ECONOMIC INTEGRATION AND INDUSTRY LOCATION: HEMISPHERIC INTEGRATION AND INDUSTRY LOCATION 3

images (1)
Other aspects of adjustment to hemispheric free trade would likely resemble the transition process in Mexico. The reduction of trade barriers in Central American and Caribbean countries, which occurred during the 1980’s, has been followed by an expansion of maquiladora-type plants and specialization in the assembly of imported intermediate inputs for export, mainly in apparel and electronics. Most Latin American countries, like Mexico, appear to have a comparative advantage in nonskill intensive manufacturing activities, such as product assembly. Hemispheric integration would likely promote the expansion of international vertical supply relationships similar to those that have developed between Mexico and the United States. This may lead to similar increases in wage inequality as has occurred in the Mexican regions where maquiladoras have been most active.
Hemispheric integration may have other effects on economies in the region, which may be most evident at the national level. Following the logic of the increasing-returns-based models discussed in the introduction, integration might cause some countries to partially deindustrialize. Puga and Venables (1997) show that the formation of a free trade area may lead industry to agglomerate in just one of the member countries. The key to their model is the combination of increasing returns at the firm level, input-output linkages between industries, and transport costs between countries.