An Empirical Analysis of the Economic Integration Between Mexico and the United States and Its Connection with Real Exchange Rate Fluctuations (1980–2000)

This article provides a new perspective about the links between the Mexican and US economies by studying the behavior of some Macroeconomic variables during the 1980–2000 period. It uses time series techniques to show that the Mexican GDP, its components and even real money balances had a robust long-run relationship with the US economic activity and the bilateral real exchange. The tighter nexuses appear to have begun in the early eighties and not in the nineties, as is often thought. The relationships here found were not modified by the inception of NAFTA or other events.     

Openness and Industrial Response in a Wal‐Mart World: A Case Study of Mexican Soaps,Detergents and Surfactant Producers

This paper uses a case study approach to explore the effects of NAFTA and GATT membership on innovation and trade in the Mexican soaps, detergents and surfactants (SDS) industry. Several basic findings emerge. First, the most fundamental effect of NAFTA and the GATT on the SDS industry was to help induce Wal‐Mart to enter Mexico. Once there, Walmex fundamentally changed the retail sector, forcing SDS firms to cut their profit margins and/or innovate. Those unable to respond to this new environment tended to lose market share and, in some cases, disappear altogether. Second, partly in response to Walmex, many Mexican producers logged impressive efficiency gains during the previous decade. These gains came both from labour‐shedding and from innovation, which in turn was fuelled by innovative input suppliers and by multinationals bringing new products and processes from their headquarters to Mexico. Finally, although Mexican detergent exports captured an increasing share of the US detergent market over the past decade, Mexican sales in the US were inhibited by a combination of excessive shipping delays at the border and artificially high input prices (due to Mexican protection of domestic caustic soda suppliers). They were also held back by the major re‐tooling costs that Mexican producers would have had to incur in order to establish brand recognition among non‐Latin consumers, and in order to comply with zero phosphate laws in many regions of the US.     

Perceived Value of Mexican vs. US Products in Mexico,Venezuela and the United States

Abstract

With the advent of NAFTA and the liberalization of Latin American markets, Mexican firms have gained new strategic options, many of which revolve around exporting regionally or to the United States and Canada. The studies explore consumer reactions to Mexican products. The first study compares value perceptions of a cross-national sample of Mexican, US and Venezuelan respondents toward US and Mexican products. It also explores the moderating effects of product content and financial risk on value differentials. The second study, limited to Mexican and Venezuelan respondents, looks for evidence of a home country bias. While the strategy implications for Mexican products differ according to a product's level of content and financial risk, the studies indicate that inter-regional trade is a viable possibility.     

Nafta,the financial crisis,and multinational management in Mexico

The North American Free Trade Agreement (NAFTA) joined Mexico, the United States, and Canada in a free trade and investment block. While NAFTA has generated considerable interest, much of the initial enthusiasm for the treaty has faded due to the Mexican financial crisis. To learn more about the effects of NAFTA and the crisis on multinational (MNC) strategy and operations, we conducted interviews at manufacturing firms in Mexico. Even with NAFTA, we found that significant restrictions remain that limit the strategies that MNCs can pursue. Also, only a limited number of MNCs have been seriously hurt by the financial crisis due to the risk management strategies these firms have adopted. We conclude with a discussion of the implications of this study for the effective management of MNC firms in Mexico.     

The impact of the yuan‐dollar exchange rate on Mexican manufacturing exports to the US: A cointegration approach

This paper makes use of three econometric methods and three time intervals to evaluate the long‐term effects of several key variables on Mexican manufacturing exports to the US . The evidence across econometric techniques and sample periods systematically indicates that: (i) a real depreciation of the yuan‐dollar exchange rate reduces Mexican manufacturing exports by lowering the price of Chinese goods in the US market; (ii) a depreciation of the peso‐dollar real exchange rate generates a strong supply‐side effect due to the high import content of Mexican manufacturing exports, which ultimately leads to lower (rather than higher) sales in the US ; and (iii) external demand and labour productivity are positively related to manufacturing exports, whereas real wages are negatively related. Therefore, a falling external demand for Mexican manufacturing products or a real depreciation of the Chinese currency could, to some extent, be offset by increasing labour productivity faster than wages. These findings reflect two fundamental problems of the Mexican economy: (i) low investment in high‐quality formal instruction and proper training programs, which gives rise to severe bottleneck points for faster labour productivity growth and (ii) excessive reliance of the export‐oriented manufacturing industry on foreign suppliers of intermediate inputs.     

Building the NAFTA Railway

Abstract

The key but too often overlooked link between firms and communities in the emerging NAFTA economy is transportation. Cross-border investment, trade, competition and cooperation are dependent on the restructuring of the U.S., Mexican and Canadian transport systems into a tightly integrated, efficient network. The paper examines the role of transport industries in the NAFTA economy, focusing particularly on a case study of the strategies of the Kansas City Southern Railway to become the “NAFTA Railway” to compete in the North American economy and the implications of these efforts for the firms involved, government transport policies, and the North American economy.     

Commodity currencies

This paper looks at real exchange rate behavior by focusing on three OECD economies (Australia, Canada, and New Zealand) where primary commodities constitute a significant share of their exports. For Australia and New Zealand especially, we find that the US dollar price of their commodity exports (generally exogenous to these small economies) has a strong and stable influence on their floating real rates, with the magnitude of the effects consistent with predictions of standard theoretical models. However, after controlling for commodity price shocks, there is still a purchasing power parity puzzle in the residual. The results here are relevant to developing commodity-exporting countries as they liberalize their capital markets and move towards floating exchange rates.     

Financial dollarization and debt deflation under a currency board

In the late currency board years, Argentina faced a real exchange rate adjustment through price deflation amidst growing devaluation expectations. Using a firm-level panel database to analyze the incidence of these factors on the currency composition of private debt and on firms’ performance, we find that widespread debt dollarization showed no relationship with the firms’ production mix or the ever-changing probability of a nominal devaluation. While relative price changes favored export-oriented firms with the expected impact on sales, earnings and investment, increases in devaluation expectations elicited only a marginal differential response in investment from more financially dollarized firms. Our findings provide support to two criticisms faced by the Argentine currency board in recent years, namely, that by fueling beliefs in an implicit guarantee it stimulated across-the-board debt dollarization and that it could not fully isolate the economy from real shocks, as the feared balance sheet effect was replaced by a gradual but equally deleterious debt deflation effect.     

The Effect of the Chinese Economy on Mexican Maquiladora Employment

During the last five years the maquiladora industry of Mexico has seen a slowing of the rapid growth experienced during the 1990s. The maquiladora expansion has been linked to U.S. foreign direct investment. Additionally, China has become a major receptor of U.S. investment for the production and export of manufacturing goods. This study estimates the impact of the industrial activity of the United States and China on employment demand in the maquiladora industry of the northern border states of Mexico. Using data on industrial activity, real hourly wages, and the real exchange rate as a proxy of Mexican competitiveness, a bounds test cointegration analysis is developed. The results show that the variables affecting external demand have impacted the maquiladora employment trend negatively, while wage differentials and the exchange rate tend to encourage maquiladora activity.     

Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S.

In spite of concerns about “twin deficits” (fiscal and the current account deficits) for the United States economy, empirical evidence suggests that “twin divergence” is a more usual feature of the historical data, i.e., when fiscal accounts worsen, the current account improves and vice versa. This paper empirically studies the effects of fiscal policy (government budget deficit shocks) on the current account and the real exchange rate, during the flexible exchange rate regime period. Based on VAR (Vector Auto-Regression) models, we identified “exogenous” fiscal policy shocks after controlling for business cycle effects on fiscal balances. In contrast to the predictions of most theoretical models, the U.S. results suggest that an expansionary fiscal policy shock, or a government budget deficit shock, improve the current account and depreciate the real exchange rate. Increases in private savings and declines in investment contribute to the current account improvement while a nominal exchange rate depreciation, as opposed to a relative price level change, is mainly responsible for the real exchange rate depreciation. The “twin divergence” of fiscal balances and current account balances is also explained by the prevalence of output shocks, i.e. output shocks — more than fiscal shocks — appear to drive the co-movements of the current account and the fiscal balance.     

The adjustment mechanism in the Euro Area

This paper analyses the adjustment mechanism in the euro area prior to the crisis. Results show that the real exchange rate adjusted to redress cyclical divergences and that after monetary unification, real exchange rate dynamics became less reactive to country-specific shocks but also less persistent. Regulations affecting price and wage nominal flexibility and employment protection play a role in the adjustment mechanism. Indicators of product and labour regulations appear to matter for both the reaction of price competitiveness to cyclical divergences and for the inertia of competitiveness indicators.     

The NAFTA Preference and US‐Mexico Trade: Aggregate‐Level Analysis

This paper focuses on the US tariff preference afforded to Mexico relative to non‐NAFTA trading partners and evaluates the trade effects of NAFTA in a manner consistent with the idea behind a preferential trading agreement. The estimation technique exploits the time‐varying dimension of the tariff preference over 1989 to 2001. This is important because the tariff preference for Mexico into the United States market existed prior to NAFTA. Further, the NAFTA preference was phased in over time. We find that a higher US tariff preference for Mexico corresponds to increased US import demand for Mexican goods, and that a higher Mexican tariff preference for the United States corresponds to increased Mexican demand for US exports. Interestingly, import demand was more responsive to changes in the tariff preference once NAFTA was in place than it was on average.     

Debt composition and balance sheet effects of exchange rate volatility in Mexico: a firm level analysis

We use Mexican firm-level data to study the role of currency mismatches in the corporate sector in exacerbating the negative effects of a devaluation. We also investigate what drives Mexican firms to borrow in foreign currency. We find that holding dollar denominated debt in a devaluation adversely affects firms’ earnings and investment. However, exporters invested more than non-exporters in the same period. We also find that the negative effect of dollar debt was stronger than the positive effect of exports in the 1994 crisis for firms with positive dollar debt and/or exports, relative to firms that did not borrow abroad and/or export. This was a result of imperfect currency matching by firms. However, in the 1998 crisis firms managed the denominations of their inflows and outflows much better and these two effects were roughly equal in magnitude. We also find some evidence of currency matching by exporters, especially after the introduction of the floating exchange rate.     

Number of creditors and the real effects of credit supply disruptions

This paper examines the role of bank-firm relationships in transmitting credit supply shocks to the real side of the economy in an emerging market. Using a hand-collected dataset for Iranian public companies, we exploit firms' exposure to a bank involved in a massive Ponzi scheme in 2011. We document a nearly 8 percentage point drop in annual employment growth rate for firms connected to the troubled bank following the credit dry-up caused by the scandal. We show that the magnitude of the effect on employment and investment is amplified by bank-firm relationship at least as much as by the financial constraint status found in previous studies. The results highlight the role of bank-firm relationships and the importance of access to multiple creditors in alleviating the consequences of credit supply disruptions.     

Terms of trade and exchange rate regimes in developing countries

Since Friedman [Essays in Positive Economics, University of Chicago Press, Chicago (1953) 157-203] an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks. I use a post-Bretton Woods sample (1973-96) of 75 developing countries to assess whether the responses of real GDP, real exchange rates, and prices to terms-of-trade shocks differ systematically across exchange rate regimes. I find that responses are significantly different across regimes in a way that supports Friedman’s hypothesis. The paper also examines the importance of terms-of-trade shocks in explaining the overall variance of output and prices in developing countries.     

Dissecting the dynamics of the US trade balance in an estimated equilibrium model

In an estimated two-country DSGE model, we find that shocks to the marginal efficiency of investment account for more than half of the forecast variance of cyclical fluctuations in the US trade balance. Both domestic and foreign marginal efficiency shocks generate a strong effect on the variability of the imbalance, through shifts in international relative absorption. On the other hand, shocks to uncovered interest parity and foreign export prices, which transmit mainly via the terms of trade and exchange rate, have a strong influence at short forecast-horizons, before the investment disturbances begin their dominance.     

Exchange rate fluctuations,firm size,and export behavior: an empirical investigation

In this paper, we examine how changes in the exchange rate and its volatility affect the export behavior of manufacturing firms. We also investigate whether both exchange rate changes and exchange rate volatility affect firms of different sizes differently. Applying the two-step system generalized method of moment estimator on our data for a sample of 221 Pakistani manufacturing firms, we find that the real exchange rate depreciation has positive impacts, whereas the exchange rate volatility has negative impacts on firms’ exports. We also find that compared to large-sized firms, small- and medium-sized exporting firms are more likely to benefit from currency depreciations. Yet, regarding the effect of exchange rate volatility, we find that the adverse impact of exchange rate volatility is weaker for large-sized firms as compared to small- and medium-sized firms. Our findings confirm the presence of nonlinearity in export-deterring (favoring) effects of exchange rate volatility (depreciation) on exporting behavior depending on firm size. Pakistan should design and implement export-favoring preferential policies by emphasizing on real exchange rate stabilization and providing incentives to large firms to come into being. Small- and medium-sized enterprises should develop such export strategies that help reduce their size disadvantages, particularly in managing exchange rate risks.     

Were Small Producers the Engines of Growth in the Canadian Manufacturing Sector in the 1980s?

Small firms are often seen to be the engines of growth. There are two main sources of empirical evidence that are adduced to support this conclusion. The first is that job creation has been coming mainly from small firms. The second is that the share of employment accounted for by small firms has increased in the past two decades. Both of these sources rely on a simple metric-employment. This paper asks whether changes in this metric affect the view of the role that small firms play in the growth process.The first section of the paper maintains employment as the measure that is used to evaluate the importance of small firms but modifies the raw measure of employment to correct for the fact that small firms pay lower wages than large firms. When this is done, small producers are no longer found to outperform large producers in terms of job creation over the 1970s and 1980s in the Canadian manufacturing sector.The second section of the paper changes the metric used to evaluate relative performance by moving from employment to output and labour productivity. The paper demonstrates that while small producers have increased their employment share dramatically, they have barely changed their output share. Small firms have been falling behind large firms both with respect to wages paid and labour productivity.     

How did investor‐state dispute settlement get a bad rap? Blame it on NAFTA,of course

In the short history of the US bilateral investment treaty (BIT) programme, there have been no instances of dispute settlement cases initiated against the United States by firms from BIT countries. The NAFTA experience changed that. Where other studies have only hinted at the reasons for NAFTA controversies, this paper makes clear three causal factors: (i) changing patterns and intensity of FDI, (ii) the application of those rules to developed countries amid those changing FDI patterns and (iii) ambiguities in ISDS rules themselves. The paper explores these and traces the ways in which lessons of the NAFTA have been instrumental in changing the pursuit of investment protection agreements. BITs used to be uncontroversial, but the NAFTA focused attention on reforms to ISDS that maintain the utility of BITs in the governance of FDI, without creating a legal structure for simply challenging the state.     

人民币实际汇率调整对中国制造业就业影响——来自1998~2007年细分行业数据的证据

本文首次利用498个4位代码的细分行业数据研究汇率调整对中国制造业就业的影响。在扩展汇率调整对就业市场影响理论分析框架的基础上,本文探讨了人民币实际汇率调整从要素密集度对中国城市制造业就业市场的传导渠道及其影响因素;并通过1998~2007年工业企业数据以及海关贸易数据构建人民币在行业层面的实际有效汇率指数,发现人民币实际汇率调整会对中国城市行业就业市场产生显著且重要的影响。研究表明:初级产品和劳动资本密集型行业的实际汇率调整对就业影响估计的显著性明显高于技术密集型行业,3类行业的就业弹性分别为0.423、0.327、0.309;相对私营行业而言,外商投资行业的净就业水平对于实际汇率调整更为敏感。