Trade Reform and Manufacturing Performance in Mexico: from import substitution to dramatic export growth

Abstract

Since the trade liberalisation of the mid 1980s the trade regime facing Mexican manufacturers has changed dramatically. The economy has moved from one where import substitution behind tariffs and some licensing restrictions was the norm to a highly open trading environment with virtual free trade between Mexico and its largest trade partner the USA and modest tariffs of around 10 per cent with other countries. Since the late 1980s manufactured exports have grown dramatically at one of the fastest rates of any economy, although financed by large capital inflows the net trade balance in manufactures remains negative. This paper surveys the recent evidence on the impact of this liberalisation process on manufacturing performance. Various performance indicators can be used to assess the impact on manufacturing. Here four are discussed: (1) revealed comparative advantage measures of net trade balance; (2) efficiency wage estimates of unit labour costs; (3) total factor growth; (4) export growth. The performance of different branches of manufacturing is examined using these indicators and tests are conducted to establish links between movements in these indicators and the degree of exposure to foreign competition experienced by the various branches. The general conclusion is that the evidence is ambiguous with only some studies supporting the view that the greater the trade liberalisation in a branch the greater will be the subsequent improvement in performance.