ECONOMIC INTEGRATION AND INDUSTRY LOCATION: Mexico-U.S. Trade and the U.S. Border Economy 2

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The empirical findings suggest that economic integration between countries is associated with the expansion of production in border regions. A 10.0% increase in export manufacturing in a Mexican border city is associated with a 1.5% to 2.0% increase in employment in the neighboring U.S. border city. This effect is substantial when one considers that export manufacturing in maquiladoras has been growing at an annual average rate of 12.1% since 1980. The impact of economic integration on U.S. border cities appears to vary with the size of the border city. For small U.S. border cities, the employment effects are strongest for the transportation and wholesale trade industries, which is consistent with the Iand-port hypothesis; for large U.S. border cities, the employment effects are strongest for the manufacturing industry, which is consistent with the binational-regional-production-network hypothesis. Further, there is no statistically significant correlation between Mexican export production and employment in interior cities located in U.S. border states, which suggests that employment growth in U.S. border cities is not a byproduct of generalized employment growth in U.S. border states. there

As NAFTA consolidates the process of U.S.-Mexico economic integration, it is likely to contribute to further relocation of U.S. production towards U.S. cities on the Mexican border. That free-trade agreements contribute to a spatial reorganization of economic activity may account for the geographic pattern of political support for NAFTA in the United States. Politicians from states on the Mexico-U.S. border may have expected that NAFTA would shift production towards their districts, raising incomes for local home owners and other constituents that own location-specific factors of production. Politicians from states that are distant from Mexico may have feared that NAFTA would lead to a relative economic contraction in their districts. Additionally, labor unions may have been concerned that a relocation of production would move jobs from northern union-friendly states, such as Michigan, Ohio, and Pennsylvania, to southern right-to-work states, such as Texas.