Third, a large fraction of Mexico-U.S. trade is in intermediate inputs for manufacturing. In the move to free trade, Mexico is specializing in specific manufacturing processes, such as the product assembly done by maquiladoras, within specific manufacturing industries. The expansion of Mexico-U.S. trade has brought with it the creation of vertical supply relationships between U.S. and Mexican firms. These relationships are transport intensive. The flow of intermediate inputs produced in the United States and exported to Mexico and the return flow of final goods, which are assembled from the imported inputs, exported from Mexico to the United States has greatly increased the importance of the Mexico-U.S. border region as a production site. The growth in Mexico-U.S. trade, the relocation of industrial activity to northern Mexico, and the shift in Mexican production towards assembly activities are all different aspects of the same transition process. there

The expansion of NAFTA to include Chile, Central America and the Caribbean, the MERCOSUR countries, or the Andean countries would certainly increase international trade within the hemisphere. There is little reason, however, to expect that the effects of hemispheric integration on industry location elsewhere in Latin America would be nearly as dramatic as they have been in Mexico. The main reason is that transport costs to the U.S. market, or to other markets in the hemisphere, do not favor relatively less industrialized regions in these countries as they have in the case of Mexico. Most trade between the United States and the countries of Central and South America is shipped by sea or air. An increase in trade with the United States would favor cities with access to a major airport or sea port. Outside of Mexico, most industrial activity in Latin America is already located in such cities — Buenos Aires in Argentina, Sao Paulo in Brazil, Santiago in Chile, Lima in Peru, and Caracas in Venezuela. Hence, there would be no need for firms in these countries to relocate in order to improve access to the U.S. market. Further, with the possible exception of Brazil, no country in the hemisphere besides the United States has a market which is sufficiently large to influence industry location inside countries.