ECONOMIC INTEGRATION AND INDUSTRY LOCATION: HEMISPHERIC INTEGRATION AND INDUSTRY LOCATION 4

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The country in which industry agglomerates serves as a hub, purchasing intermediate inputs from other member countries, which trade mainly with the hub country and relatively little with each other. In some respects, the United States operates as a hub for the North American economy. The U.S. auto industry is supported by auto-parts production in Canada and Mexico, and the U.S. apparel and electronics industries are supported by maquiladora operations in Mexico.

An important question is whether the expansion of NAFTA to include other countries in the hemisphere would create a sufficiently large economy, or an economy with sufficiently high transport costs, to support multiple hubs. One could imagine Argentina and Brazil serving as hub economies for the southern cone and competing with the United States in certain industries, such as automobiles, where Argentina-Brazil trade through MERCOSUR has been particularly active. The expansion of an Argentina-Brazil hub might entail a decline in industrial production in small neighboring economies, such as Chile or some of the Andean countries. One could alternatively imagine the addition of MERCOSUR to NAFTA causing the collapse of auto and other industries in Argentina and Brazil, as the United States, supported by production Canada and Mexico, become the hemispheric industrial center.

Which path the hemisphere takes will depend on the strength of scale economies and transport costs, the magnitudes of which can only be uncovered through further empirical work.