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

What are the implications of Mexico-U.S. economic integration for regional economies in the United States? The expansion of maquiladora-based trade represents expanding vertical supply linkages between U.S. and Mexican firms. It seems clear that these linkages have helped pull economic activity northward in Mexico. In principle, Mexico-U.S. trade could also pull U.S. production southward.

In Hanson (1996b, 1997b), I examine the impact that the growth in Mexico-U.S. trade has had on the location of production in the United States. There are several ways in which the economic integration of the two countries could contribute to a relocation of economic activity in the United States. First, an increase in U.S.-Mexico trade could raise demand for transportation and warehousing services on both sides of the border, in which case border cities function as land ports. Second, the existence of transport costs may give U.S. firms that export to Mexico or that supply maquiladoras with inputs, an incentive to locate their production facilities in U.S. border cities. In this outcome, the border is the center of a binational regional production network for the North American market.

To assess the impact of Mexico-U.S. trade on industry location in the United States, I examine the correlation between economic activity in pairs of U.S. and Mexican border cities. cash payday loans

I use annual data on the ten major border-city pairs for the period 1975-1994 to estimate employment growth in U.S. border cities as a function of a series of control variables and the growth in export production in nearby Mexican border cities. Nearly all production for export in Mexican border cities occurs in maquiladoras. A positive correlation between export production in a Mexican border city and employment in the neighboring U.S. border city would be consistent with the hypothesis that production in border-city pairs is linked through vertical supply relationships. But it could also be simply a byproduct of secular shifts in U.S. employment towards southwestern states, which are evident in Table 1. To control for this possibility, I also examine the correlation between export production in Mexican border cities and employment in interior cities located in U.S. border states.