce the efforts to prornote economic growth and
political
pluralism
northern neighbors
already
important
-
15
by
prornoting
free
trade
with
its
For the US, NAFTA reforms enhance an
export
market. 16
For
Canada,
NAFTA
reinforces and strengthens its advantages in the US market
obtained by the Canadian US Free Trade Agreement (CUSFTA) of
1988, and expands export opportunities for Canadian firms to
Mexico. 17 It is important to emphasize that NAFTA used, as a
14
Lustig, N o r a ,
on Stratecnr w
rlca (Paris: Organization for Economic Cooperation and
Development (OECD) - Inter-American Development Bank, 1992 .)
15
Brown, Drusilla K,, Alan V, Deardorff and Robert M.
Stern. Worth A r n e r i c a n Integrati~n*~
in The Economi c Journal,
Vo1.iU2 (November 1992,)
16
Ibid .
17
Hart, Michael. A
Policy and Law
3990,)
-
A
for Trade
Institute for Research on Public Policy,
for
u,
(Ottawa: Centre
model,
CUSFTA, whose
main objective
"was
to create an
increasingly open market for trade and investment in goods
and
C
services
between
the worldsr two
largest
trading
partners." (Çchott 1990, 1) The main objective for Canada in
that agreement was to maintain security of access to the US
market.
Since the beginning, NAFTA has been a controversial
t
issue in al1 three countries. In the US and Canada, one of
the main concerns has been the possibility of job losses to
Mexico because of its lower wage standards. For the medium
and srnall-sized Mexican firms, one of the main concerns was
the future '5nvasionW of the Mexican market by large and
highly techno-productive US and Canadian firms. Throughout
the negotiations the US perceived the agreement as
an
opportunity to export more products to Mexico, and also as a
way t o control the illegal immigration of M e x i c a n workers.
Canada,
on the other hand, appears to have entered the
negotiations mainly to maintain the viability of the CUSFTA.
#
In Canada, Mexico seems to be perceived more as a potential
threat for losing jobs than as a p o t e n t i a l market, although
this perception has changed in some respect as Canadian
firms have realized the opportunities that exist with NAFTA
in Mexico,
The key idea of NAFTA was t o create the biggest free
trade zone in the world, with a market of 356 million people
and a Gross Domestic Product
1990 prices.
social
as
countries,
10
(GDP)
of USS6.5
trillion at
From the outset, its purpose was t o promote
well
The
as
economic
current
development
drive
integration in NA can only be
towards
for
greater
the
three
economic
fully understood in the
context of regional and global trends.19
NAFTA is an attempt to form a PTA; its main purpose has
been to establish a frarnework for the liberalization of
trade throughout NA by establishing pref erential and mutual
incentives for trade between the members. The preferential
access to their markets is established by reciprocity. In
18
Department of Foreign Af fairs and International Trade,
a t r s al1
(Ottawa: 1993.)
0
Bulmer-Thomas, Victor, Nikki Craske and K o n i c a Serrano.
d
N w h A w i n ; l ~Free T a d e A ~ e e m a t :Who w i l L
b e f i t ? (New York: St- Martin's Press, 1994.)
l9
me
this context, NAFTA is a set of rules w h i c h stipulates that
the preferences negotiated will
be maintained only
for
members, and it prevents the trans-shipment of goods from
non-member countries by establishing clear rules of o r i g i n .
NAFTA was established primarily between natural trading
partners ,
(The US
and Canada and The US
and Mexico) .
According to the Wonnacott and Lutz (1989) rnodel, the trade
creation effect
is
supposed
to be
greater
than
trade
diversion when the countries involved are natural trading
partners. On these grounds, NAFTA c m be perceived as a
rnechanism to improve the economic welfare of the member
countries and of the world as a whole. Moreover, membership
to the agreement is open to any country that can meet its
obligations. MlFTA is then not considered a protectionist
trading bloc and it could become a path to ensure faster
econornic growth in the entire region.
Under
NAFTA,
the elimination of
tariffs and
trade
barriers has been scheduled in three categories:
1. - Irnrnediate elimination
2.- Elimination over a 5 and 10 year period for most
products ; and,
3 . - Elimination over 15 years for certain sensitive
products .
Furthemore,
each
country
has
agreed
to
give
national
treatment to the goods, services and investments of the
other parties. Enhanced national treatment m e a n s that goods
of one party exported to one of the other NAFTA countries
will be treated as if they were produced in the importing
country
( e
,
dornestic
as
goods) .20
The
agreement
establishes that the members eliminate import licenses and
quotas on products with the exception of protecting human,
animal or plant
20
l i f e or the environment. The a g r e e m e n t
Secretaria de Comercio y Fomento Industrial, T r a t a de
.
re Cornercm de -ca *
d
Norte Tomo 1 (México: DE',
C
1996, )
eliminates
prohibitions
and
quantitative
restrictions
applied a t t h e border, thus reducing barriers to trade. To
ease cross-border trade, NAFTA allows the temporary entrance
of business persons to each of the three countries and
allows them t o bring goods or t o o l s of trade (professional
samples) duty f ree on a temporary basis
.21
2.5 SUMMARY AND CONCLUS IONS
The theory of EI states that when two countries at the
same stage of development join or fonn an ETB, trade between
them will tend to increase.
However,
it also states that
there are also other economic factors that have an effect on
their trade such as the s i z e of the economies, the GNP per
capita ratio, the sharing of a common border or a common
language. 22 The principles
of
trade negotiations used in
NAFTA help to reach the conclusion that =TA
is a free
trade oriented bloc. In this case, according to the theory,
22
Frankel, Jef frey, Ernesto Stain and Shang-jin Wei.
"Trading blocs and the Americas: The Natural, t h e Umatural
o
t Dcmomicg
and the Super-natural" in l
V O L 47 (1995.)
.#
the trade creation effect will tend t o dominate and produce
welfare increasing economic changes for the economies that
l o i n the bloc. However, the theory does not predict clearly
what will happen between two countries that are not at the
same stage of development and join an FTA such as Canada and
Mexico in NAFTA. To examine this situation, 1 will use four
hypotheses to organize the analysis of the main effects of
NAFTA on t h e two couritries. T h e situation i s complicated
slightly with respect to the theory because Mexico has
evolved from a closed economy t o an open one in a relativey
short period of time. The hypotheses that will be discussed
and analyzed in the next two chapters are:
HI: The establishment of a t r a d e liheralization program
i n Mexico led t o an increase i n t r a d e with Canada,
H2: NAFTA caused Mexico
-
Canada trade to increase
a f t e r 1994.
H3 : The
increase
trade creation effects have
in trade between Mexico
4
implementation of NAFTA.
dominated the
and Canada
since the
H4:
Investment
by
Canadian
firms
in
Mexico's
maquiladora plants accounts for most of the increase in
Mexico's
exports to Canada under NAFTA.
The first three hypotheses are meant to capture the
export effects of trade liberalization and NAFTA on Canada
-
Mexico trade. The fourth hypothesis is used to highlight and
test the suspicion that a substantial amount of any increase
in Mexico's exports ta Canada can be explained by the
establishment of new manufacturing plants post-NAFTA, rather
than an expansion in output by plants already in existence
prior to NAFTA.
The latter hypothesis is not an effect
8
predicted by t h e CU
-
FTA theory.
By testing these hypotheses it should be possible to
isolate and explain the important changes i n Canada
bilateral trade before and after NAFTA.
-
Mexico
To do this, it will
be necessary to examine trade flows at the aggregate level
and at the disaggregated commodity level to conclude which
areas and sectors have had the most trade weight. To beqin,
the
next
chapter reviews the relevance of
trade as
an
economic t o o l
to promote growth in NA and analyses the
evolution of the Mexican economy and its trade w i t h Canada.
CHAPTER III
3 - 1 TRADE AND ECONOMIC PERFORMANCE
Trade has an important role i n t h e economic development
of any country. According to Bhagwati ( 1 9 7 9 ) , the relation
between international t r a d e and development constitutes a
complex and important subj ect . The developrnent of national
capacities f o r improving trade between t h e members is one of
b
the
main
objectives
of
NAFTA.
In
this
chapter,
trade
relations between Mexico and Canada will be analyzed, to
establish if there has been an increase in t r a d e , postNAFTA.
For this, a h i s t o r i c a l t r a d e analysis f r o m 1980 to
1997 w i l l be conducted in order t o cover t h e performance of
trade p r i o r to Mexicor s trade l i b e r a l k a t i o n (1980
-
1985) ,
after the implementation of the economic reforms (1986 1994) and post-NAFTA
(1994
mainly based on Mexico's
-
1997)
.
The analysis will be
economic performance; this is done
because Mexico had to make the m o s t structural reforms in
its econorny in order to secure its place in NAFTA, The s e t
of four hypotheses f r o m t h e previous chapter will be used to
organize the analysis of the economic factors that have
influenced the pattern of trade between Canada and Mexico.
3.2 HISTORICAL TRADE ANaLYSIS
Hypothesis
1:
The
establishment
trade
a
liberalization program in Mexico led to an increase in trade
with Canada.
To test this hypothesis, an analysis of trade patterns
between Canada and Mexico will be conducted from 1980 till
1985. Moreover, the review of the main issues concerned with
Mexico's
economic policy and its evolution will contribute
to conclusions on possible implications regarding its trade
with Canada.
Trade data f r o m Statistics Canada of Canada's
trade
with Mexico shows that since 1980, Canadats imports from
Mexico have been growing at a faater rate than its exports
to Mexico.
(See
Figure 1) However, it is useful to examine
trade behaviour in terms of the sub-periods: 1980
1986
-
1994; 1 9 9 4
-
1997,
-
1985;
Canada's trade with Mexico
Source: Statistics Canada
3-2.1 MEXICO'S
CLOÇED ECONOMY (1980
Throughout the 1970's
import
-
1985)
and early 1980's
Mexico had an
substitution policy. This trade policy restricted
imports and enhanced measures t a promote
exports to al1
sources. It tended to rely on the Mexican domestic market
rather than external trade as a means of economic growth,
mer this period of time, trade between Mexico and Canada
was relatively small i n current terms, although Figure 1
shows t h a t
bilateral t r a d e has been constantly growing,
independent of Mexico's economic development and i t s trade
regime. For example, one
reason for the r e l a t i v e l y srnall
trade could be that before Mexico's
trade liberalization,
the Mexican Government had implemented a series of trade
barriers
i n order t o p r o t e c t t h e domestic industry from
foreign
cornpetition.
These
restrictions
included
high
t a r i f fs r duties , drawbacks and other measures , like quotas
and licenses i n most products.
For example, i n order to
restrict imports, Mexican tariffs ranged f r o m O to 1 0 0 per
cent; according t o Hart (1990) , t h e s e rates were applied to
individual product s as circumstances required . A t the same
tirne,
prior
import
authorization
was
needed
for
most
products; however, t h i s requirement did not assure, a t any
moment, access t o t h e Mexican market. This series of trade
barriers
c l e a r l y did have an
performance with the world.
effect
on Mexicors trade
Moreover, over the early 198Ors, the Mexican economy
experienced some years of prosperity (growth in its GDP) and
some years of crisis (decrease in its G D P ) . For example,
after the oil crisis of 1980, the rise in world interest
rates and the fa11 of oil prices in 1981, Mexico experienced
a series of economic adjustments that were extremely costly
to the overall economy. From 1980 to 1981 Mexicof s GDP
increased 8 . 8 % , but in 1982 and 1983 Mexico's GDP fell by
0.6% and 4.2%
respectively in each year. (Banco de Mexico.
1992) According to Lustig (1992), real wages in the 1980's
fell between 40% and 50% and signs of recovery were only to
be seen after 1989.
Mexico suffered a large devaluation of its currency in
1982, This was due to a financiai. crisis related to its
foreign debt . A t t h a t tirne, access to foreign credit ceased
and it was necessary for the economy to cut back on al1
kinds of spending, both in the public and private sectors.
The devaluation gave Mexico a p r i c e incentive to sel1 its
products abroad and deterred imports. However, the trade
sector was not very important in the economy due to the
import
substitution policy that was
in place.
In this
context, trade with Canada, as with the rest of the world,
tended to be small. Mexico had a closed economy. However,
Mexico's exports to Canada from 1980 to 1985 show a constant
increase of 25.6% per year and Mexico's
imports from Canada
show an increase from 1980 to 1981 of 31% with a decrease
from 1981 to 1982 to the order of 38%. From 1982 t o 1985
Mexico's
imports from Canada maintain a flat but constant
level . (See Figure 1).
3.2.2 MEXICO'S
TRADE LIBERALIZATION (1986 - 1994)
Starting in the m i d - 1 9 8 0 t s , Mexico carried out a series
of economic reforms designed to reduce import barriers and
foster export activities . For example, the reduction and
elimination of obstacles t o trade were implemented through
measures such as reducing import tariffs and eliminating
quantitative
restrictions
majority of products.
and
import
Licenses
*Mexico unilaterally
for
the
reversed more
than a century of protectionism and ùramatically opened its
market to foreign competiti~n.~
(Hart 1990) ,
One important change in 1986 was Mexicofs decision to
join GATT. This change led Mexico, in only a few years, to
switch from being one of the most closed economies in the
world to one of the most open by the middle of the 1990's.
The result of these initiatives was that Mexico had an
average tariff rate of 12 -6% at the end of 1989, d o m from
typical rates in the 20
-
40 per cent range prior to 1986.
The economic reforms according to Hart (1990) had a positive
impact in the trade sector in the short term. For example,
"Exports
doubled
implementation
of
in
the
the
first
policies
two
while
years
imports
of
the
soared.
Regarding its trade with Canada, Figure 1 shows that Mexican
exports to Canada started to go up from 1986 to 1990 and
continued to rise from 1990 till 1994. However, Mexico's
imports from Canada stayed relatively constant (See Figure
1). Over this period of tirne, real per capita consumption in
Mexico showed a 6 - 4 % increase in 1987 followed by a 25.3%
increase in 1988/
(Hart 1990, 37) Mexico's
1.5% in 1987- 1-18 in 1988 and 3.0% in 1989,
real GDP rose
liberalization was
Trade
implemented
in Mexico
to
foster trade with the world, The economic refoms had an
impact on t h e recovery of the Mexican economy, on the trade
sector and on its bilateral trade with Canada. For example,
in
1985,
exports
to Canada were CanSl.4
billion
(1994
dollars) . This represented nearly three tintes the s i z e of
its imports, which were CanS416 million in 1994 dollars. In
this context, the trade liberalization policy in Mexico had
a significant impact on its exports to Canada after its
implementation,
By
the
early
1990's
the
Mexican
economy, after
a
transition period of economic refoms, was seen as a stable
one. From 1990 to 1994, ' ~ e x i c os, real GDP grew at an average
rate of 3 -8% in real te-
per year. Inflation was under
control at a rate of 15% per year. T h e economic policy of
the
Salinas
administration
(1988-1994)
centered
its
attention on the exchange rate in order to sustain economic
stability in Mexico.
However,
the exchange
rate had
a
crawlulg peg system, which allowed s m a l l daily changes of
the Mexican Peso vis-a-vis the US dollar. Statistical data
of the Banco de Mexico show that after 1992, the real
exchange rate of the Peso appreciated, and continued in this
situation until the devaluation of December 1994. The review
of trade data f r o m Statistics Canada for the period of 1990
Mexican exports to Canada grew 144% i n
t o 1994 shows that
.
a t an average of 2 8 % per year. Imports by Mexico
real te-,
from Canada also grew, but much slower, at an overall rate
of 5 4 8 , an average of 10.8% p e r year.
Nevertheless,
to
economies, a b r i e f
make
a
comparison
between
both
analysis of the Canadian economy from
1988 till 1997 will
be made to try to understand how its
performance could have had an impact on its trade relations
&
with Mexico. For example, Canada had a constant increase of
its GDP over this period of time at an average of 3 -75% p e r
year. The exchange rate of the Canadian d o l l a r vis-a-vis the
US
a
dollar
depreciations
was
relatively
or appreciations
constant,
with
.
and imports are
Export s
no
important f o r the Canadian economy. For example,
exports
accounted f o r
almost 26% of
GDP
while
sharp
in 1990
imports
accounted f o r 25%. In 1996, exports accounted for 38.95%
while irnports accounted f o r 35%. T h i s shows the relevance of
the t r a d e sector f o r the Canadian economy.
It a l s o shows
that compared with Mexico, the Canadian economy has been
s t a b l e . T h i s could be one economic f a c t o r that has led t o
t h e i n c r e a s e of trade for Canada w i t h Mexico from 1980 t o
1 9 9 4 . However,
over t h i s period of t i m e ,
Mexico has had a
trade surplus at t h e aggregate level with Canada, i n p a r t ,
mainiy because of t r a d e r e s t r i c t i o n s that were i n place i n
Mexico i n t h e e a r l y 1980% and because of the change of i t s
t r a d e p o l i c y a f t e r t h e mid-1980's.
According t o Bhagwati
(1979), c o u n t r i e s that have l i b e r a l i z e d their foreign trade
regirne tend to improve t h e l e v e l of p r o d u c t i v i t y i n t h e i r
export s e c t o r by having b e t t e r access t o foreign markets.
According t o h i m ,
b e t t e r export performance is related t o
better economic performance, by promoting a more efficient
a l l o c a t i o n of
resources.
T h i s is c l e a r l y related t o
the
increase of trade between Canada and Mexico after 1 9 8 5 and
t h e development of both economies. ûverall, over t h e period
of 1985 to 1994, trade between Canada and Mexico has more
than doubled despite Mexico s s i t u a t i o n . In this context , we
can accept the hypothesis that the trade liberalization
policy of Mexico has l e d to a n increase in trade with
Canada.
-
3 3 TRADE AND ECONOMETRICS
Hypothesis 2:
NAFTA caused Mexico
-
Canada trade to
increase after 1994.
We
will
test
this
hypothesis,
-
econometric analysis of Mexico
by
means
of
an
Canada trade.
The mode1 used in this thesis was originally developed
by Gould (1996) to analyze t h e performance of exports and
imports b e t w e e n the US and Mexico and the impact of NAFTA on
them.
The
equations
in this
thesis describe
the
same
#
relations between Canada and Mexico as Gould set out for the
US
-
NAFTA,
Mexico situation. In order to isolate the effect of
the
analysis
will
be
conducted
reviewing
the
e v o l u t i o n of the Mexican economy over a specific period of
#
time, before and after M T A - This will create a framework
to analyze the effects of some interna1 and exterrial f a c t o r s
that the Mexican economy has experienced and their possible
implications w i t h respect to its trade with Canada. The use
of
dummy variables i n the model w i l l help t o take into
consideration these f a c t o r s .
Gould's approach was based on two equations to explain
t h e r e l a t i o n of exports and imports
. This
same procedure
is
followed i n t h i s t h e s i s .
The two equations are:
1.- Log IMPM = a,
+ bl
Log TCIMPW(-1)
+
C,
Log IMPM(-1)
+ d, Log CIP(-1)+ e, Log EXCH(-1) + f, D86 + g, D94 + h, D95
where :
IMPM: Total Canadian imports from Mexico.
EXPM: Total Canadian exports t o Mexico.
TCIMPW: Total Canadian imports from the world minus imports
f r o m Mexico.
TCEXPW: T o t a l Canadian exports to the w o r l d minus exports to
Mexico.
EXCH: Nominal Exchange rate Canadian Dollar - Mexican Peso
at 1994 prices, 23
CIP: Canadian Industrial Production
MIP: Mexican Industrial Production
D86: Dummy for Mexico's
Trade Liberalization
D94: Dummy for NAFTA
D95 : Durmrry for Peso Crisis
The mode1 uses monthly data on trade flows between
Canada and Mexico from 1980 to 1997. This period of time is
enough to take into account the structural as well as the
temporary shocks (Peso Crisis) affecting the Mexican economy
over
the
years.
These
shocks
have
to
be
taken
into
consideration because it is expected that these factors did
have an impact on Mexicor s overall trade performance with
the rest of the world. The data have been expressed in 1994
23
GouLdrs (1996) mode1 used t h e real exchange rate f o r the
Mexican Peso - US Dollar. T h e real exchange rate is an index
of the real value of one currency with respect to another.
The real exchange rate f o r the Canadian Dollar - Mexican
P e s o w a s not available. The nominal exchange rate between
these t w o currencies was used,
prices.
The data sources are Statistics Canada, Banco de
Mexico and the International Monetary Ftmd.
The three dummy variables are used as structural
parameters
to
test
the
contribution of
Mexico's
trade
liberalization, NAFTA and the Peso Crisis.
Gouldrs (1996) work does not indicate the expected
sign of the coefficients of the independent variables. In
this thesis, however, we postulate the expected relationship
based on economic theory.
Equation I :
Canadian
Imports
from
Mexico
lagged
one
period:
Positive sign because it is expected that the actual level
of imports will tend to track i t s value i n the previous
period.
Total Canadian Imports from the World (except Mexico)
lagged one period: Uncertain since it depends on whether
Canadian
imports
from
Mexico
are
complementary
substitutes for al1 other Canadian impoas.
Canadian Industrial Production: Positive, because an
increase in industrial production will trigger increased
demand f o r
imported inputs and provide more incorne for
Canadians to spend on imported items.
&change
rate lagged one period:
Negative;
as
the
Mexican Peso depreciates, Canada would tend to import more
products from Mexico,
Trade Liberalkation du-:
Uncertain because
trade
policy reform i n Mexico was targeting the world as a whole
and n o t directly t h e Canadian market.
NAPTA dummy: m e c t e d to have a positive relation with
Canadian imports from Mexico because of the preferential
t a r i f f incentive of the trade agreement.
Peso Crisis du-:
The effect may be captured by t h e
exchange rate, but nevertheless we expect it to show a
positive impact on Canadian imports from Mexico.
#
Equation 2:
Canadian
exports
to
Mexico
one
lagged
period:
Positive sign, because of the assumption t h a t exports will
generally track their previous value over time.
Canadian exports to the world (except Mexico) lagged
one period: Uncertain, since it depends on whether Canadian
exports to Mexico are complements or substitutes for all
other Canadian exports.
Mexican
period:
Industrial
Production
variable
lagged
one
Positive, as an increase in industrial production
will stirmlate the demand for imports.
Trade Liberalization dummy: Positive; reducing Mexico's
trade barriers in t h e mid-1980's
can be expected to have a
positive impact on its imports from Canada.
NAFTA dummy: Expected to have a positive sign because
of
t h e preferential t a r i f f incentive in t h e Mexican market
for Canâdian products under NAFTA.
Exchange rate lagged one period: Positive relation with
Canadian exports to Mexico; as t h e Mexican Peso depreciates
the
Canadfan
dollar
per
peso
exchange
rate
declines,
Canadian products becorne more expensive for the Mexican
consumer and less are bought.
Peso Crisis dummy: Reflecting the weaker value for the
Peso, we expect its coefficient to be negative, to the
extent it captures effects beyond t h e exchange rate.
Econometrlc Results :
Equation 1 :
Log IMPM = 9.2
-
( . 009)
.30 L o g TCIMPW(-1) + - 4 8 L o g IMPM(-1) +
( ,2176)
- 4 5 Log CIP (-1)
-
(-4320)
-37 D94
(.OOO4)
+.O?
( .OOOO)
-10 L o g EXCH(-1)
(.
0038)
-
- 2 4 D86
+
( - 0449)
Dg5
( ,4608)
The figures in parenthesis are the significance level for
the t-statistics for the coefficients.
Equation 1 shows that all the coefficients had the expected
sign based on the above predictions
predicted. )
,
However,
an
analysis
(for those actually
of
the
independent
variables shows that:
Log TCIMPW(-1) was not significant even at the 10%
level .
Log I M P M ( 4 ) was highly significant at the 1% level.
Log CIP (-1) was not significant even at the 10%
level .
Log EXCH(-1) was highly significant at the 1% level.
D86 was significant at the 5% level,
D94 was highly significant at the 1% level.
D95 was not significant even at the 10% level.
,
Interpretation of the results: Equation 1 shows that the
independent variables that have a significant impact on
.
Canadian imports f r o m M e x i c o are CIMPM ( -1)
NAFTA. Neither TCIMPW(-1) nor CIP(-1) is a
3
EXCH ( -1) and
significant
explanatory variable w i t h respect to Canadian imports from
Mexico. However, the 'R
is relatively high at 0 -79 which
s h o w s t h a t , as a group, the independent variables do have a
strong influence explaining Canadian imports
from Mexico
over this period of tinte. The F value is high (iE.006) and
significant at the 1% level. In this case, as the value of F
is highly significant, we can accept equation 1 as a good
explanatory mode1 f o r Canadian imports fr o m Mexico.
Econometric results
Equation 2 :
L o g EXPM = -3.66
+
.18 L o g TCEXPW(-1) + - 3 3 Log EXPM(-1)+
(.3391)
( ,2306)
(-0000)
1.67 Log MIP(-1) + .16 L o g EXCH(-1) + -35 D86
( ,0000)
- IO
(-0000)
+
( ,0004)
D94 + -16 D95
( ,2970)
( ,0886)
R~ = -61
F
= 46-65
F-Probability: ,0000
DW = 2 - 0 8
The figures in parenthesis are the significance level f o r
the t-statistics f o r the coefficients-
0
Equation 2 shows that, as expected, most of the coefficients
had the expected sign, except for EXCII and D95.
The analysis of the independent variables shows that:
Log TCEXPW(-1) was not siginficant even at the 10%
level .
Log =PM(-1)
was highly significant at the 1% level .
Log MIP(-1) was highly significant at the 1% level.
Log EXCH(-1) was highly significant at the 1% level.
D86 was highly significant at the 1% level.
D94 was not significant even at the 10% level.
D9S was significant at the 10% level,
Interpretation of the results: Equation 2 shows that the
independent variables that have a significant impact on
Canadiari exports to Mexico are EXPM(-1), MIP(-I), EXCH(-11,
D86 and D95. While the NAFTA dummy (D94) has the expected
positive sign, it was not statistically significant. One
possible explanation f o r this result is that the type of
*
goods Canada exports to Mexico are not responding in the
short run to changes under NAFTA.
The '
R
for this equation
is 0.61 which is lower than for equation 1; however, it
s t i l l has a relatively high level of explanation between the
independent variables and the dependent variable. The value
of F f o r this equation is 46.65, which is l o w e r than for
equation 1, but it remains significant at the 1% level. In
this regard, the mode1 as a whole gives a good explanation
of Canada's exports to Mexico.
ûverall conclusion of the econometric section:
Both equations show a significant .'R
The NAFTA dummy (D94),
controlling for other variables, shows a srnall but positive
impact on trade between Canada and Mexico
only in equation
1. The dummy MLFTA in equation 1 w a s highly significant at
the 1% probability level while the dummy of NAFTA for
equation 2 was not significant even at the 10% level. In
this regard, we can accept hypothesis 2 o n l y for equation 1.
NAPTA created an increase in Canada's
imports from Mexico
but does not appear to have had a significant impact on
Canada's
exports to Mexico- (For technical details of the
econometric results see appendix 9) .
3-4
EVOLUTION OF THE MEXICAN ECONOMY: TIB FIRST YEARS OF
NAFTA (1994
To put
-
1997)
the
results of the econometric analysis in
perspective, we will now examine some of
the important
economic events i n t h e Mexican economy undex NAFTA.
At
the end of 1994, Mexico had a current account
deficit of USSI8 - 5 billion in its Balance of Payments. In
December
of
year,
that
the
Mexican
Peso
was
sharply
devalued, falling fr o m 3.5 pesos per US dollar to about 6.5
pesos per US dollar. The devaluation of t h e Mexican currency
had
an economic
impact on Mexico's
international trade
position and in the overall economy.
The crisis of Mexico in the first years of NAFTA could
be seen as a setback for its economic performance of the
previous six years.
Mexico
(1997, 23),
For
example, according to Banco de
the crisis caused a decline in the
consumer income, a drop of 6.5 % of Mexico*s GDP, and a rise
in inflation of around 52% in 1995. However, despite the
situation in the first years of NAFTA, economic reforms w e r e
not reversed in Mexico. T h e crisis was met with a deepening
and broadening of reform efforts. For example, one econornic
aspect of the devaluation was that in 1995, Mexico had a
surplus
of USS7.4
billion on its current account. This
surplus was caused mainly by a 30% rise in exports and a
fall of 10% in imports. The increase in exports reflects in
part the very strong response of Mexican e x p o r t e r s t o the
crisis (and the devaluation) and a clear message from the
government that t h e crisis would not mark a return to the
pre-reform
without
status.
Mexican
Wassy
(1997)
the increase in the amount of
states
exports
that
i n 1995,
Mexico's GDP would have dropped 12% which would have been a
depression in the economy that might even have been extended
to al1 LA.
The economic effect of the peso devaluation on Mexico's
trade with its NAFTA partners was more moderate w i t h Canada
than w i t h t h e US. Exports of the US to Mexico declined 11%
in 1995. For example, after the peso devaluation, a US
surplus with
Mexico
of
USS1.6
billion
in agricultural
products in 1994 became a US deficit with M e x i c o of UÇ$26O. 0
million in 1995. With respect to Mexico's
trade with Canada.
M e x i c a n exports to Canada were C$5,350 million in 1995,
which represents an increase of 18.2%
from 1994 to 1995.
Canadian exports to Mexico were C$1,100 million, an increase
of
5.4%
for the same period.
In this context, despite
Mexico s situation, the two-way trade between Canada and
Mexico increased by 13% in real tems in the first years of
NAFTA. Total trade was nearly C$6,500 million in 1995. After
the peso devaluation, Mexican products became cheaper for
the Canadian consumer, which explains part of the increase
in Mexican exports to Canada. At the same time, Canadian
products
became
more
expensive
for
Mexican
consumers,
although imports from Canada did not fall as would have been
predicted a f t e r a devaluation. This could be, in part, due
to the kind of products that Mexico has been importing from
Canada since the earLy 1990 s and because of the TA. For
example,
according to SECOFI: (1997), Canada is the first
s u p p l i e r to Mexico of some kinds of cereals and seeds, l i k e
wheat and meslin. Some of the products imported by Mexico
f r o m Canada could be considered as nessentialsm for the
M e x i c a n economy, and so even in times of crisis in M e x i c o .
trade with Canada has not been affected as with other
countries. For example, "in 1995, when Mexican imports from
non-NAFTA partners were reduced by 25%, those from Canada
actually increased."
(SECOFI 1997, 2) This is because the
agricultural and "essential" goods that Mexico imports f r o m
Canada have low price elasticities.
NAFTA has led to the possiblity of a more developed and
wealthier NA,
by
promoting
trade between
the
members.
However, over the f irst years of NAFTA, Mexico struggled ta
rnaintain a stable economy. For example, by the middle of
1996, Mexico was still recovering from the financial crisis
of 1994. According ta Banco de Mexico
(19971, investment
rnaintained its recovery, fiscal consolidation continued and
Mexico's
access to international financial markets was, for
the most part, protected. This situation w a s used as an
anchor
to
obtain
stability.
In
1996
Mexico's
total
international trade (imports and exports) reached close to
US$185,481 millions;
an increase of almost 22% mer the
previous year. 24 Imports account for almost 50% of Mexicors
of M
A increased by an average of 13.8% in the first three
years of the agreement.
Since NAFTA, bilateral trade between Mexico and Canada
has increased from Can$4,549 million i n 1993 t o Can$7,223.1
million i n 1996; trade has increased 58% over t h i s period of
time. (DFAïT 1997) If the cornparison is from 1994 to 1 9 9 7 ,
the increase i n b i l a t e r a l trade has been 51% i n real terms
at 1994 prices .
Mexican exports to Canada reached a total of Can$6,012
million
in 1996. Canada's
exports
to
Mexico
have
also
increased i n t h e last three years, to a total of Can$i,?ll
million i n 1996- Thus, Mexico has become Canadafs ninth
largest export market and t h i r d largest import source, only
a f t e r the US and Japan.
However,
imports by Canada from
Mexico i n 1 9 9 5 represented less than 3% of t o t a l Canadian
imports from the w~rld.'~The TA has brought the oppoatmity
to expand trade between these two corntries. Trade at this
stage of NAFTA and at the aggregate level is s t i l l mal1
-
26
The Economist Intelligence Unit, Mexico : ~nwtrv
(London: 1st quarter 1997.)
compared with their total trade with the w o r l d . For example.
Mexican exports to Canada in 1995 represented only 2.5% of
total Mexican exports to the world and Mexican imports from
Canada represented 1.9% of Mexico's
total imports from the
~orld.~' This situation is likely to continue until the
phase out of the tariff schedule since firms need time to
develop markets. After that, i t seems likely that their
respective trade will tend to increase,
in overall terms and from a macroeconomic perspective,
MLFTA appears to have been more important f o r Mexico than
for
the
structural
US
and
Canada.
Mexico
transformations in
its
has
experienced
economy
major
in order
to
maintain its viability in NAFTA. The development strategy
for Mexico has been based on the assumption, that NAFTA will
lead to real economic benefits f o r the members- In this
context, as the Mexican econony evolves and strengthens in
the
future, there will be more opportunities to trade.
Frankel, Stein and Wei (1995, 70) have conduded that, "as
countries become more developed, they tend ta specialize
27
Banco de M e x i c o ,
1997. ) pp. 294
The E c o n m
1996 ( M e x i c o ,
DF:
more and to trade more."
The idea is that through trade'
NAFTA will help Mexico to become a more developed economy.
For example, Clinton (1995) forecasted that Mexico was going
to have major benefits by joining NAFTA, with a total net
benefit of 5% of its GDP, while the US was going to obtain
an increase of 0 - 3 % of its GDP;
and Canada, in Clinton's
forecast, was going to obtain an increase of . 0 7 % of its
GDP.
T h i s is because Canada and the US already had an FTA
and by joining it, Mexico would become a third market.
The
crisis of
1994
could be
seen as a transitory
setback for the Mexican economy and i t s economic reforms of
the
mid-198ORs,
although Mexico's
recovezy reached pre-
crisis peaks by the end of 1996, For Mexico, the o n l y way to
increase its GDP through NAFTA is by increasing the t o t a l
volume of trade with both the US and Canada,
By the year 2003, NAFTA will eliminate virtually al1
tariffs between Mexico, Canada and the US and will thereby
create more opportunities f o r trade and investment inside
N
A
.
'
For
Mexico
and
Canada,
the
importance
of
their
b i l a t e r a l trade will tend to increase as has been the case
in the early years of NAFTA. As Canada and Mexico tend t o
t r a d e more, Canada and its stable economy could be seen in
Mexico as a constant market
for i t s products.
I n this
context, NAFTA would led to a more integrated NA.
At this stage of the thesis, it is important t o analyze
whether MLFTA has contributed to an economic improvernent for
the countries involved. ET theory states that if new trade
is created after the implementation of a FTA, then i t is
supposed t o be
a state
of
welfare
improvement
for
che
countries involved and for the world as a whole. According
t o the principles of trade negotiations, NAFTA is supposed
to be a free trade oriented bloc. The issue at the m o m e n t is
that f r o m 1994 t o 1997,
total trade between Canada and
Mexico has increaoed. However, the analysis done so far only
examines the trade data at the aggregate level. The question
rernains whether trade has been created o r diverted after
UAFTA between Canada and Mexico. To answer this question
~~~~~
20
-
-
D e p a r t m e n t of Foreign Affairs and International Trade,
A Paffnershig a+ WQEk (Ottawa: 1997.)
requires an analysis at a more specific level, namely those
products that account f o r most of the trade between these
two countries
.
3.6 EVALUATING NAFTA AT THE: SECTORAL LEVEL:
TRADE CREATION
VS TRADE DIVE2tSION
Hypothesis 3:
Trade creation has been the dominant
ef fe c t under NAFTA.
To test this hypothesis it i s necessary t o examine
Mexico
- Canada trade at the
commodity level. T h i s is done
by a review of Canadian imports from Mexico from 1988 to
at
1997
t h e 6 digit subheading level of
System (HS) of
total
Canadian
the Harmonized
trade data. The data at this level cover
imports
from
the world
by
main
import
sources,
The analysis is conducted using data on total Canadian
imports from Mexico, from the US and f r o m t h e ROW.
Trade
between the NAFTA members is also compared t o determine the
t o t a l share of intra-regional trade versus trade with t h e
ROW f o r Canadian imports. Based on values expressed in 1994
prices, the analysis is conducted in terms of the shares of
the Canadian market (the actual monetary figures of Canadian
imports from Mexico are reported in the appendix) . Canada's
exports ta Mexico did increase modestly after 1994 at the
level.
aggregate
(See appendix
3
.
The
main
products
exported from Canada to Mexico are examined below but the
trade creation
*
Canada's
-
trade diversion analysis is confined t o
rapidly growing imports from Mexico because the
econometric analysis showed NAFTA only had a significant
impact on these imports.
The products that have the greatest trade weight in
Canadars imports from Mexico, which account for alrnost 45%
of total Canadian imports from Mexico are: rnotor vehicles
with reciprocating piston engine displacing > 1500 cc to
C
3000 cc; i g n i t i o n wiring sets and other wiring sets of a
kind used in vehicles, aircraft, etc; parts of seats; color
television
receivers; and
telephones
sets.
Except
for
telephone sets, before NAFTA these products were already
imported f r o m Mexico. (See Table 1)
3 -6.1 TRADE ANALYSIS
Motos vahicles w i t h reciprocating piston angine:
In 1988, Canadian imports from Mexico of t h i s product
w e r e less than 1% of t o t a l Canadian imports from the w o r l d .
The US was t h e m a i n source t h i s product, accounting for 71%
of total imports. The ROW provided the o t h e r 298, Imports
from Mexico grew s h a r p l y over the period 1988 t o 1 9 9 7 , T h e
larger Mexican share displaced imports from t h e US.
example,
by
1995,
Mexican participation
For
in this market
reached a peak of 2 0 % , while at the same time t h e US share
had declined to 60% of t h e market and t h e ROW h a d t h e other
20%.
By 1997, Mexican participation was reduced to 14%,
while imports from t h e US represented 58% and the ROW g r e w
to 2 8 % . P r i o r to NAFTA, the ROW was gaining market shares at
t h e expense of the US. Begiluiing in 1993, Mexico began to
capture market shares at the expense of the ROW, as did the
US, (See Table 1)
Ignition Wiring sets:
In
1988,
Mexico
provided
Canadafs market. Mexico's
22%
of
this
product
to
market share averaged 19% of the
Canadian market from 1989 till 1993. Beginning with NAFTA in
1994, Mexicofs share began to grow steadily, reaching 43% by
1997. Mexico's
gain w a s at t h e expense of the US. In 1988,
75% of Canadian imports in this product came f r o m t h e US. In
1993, the US share topped out a t 80% of
t h e market. From
1994 t o 1997, US market share fell sharply t o 51% (See Table
Parts of Seats:
The US has been and still is the main source of this
product f o r Canada. In 1988, it had 86% of the market; it
maintained an average of 80% f r a m 1988 to 1993. From
1997, the US share declined, reaching 73% in 1997,
participation in Canada was small: f r o m 1988 to 1993 the
average of Mexican participation was about 3% per year.
However,
in 1993, the Mexican share increased to 8%- This
was followed by a further increase in 1994, when Mexican
participation accounted for 20% of the market.
Mexico's
share
reached
22% of
Canadian
By 1 9 9 7 ,
imports.
After
accounting for as rnuch as 19% of the imports pre-NAFTA, the
R O W t s share fell to 5% of the market by 1997.
Television Receivers:
Mexican p a r t i c i p a t i o n i n the Canadian market grew from
4% of t h e
market i n 1988 to the 1 3 4 7 % range in 1992-93. By
1997, Mexico accounted for 40% of total Canadian imports
from t h e world i n t h i s product.
Mexico's
gain i n market
share has been almost totally at the expense of the ROW.
(See Table 1)
Telephone Sets:
From 1988 to 1993, Canada imported this product mainLy
from t h e ROW (as m u c h as 80-85%) and the US (in the 1520%
range). Canada began importing telephone sets f r o m Mexico i n
1993, when Mexico captured 7% of the market. After -A,
Mexicors share g r e w rapidly to a peak of 36% in 1996 and
backing off slightly to 34% in 1997. Mexico's
gain has been
largely t h e result of displacing t h e ROW whose share had
fallen to 55% by 1997, and to a lesser extent, t h e US.
3 - 6-2 OVE=
CONCLUS IONS
Since 1994, Mexico has been displacing either the US or
the ROW or both in the Canadian market in t h e five products
that account for most of Canadats imports from Mexico.
According
to
Statistics Canada,
imports
of
these
five
products from the ROW have increased as the total volume of
imports of Canada have increased. In this context, as t o t a l
trade in these five products has increased, w e have
examine whether this is trade creation, t r a d e divers ion
both*
For this, we have to review the Canadian tariffs that
apply to Mexico and t h e US with NAFTA and the t a r i f f s that
apply to the ROW under the M o s t Favored Nation (M)tariff
in Canada. In this regard, if the tariffs are low or the
same f o r both NAFTA partners and f o r the ROW, then we c m
conclude that if Mexico's
share of imports by Canada has
increased since 1994, t à i s w o u l d clearly appear to be trade
creation. For example, when Mexico and the ROW face the same
tariffs in t h e Canadian market,
there is no reason to
conclude that NAFTA is displacing the ROW because of higher
tariffs f o r non-NAFTA members. According t o the theory of
EI, if trade increases between two countries t h a t loin o r
f o m an FTA without displacing a third one w i t h tariffs or
non- tariff barriers, then the increase of trade between t h e
two countries that join the FTA will be trade creation.
3.6.3
1,
REVIEW OF CANADA'S CUSTOM TARIFF SCHEDULE
Motor vehicles with reciprocating p i s t o n
displacing > 1500 cc to 3000 cc.
Tariff fox Mexico
1.6%
T a r i f f f o r t h e US
Free
MFN Tariff
6.7%
engine
II. Ignition wiring sets and o t h e r wiring sets of a
kind used i n vehicles, a i r c r a f t , etc.
T a r i f f for Mexico
Free
Tariff f o r t h e US
Free
MFN T a r i f f
Free
III. Parts of Seats f o r domestic purposes.
Tariff f o r Mexico
Free
Tariff f o r the US
Free
MFN
Tariff
Free
IV. Television R e c e i v e r s .
T a r i f f for Mexico
Free
Tarif f for the US
Free
MFN Tariff
5%
V, Telephone SetsT a r i f f f o r Mexico
Free
Tariff f o r the US
Free
MFN
Tariff
8,5%
In this context, as the tariffs are low in the Canadian
market, Mexican participation in these products is high and
tends to represent a large share of Canadafs total imports
from the world a f t e r 1994. Furthemore, i n a commodity by
commodity tariff
the review of
rate analysis,
Canada's
Custom Tariff Schedule shows that:
-
For motor vehicles with reciprocating piston engine
displacing
advantage
to 3000
>
1500
cc
of
5.1
percentage
cc. Mexico has a
points
vis-a-vis
the
tariff
ROW.
Kowever, the US has a duty free access into the Canadian
market. Table 1 shows that the increase of Mexico's share i n
the Canadian market has been at the expense of the ROW. So,
if we consider Mexico as the low cost producer in NAFT&
than trade in this product between Canada and Mexico appears
t o be diverted vis-a-vis the ROW,
- For ignition wiring sets and other w i r i n g sets of a
kind used in vehicles, a i r c a f t , etc. and Parts of Seats for
domestic purposes. M e x i c o , the US and the ROW have duty free
access into the Canadian market* In this case, the ROW does
not face ariy tariff discrimination vis-a-vis Mexico and the
US. Table 1 shows an increase in Mexico's
share of both
products in the Canadian market. Mexico is displacing the US
in ignition wiring sets and, the ROW and the US in the parts
of seats market. In this case, the increase on trade can be
regarded as created for both products because Mexico appears
to be the low cost producer.
-
Tekvision
Receivers.
Mexico
and
the
US
have
pref erential duty free access into Canada vis-a-vis a five
percent t a r i f f for the ROW. Table 1 shows that, from 1994 to
1997, Mexico gained market share at the expense of the ROw
while
the
US
maintained
its
share.
In
this particular
product, Mexico appears to be displacing the ROw,
at least
in p a r t because of the t a r i f f incentive. In this case, trade
appears to be diverted,
- Telephone Sets. The r e v i e w of Canada's Custorns Tariff
Schedule shows that Mexico and the US have preferential duty
free access t o the Canadian market while the ROW face a
tariff
of
percent.
8.5
Table
I
shows
that
Mexico
is
displacing both the US and the ROW in the Canadian market.
According to the theory,
has been
trade
created
this appears to be a case were
(Mexico displacing
the US)
and
diverted (Mexico displacing the ROW) .
As a general conclusion and according to Viner's theory
.
(1961)
trade
appears
to be created between Canada and
Mexico a f t e r NAPTA in two of t h e five main products exported
by Mexico to Canada- However, the main conclusion of this
section is there a mixed result on whether trade has been
created or diverted between Canada and Mexico on the five
products
that have
the greatest
trade weight
in their
bilateral trade. In t h i s case, w e can not accept o r reject
hmothesis 3 .
For a t o t a l analysis of NAFTA, the s a m e should be done
for al1 the products involved in the TA. However, this goes
beyond the scope of this thesis.
The tariff phase-out in NAFTA between Canada and Mexico
means all tariff reductions will be practically complete by
the year 2003. As t h e tariffs drop to zero, the forecast of
this study
that
tend
trade
increase .
The next chapter reviews the pattern of fixed direct
a
investments of Canada in Mexico from 1988 to 1996 to try to
establish
the
impact
of
NAFTA
on
investment
and,
by
extension, on trade. This is important because Canadian
investments in Mexico could be linked to the pattern of
I
trade
between
Canada
and
Mexico.
That
is,
Canadian
investment in Mexico could be seen as a mechanism to create
trade
between
the
two
countries.
For
investment is established in Mexico,
example,
as
new production
new
is
*
developed and n e w exports are created. Ço, =TA
inspired
n e w investment between these two countries could explain
some or al1 of the observed increase in trade.
HS Code
940190
Parts of Seats
1988
1989
1990
1991
1992
1993
2%
5%
2%
8%
Me%
3%
US
86%
78%
80%
81%
89%
85%
ROW
11%
19%
18%
14%
9%
12%
852810
3%
Television receivers (Including video monitars and projectors) Color
1988
1989
1990
1991
1992
1993
1994
1995
1996
4%
13%
12%
13%
17%
13%
17%
25%
36%
U6
50%
44%
49%
46%
46%
47%
50%
51%
49%
ROW
46%
43%
39%
41%
37%
10%
33%
24%
15%
NAFTA
57%
57%
61%
59%
63%
60%
67%
76%
85%
Mex
Note; 852812 Television Receivers Color
-
Effective 1996 Onwaxds
-
Previously included in code 852810
HS
Code
Telephones Sets
851720
1900
1909
1990
1991
1992
1993
1994
1995
1996
1997
0%
0%
0%
0%
0%
7%
11%
20%
36%
34%
US
10%
15%
20%
19%
26%
20%
12%
16%
15%
11%
ROW
82%
85%
80%
81%
74%
77%
67%
64%
49%
55%
NAFTA
18%
15%
20%
19%
20%
27%
23%
36%
51%
45%
M ~ x
Note; 851710
-
Code Deleted in 1996 and split in codes 851711 Telephones Sets with c o r d l e a ~ handsete and
code 051719 Telephones Sete other than with cordless handsets, For 1996 and 1997 an average was performed
f o r both codea,
4.1 ~ S T M E N T S
The trade Iiterature does not assess the investment
b
patterns
two
between
countries
at
different
levels of
development that join a FTA, like Canada and Mexico in
NAFTA.
At
this
stage of NAFTA,
bilateral trade between
Canada and Mexico has grown. However, as already shown,
Mexican exports to Canada have increased much more than
imports from Canada. The question is, why? One
Mexico's
possible explanation is that the increase of exports f r o m
Mexico
to Canada
is related to Canadian investment
in
b
Mexico ; specifically in maquiladora companies established
under the Maquiladora Programme
(MP)
.
This leads to the
following hypothesis .
H4:
Investment
by
Canadian
firms
in
account for most of the increase in Mexico's
maquiladoras
exports to
Canada after 1994,
To test t h i s hypothesis, it is important to understand
,
the concept of the MP and the intention of the Mexican
Government within NAFTA. The MP was developed by the Mexican
4
Government in 1965. Fixms that invest in Mexico within the
@!i
are able to import parts and components duty free for
products to be assembled in Mexico, as long as the products
,
are exported. This programme was intended to attract foreign
direct investment to Mexico. One of the reasons for the
Mexican Government to join NAFTA was to promote Mexico as a
stable country for foreign direct investment. NAFTA brings a
*
clear set of rules and certainty f o r foreign investors not
only in Mexico but
in the three member countries. The
chapter on investments i n TA sets these rules and allows
investors
to s e l 1 their products
i n the entire ETB with
*
almost no restrictions after the year 2001. This provision
is a clear incentive for firms t o invest in the region.
4 - 2 PATTERN
OF I N E S T M E N T
I
To examine hypothesis 4, it is useful to examine t w o
items: total Canadian investment in Mexico from 1988 to 1996
and total Canadian investment in Mexico at the sectoral
level. iüe are looking for evidence that NAFTA has prornoted
and created investment by Canadian firms in Mexico.
According to Statistics Canada, Canadian investment in
M e x i c o is small if compared with total Canadian investment
abroad; Canadian investment in Mexico represented, in 1983,
*
less than 1 per cent of total Canadian investment abroad.
From 1988 to 1991, Figure 2 shows that Canadian investment
in Mexico was in the $200 million range annually. This
appears to change in 1992, when investment increases to $450
million and to $530 million in 1993. Over the first three
years of NAFTA
(from
1994-1996), Canadian investment in
Mexico averaged almost $1.1 billion annually. By comparison,
although Mexican investment in Canada has increased under
NAFTA, it reached less than $300 million annually from 1994-
1996. (See Figure 3 )
FIGURE 2
Canadian lnvestrnent in Mexico
Year
Source: Department of Foreign Affairs and
International Trade. ~
~
n
e at
Canada 1 9 9 7
Work
r
s
~
FIGURE 3
Mexican Investment in Canada
Year
Source: Department of Foreign Affairs and
International Trade. N A F T A : t n e r s m at W o e
Canada 1997
ûverall,
Canadian
investment
concentrated in the following
in
sectors:
manuf acturing and telecornminications
Mexico
mining,
.'' The
has
been
banking,
question is how
important have Canadian owned maquiladora fim been in
29
M&can
W a s s y in Canada, ( l a n a d i a n t
Fn M e x i c a n W a s s y Web Page 1998, m : / f w w w . e - * c &
in
Mwico
producing Mexican exports to Canada. According to a study
conducted in 1998 by the United S t a t e s International Trade
Commission (USITC) on Canadian participation in Mexico' s MP ,
only a small number of Canadian firms used this program
before NAFTA. According to the USITC (1998), by the end of
1992 there w e r e
Mexico.
a total of six Canadian Maquiladoras in
( S e e appendix
11) Furthemore,
according to the
USITC (1998), Canadian involment in the MP in Mexico has
had an impact on their bilateral trade even before NAFTA.
For example, a large portion of motor vehicle parts exported
from
Canada
to
Mexico
According
.
in
1992
to the USITC
were
destined
(1998), the
for
first
Canadian maquiladoras w e n t to Mexico seeking to maintain
their price competitiveness vis-a-vis US maquiladoras. They
were mainly labor-intensive manufacturing firms that used
low-technology
'
t o produce a w i d e range of products from
electrical equipment and electronic components to scuba
diving suits .3a
30
They w e r e mal1 and medium size assembly
United States International T r a d e Comission, "Canadian
Involvement in Mexico * s Maquiladora Industrytr in m t r v .
Trade md Tee- Revie~(Washington DC : June 1998 .)
plants that set up
in Mexico
in order to remain p r i c e
cornpetitive.
After NAFTA came into effect, Canadian interest in
Mexico's
MP increased significantly. By the end of 1997, the
number of Canadian owned maquiladora plants had increased to
29. (See appendix 11) In other words, after =TA,
ownership
of
maquiladora
plants
in
Mexico
Canadian
more
than
quadrupled in five years. This is a clear indication that
the TA had an impact on the pattern of Canadian investment
in Mexico. A review of information available on the type of
production by the Canadian maquiladoras in Mexico shows that
there is a large sectoral diversification in the 29 firms.
However, the leading sectors for Canadian investntent in this
program after 1994 were automotive parts and electronics and
telecommunications.31
Published direct investment data at the sectoral. level
is not a m i l a b l e .
evidence
to
In its place, we have used indirect
conduct
the
analysis
for
Hypothesis
4.
Specifically, we have used employment as a proxy for s i z e of
plant, and therefore for the l e v e l of investment. Table 11
shows
that
Mexico * s
the main sectors of Canadian investment in
MP
(automotive
parts,
electronics
and
telecommunications) account for most of the employment by
these Canadian finns i n Mexico,
TABLE II
EMPLOYMENT OF CANADIAN MAQUILADOWAS IN MEXICO
BY MAIN SECTOR
No. of fim
-
Automotive parts
and components
-
E l e c t r o n i c s and
Telecommunications
-
Other
Total:
%
Total employment
8
64,2%
29
100.0%
Source: United States International Trade Commission
Washington DC: 1998
For example, in the automotive industry, the number of
Canadian maquiladoras increased after NAFT24 fmm two to
eight (See appendix 11). Table II shows that these eight
Canadian subsidiaries in Mexico account for 64.2 per cent of
total
employment
Furthemore,
Table
of
II
Canadian
shows
maquiladoras
that
including
in
Mexico.
the
five
electronics and telecommunication firms wîth the automotive
parts and components, the share of these sectors in Canadian
maquiladora employment in Mexico rises to almost 88 per
cent. Using employment as a proxy of the size of investrnent
thus suggests that these two sectors combined account for
most of Canadian investment in maquiladora plants in Mexico.
Furthemore,
recalling the five main products that account
for most of the increase in Mexico's exports to Canada after
1994, (see Chapter III) we note that theee products al1 f a l l
in the two main investment sectors* This is indicative
evidence that Canadian investment in Mexicors MP led to an
increase in Mexico's
exports to Canada since 1994. In this
sense, we can accept Hypothesis 4 .
5.1 CONCLUSIONS
This thesis is intended t o b e a study of Mexico's
trade
relations with Canada from 1980 ta 1997. I t s main objective
is
to
evaluate whether
has had an
Agreement
the
impact
North
American
on trade
Free
between
Trade
the
two
countries after 199 4 ,
To test t h e overall economic relations between Canada
and Mexico, we used t h e following four Hypotheses:
Hl: The establishment of a trade liberalization program
in M e x i c o led to an increase in trade with Canada.
,
H2: NAFTA caused Mexico
-
Canada trade ta increase
after 1 9 % .
H3:
increase
The
trade
creation
effect
in trade between Mexico
have
dominated
and Canada
the
since the
implementation of NAPTA.
E4:
Investment
by
Canadian
firms
in
Mexicors
maquiladora plants accounts for most of the increase in
Mexicors exports to Canada under NAFTA.
To test Hypothesis 1 Canadian and Mexican trade data
was analyzed. The results showed that after Mexico changed
its trade regime in the mid-1980 ' s from import substitution
towards
trade
liberalization, trade between
Canada
and
Mexico increased. In t h i s case, the implementation of a free
.
trade oriented policy in Mexico had a positive impact over
the following years on the volume of trade with Canada and
the rest of the world,
In the early 1990rs, Mexicols trade policy continued to
transform trade as a t o o l f o r economic growth.
Moreover,
over those years Mexico's trade policy evolved and became
oriented towards closer economic ties with North America;
specifically with the United S t a t e s .
I
In order to evaluate Mexicor$ strategy regaràing its
trade with Canada, an econometric model was used in testing
Hypothesis 2 , This model was intended to test whether NAFTA
had an impact on Mexico and Canada trade relations. The
econometric results showed that after o d y four years of the
Trade Agreement, NAFPA had significant effects on Canadars
imports f r o m Mexico while it did not significantly effect
Canadars exports to M d c o .
the
results
indicate
From an economic perspective,
that
NAPPA
has
supported
the
improvement of t h e export sector by increasing trade between
the member countries. From an economic cooperation point of
view, NAFTA can be perceived as a mechanism to expand social
.
and economic growth in a developing country without being an
economic cost f o r an already developed nation. F o r example,
the 29 Canadian maquiladoras in Mexico helped create jobs
and incorne in Mexico while at the same time with NAFTA,
*
these
firms
became
more
competitive.
Furthemore,
the
econometric results show that Canadafs aggregate trade with
Mexico w a s not affected by Canada's
trading w i t h the rest of
the world.
The complex theory of Economic Integration described by
Viner (1961), led us to develop Hypothesis 3
.
The goal was
to investigate whether trade has been created or diverteà
between Canada and Mexico on the products that account f o r
&
most of the increase on trade since NAFTA. In order to test
Hypothesis 3, a market share and a customs tariff analysis
of Canadars imports was conducted on the five products that
account for much of the increase in Mexico's
exports to
Canada. The products are : Motor vehicles w i t h reciprocating
piston engine displacing
1500 cc to 3000 cc; ignition
wiring sets and other wiring sets of the E n d used in
aircraft,
vehicles,
etc;
parts
receivers ; and telephone s e t s .
of
seats;
television
The results suggest that
Mexico has a tarif f advantage on motor vehicles, television
receivers and telephone sets vis-a-vis the
world.
these
rest of
the
In this context, trade appears to be diverted on
three
products.
Trade
appears
to
be
created
on
ignition w i r e sets and parts of seats. the two products for
which Mexico does not have preferential tariffs vis-a-vis
the rest of the world. (See Chapter III.) Since -TA,
trade
between Canada and Mexico in these five products combined
have showri both trade creation and trade diversion effects,
In light of this, Eypothesis 3 can neither be accepted n o r
rejected; more time and study i s needed t o establish a
clearer result .
As
M
A
is
a
trade
and
investment
agreement,
Hypothesis 4 was developed on whether Canadian investments
i n Mexico's
Mexico's
maquiladora program have
exports
to
Canada
after
an
had
1994.
impact on
test
To
this
hypothesis, data on the investment pattern between the two
countries was analyzed ( p r i o r and post NAFTA).
After NAFTA,
Mexico became an attractive place for
Canadian f i m s t o invest; reviewing the data showed Canadian
investments in Mexico increased sharply after 1994. This
analysis
concludes
that
Canadian subsidaries
in Mexico
account for most of the increase in trade after 1994 in
automotive
parts,
electronics
and
telecommunications
equipment. In this context, the increase in trade between
Mexico
and
Canada
under
investments in Mexico's
NAFTA
is
related
to
Canadian
maquiladora program,
The main objective of NAFTA is ta increase trade and to
promote s o c i a l and economic development for its three member
C
countries. However, the formation o f a regional trading bloc
in N o r t h America has been no easy task. The anticipation of
jobs lost to M e x i c o was one of the main barriers against
NAFTA for Canada and the U n i t e d States, On the o t h e r hand,
Mexico wanted a fair trade agreement with the United States
but p o l i t i c a l reasons made t h i s unachievable p r i o r to 1994.
NAFTA is not a simple trade and investment agreement that
has promoted free trade and investments between its members;
i t is more than that. The political implications of NAFTA
for each one of t h e countries involved are acknowledged, but
go beyond the research of this thesis.
Khowing the economic theory of Free Trade Areas and
Customs Unions is important to understand the framework of
the economic integration process i n North America. The major
conclusion of this thesis is that t h e economic impact of
NAFTA
on
Mexican
-
CanadLan
trade
relations has
been
positive, Trade and investments between these two countries
have g r a m since 1994. Employment has grown in Mexico from
Canadian investments in maquiladoras.
So
far,
NAFTA has
helped in the economic integration efforts of Mexico with
North
America,
although the
full
economic
integration
process will not be felt until al1 tariffs and quantitative
restrictions &op
to zero by the year 2009. Trade between
Mexico and Canada should continue to grow as each country
identifies its
States w i l l
United
s t i l l be the main market f o r both countries,
NAFTA provides,
opportunity
trade opportunities, although the
to
at the end of the millenium, a h i s t o r i c
enhance
economic
growth
and
raise
the
standard of living f o r Canada, Mexico and the United States,
as a region and as an Economic Trading Bloc.
MEXICO'S MAJOR TRADING PARTNERS/I
(In per cent)
TOTAL
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Canada
1.7
4.1
2.2
3.0
2.4
2.5
2.3
Guatemala
0.4
0.5
na
na
na
na
na
Other
5.9
6.0
1.8
1.9
2.5
2.9
2.7
14-0
12-9
7-7
5-4
4-9
5-0
4.2
Spain
5-4
4.2
2.7
1.7
1.4
1.0
1.0
France
2-1
2.2
1.2
0-8
0-9
0.6
0 -4
*
-
mJROPE
Other
-
ASIA
Japan
Other
**
ROW
Figures may n o t add-up due to rounding off,
** (NA) N o r t h
America, (LA) Latin Arnerica,
world ,
Source: Bank of Mexico
( M W ) Rest of the
MEXICOCS MAJOR TRADING PARTNERS/~
(In per cent)
- AMERICA
Na
US
Canada
LA
Argent ina
Brazil
Guatemala
Chile
Other
-
EUROPE
Germany
Spain
France
LOI
Other
Other
- ROW
*
Figures may n o t add-up due to rounding off.
* (NA) N o r t h America, (LA) Latin America, ( M W )
world.
Source: Bank of Mexico
R e s t of the
TRADE BETWEEN CANADA AND MEXICO
Thousand of Canadian $ at 1994 prices.
Exports to
Mexico
Imports from
Mexico
1,277,890
I
Source : Statisi ics Canada
Total
rade
4
(2ANADA IMPORTS FROM
MEXICO
Two digits Harmonized S y s t e m (HS), 10 main chapters.
Million of Canadian $ at 1994 prices
HS Description
87
1995
1996
Vehicles, not railway
85 Electrical
84
1994
Machinery
Machinery
94 Furniture and
Bedding
27 Mineral Fuel, a i l , etc
90 Optic Instruments
72 Iron and Steel
07 Vegetables
08 Edible
Fruit and nuts
73 Iron/Steel Products
Source: W o r l d Trade
Atlas and Statistics Canada
1997
CANADA IMPORTS FFLOM MEXICO
Four d i g i t s Harmonized System (HS), 20 main products.
Million of Canadian $ at 1994 prices
HS Description
87 Vehicles, not railway
8703 Passenger Motor
8708 Part and Accessories
1,729
1,058
578
85 E l e c t r i c a l Machinery
865
Insulated Cable
8528 Television Receiver
23 9
8544
84 Machinery
8471 Computer Components
8407 Piston Engines
94 hrrniture and Bedding
9401 Seat (Not Dental, etc)
9403 Other F u r n i t u r e
27 Mineral Fuel, oil, etc
2709 C r u d e O i l
2710 031 (Nat crude)
90 Optic Instruments
903 2 Aut RegfControl
9009 PhotfTemcopy
.
72 Iron and Steel
7207 Semifinish Iron
7213 Bar, R o d , H t Roll
80
07 Vegetables
0709 Vegetables,other
0702 Tomatoes, fresh
70
24
08 E d i b l e Fruit and nuts
0804 Date,Fig, Pineapple
0807 Melon, Papayas, fresh
66
97
31
28
110
31
37
83
12
74
23
14
73 Iron/Steel Products
7320 Spring + Leaves
7 3 04 Tube, Pipe,Seadess
36
17
3
34
16
2
55
24
62 Woven Apparel
6212 Bra,Grdl, G r t r , etc
6203 Suites,Ensambles,etc
13
7
19
13
2
2
29
17
4
22 Beverages
2 2 0 8 E t h l Aîcohol
2203 B e e r made f r o m malt
22
14
8
31
17
13
33
16
16
16
4
19
28
17
6
C
Source: World Trade A t l a s and Statistics Canada
6
CANADA EXPORTS TO MEXICO
~ w odigits Harmonized System (HS), 10 main chapters
Million of Canadian $
HS Description
87 Vehicles, not railway
1994
1995
143
197
12 Misc , Grain,Seed,Fruit
84 Machinery
10 Cexeals
85 E l e c t r i c a l Machinery
47
Woodpulp
25 S a l t , Sulfur,Earth,Stone
04 Dairy Products
40 Rubber
59
7
Impregnated Text Fabrics
Source: World
20
26.3
Trade Atlas and Statistics Canada
CANADA EXPORTS TO MEXICO
Four digits Rarmonized System (HS), 20 main products
Million of Canadian $
ES Description
1994
1995
1996
1997
87Vehicles, not railway
8708 Parts and Accesories
8703 Passenger Motor
143
84
61
197
157
40
222
161
60
238
12 Misc . Grain,Seed,Fruit
1205 Rape or Colza Seeds
1204 Flaxseed (Linseed)
147
13 0
10
173
172
0.02
184
106
0-2
200 . 4
200
O -4
93
12
7
224
31
19
149
29
20
92
37
22
10 Cereals
14 0
IO6
1001 Wheat and Meslin
LOO8 Other Cereals
130
10
93
12
123
111
12
124
113
8
85 Electrical Machinery
8517 Ln Telephone
8542 Integrated Circuits
52
17
5
22
9
2
87
39
47 Woodpulp
47
53
24
Semichimical WoodpuLp
Mechanical Woodpulp
35
O
37
O
15
O
39
17
12
25 Salt,Sulfur,Earth,Stone
26
6
27
17
IO
41
25
15
37
21
15
84 Machinery
8483 Transmission Products
8409 Parts Engines
4705
4 701
2503 S u l f u r of al1 Ends
2524 Asbestos
19
6
200
37
74
25
19
0 4 Dairy
Products
0402 Milk, Crearn, Conc, Sweet
0406 Cheese
*
40 Rubber
4011 New Pneumatic T i r e s
4016 O t h e r Articles
43
41
2
32
31
I
45
45
O
7
20
19
L
11
14
0.8
O
O
27
12
1
5
6
8
59 Impregnated Text Fabrics 26.3
5903 Plastic,Not T i r e cord 26
5911 O t h e r T e x t Plastic
0-3
19.3
19
0-3
20
20
0-2
Source: World Trade A t l a s and Statistics Canada
27
26
0.4
Year
1) Export P r i c e Index
Source: Statistics Canada
2) Import Price Index
ECONOMETRICS
There are a nurnber of issues concerning the econometric
mode1 developed by Gould (1996) and Mexico - Canada trade.
However,
for
this
thesis
this
model
is
the
most
reliable. (See Chapter If 1)
Ordinary Least Squares COLS) has been used for testing
.
the equations of Oouldrs (1996) model and the Time Series
Processor (TSP) h a s been used as the cornputational program
to estimate the parameters. The variables in the mode1 have
been set in logarithms3' and the independent variables have
been lagged one period (-1).
In the first regression (see Chapter III) the value and
the
of
level
coeffient
checked
of
to
significance
determination
determine
for
the
(R')
for both
the degree of
variables
and
the
equations w a s
explanation of
the
independent variables over the dependent variable. Also
-
32
U s i n g logarithms often reduces the heteroscedasticity in
an econometric model. Thus. the hypothesis of homogeneous
variances for logarithms data is acceptable. Oujarati (1988)
checked was the value and level of significance for the Fstatistics in order to establish the relability of
.
the
model .
In this section, a second regression for bath equations
will be conducted to test for possible serial correlation
between t h e independent variables. This includes a first
b
order autoregressive correction AR (1) test
for positive
serial correlation, and an F-statistics test f o r serial
correlation. The value of the AR(1) gives the value of the
existencing
correlation
of
the
variables
to
test
the
following hypothesis:
H,
:
No Positive Serial Correlation
H,
:
Positive Serial Correlation
If the coefficient AR(1) is equal to one, there is positive
serial correlation within the variables,
If this is the
case, H, can be rejected.
A second serial correlation t e s t is established at the
1% l e v a of significance. T h e use of the P-statistic and its
probability
tool
of
ocurrence
will
help
to
test
the
following hypothesis :
Ho : No serial correlation
Hl
:
Serial correlation
If the probability of the F-statistic is larger than the 1%
level of significance applied, t h i s means t h a t if F is not
significant,
b
than
the
null
hypothesis
of
no
serial
correlation can be accepted.
Equation 1 : (Canadats imports from Mexico}
Regression 2
F i r s t serial correlation test:
After 20 iterations, the AR(1) coefficient is -0.4705,
this case, there
not
problem
positive
correlation within the variables. He can accept the nul1
hypothesis,
Second serial correlation test:
The
value
of
the
F-statistic
is
and
2.4583
its
probability is 0.0258. This is larger than the 1% level of
significance.
In
this
case,
can
we
hypothesis of no serial correlation
accept
the
nul1
(either positive or
negative) .
Equation 2: (Canada's exports to Mexico)
Regression 2
F i r s t serial correlation test:
Following the same procedure in equation 1, the AR(i)
technique has been applied. After 4 iterations, the AR (1)
coefficient is -0.2712 which indicates that there is no sign
of
serial
positive
variables.
We
can
correlation
accept
Ho
within
of
no
the
indpendent
positive
serial
correlation.
Second serial correlation test:
Gives a value of 0 -5472 for the F-statistic and high
probability of 0 -7753. This implies that the F-statistic is
not
significant at
the
1%
level.
Therefore,
the
nul1
hypothesis of no serial correlation within the variables can
be accepted.
TOTAL CANADIAN DIRECT INVESTMENT
Millions of SC
Source: Department of Foreign Affairs and International
Trade
CANADIAN MAQUILADORAS IN MEXICO
Type of
product
1.- Noma Appliences
2.
-
3.-
Applience wire
Number of
employees
1994
2,000
NA
Norna de Mexico
Christmas trees
lights
NA
Manufactuxera Int,
Marina
F i b e r glasa
pleasure craft
NA
Automotive
sensors & bulbs
1994
560
Electrical and
electric components
2991,
250
4.- Siemens Automotive
5,-
Start up
Span de Mexico
- Stuard Entertainment
7 . - M a j ilosa Tehuazan
Bingo Cards
1991
275
Apparei, for women
1994
250
8.- Zhalpulco Agro Ind.
-Parel
1994
250
9 - - Ind. Techtrol de Mexico
Wire harness
and cable
10.- Three Way S.A.
Playera shirts
and t-shirts
1994
95
Automotive parts
1994
240
Automotive parts
1994
50
NA
NA
1994
160
6-
11.
- Gecamex
12.- Vogue Dessous
13-- VentraMex
14.
-
Bmblematico de Mexico
Metallic broaches
15.- Dicon Safty Products
Smoke alarms
16, - Autopartes y Manuf,
Automotive
cornpanents
de M e x l c o
17,- Bauerhin Tecnologia S.A
Baby seats
18.- Bay Mills S.A.
Decorative
window panels
19,- Dor Seal S.A.
Ornamental
glass windows
20,-
Sistemas y Conexiones
21.- Celestica de Monterrey
-
22,
Accesorios Decorativos
de Mexico
-
23 . Arnerican Fire Logs
24.-
-
25.
Auto Trirn de Mexico
Winston de Mexico
Automotive wire
barnesses
Blectronics
for telecommunications equipment
Decorative
pillows
Fire L o g s
Leather wheel
cotreYs
P l a s t i c injection
molding
-
Missala Manfred
Friedreich
Metal frame p a r i s
2 7 , - Corporation Resentel
Plastic articles
26.
28.-
Industrias Nauticas
del Noreste
Scuba
suits
diving
29.-
Norte1 de Mexico
Digital telephone
sets/ pay
telephones
NA: Information not availabe
* : Sold to a US firmSource: United States
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