North–South trade liberalization and returns to skill in the south: The case of Mexico

Abstract

This study examines the effect of North American Free Trade Agreement (NAFTA), an instance of North–South trade liberalization, on returns to skill in Mexico. Mexico is abundant in low-skill workers relative to the US and Canada, and so, by the Heckscher–Ohlin–Samuelson trade model, NAFTA ought to have raised the relative earnings of low-skill workers, that is, lowered returns to skill in Mexico. Analysis of Mexican labour micro-data yields the finding that while returns to skill in industries producing tradeables have risen, ceteris paribus, since Mexico embarked upon trade liberalization by joining the GATT in 1986, this rise was less pronounced by 1999 in industries liberalized relatively rapidly by NAFTA, launched in 1994, than in industries liberalized relatively slowly by this phased trade treaty. This is considered evidence of NAFTA holding back rise in returns to skill, since it is plausible such a dampening would have been more marked in industries more rapidly exposed to trade with Mexico's skill abundant northern neighbours. Hence, this study suggests trade with developed nations may lower returns to skill in developing nations.

Keywords:

• NAFTA
• returns to schooling
• Heckscher–Ohlin model

JEL Classifications:

• F1
• F11

Notes

1. A number of goods slated to become duty-free between 1998 and 2008 became so ahead of schedule on account of four rounds of accelerated tariff elimination, in 1997, 1998, 2000 and 2002.

2. Import tariffs are not the only gauge of an economy's openness. However, this is a study of the particular liberalization, under NAFTA, of the North–South trade between Mexico and its more skill abundant northern neighbours and not an examination of the general opening of the Mexican economy. Even though NAFTA's provisions extended to the elimination of non-tariff-barriers, tariff elimination was its hallmark. Besides, as will be seen, NAFTA's phased manner of tariff elimination is central to this study's empirical strategy. Hence, the present focus on import tariffs.

3. Goods whose domestic supply is restricted so as to raise their prices, ostensibly to benefit their producers.

4. Those in Categories A and B of NAFTA's schedule of tariff elimination.

5. Although the labels fastlib and slowlib pertain to NAFTA, they really indicate all tradeables but for the few excluded from the provisions of this tripartite treaty, and so the industries thus labelled would have been affected by both the GATT and NAFTA.

6. Robertson (2000, 2004) too uses labour micro-data, though for the purposes of basic illustration.

7. This is a more stringent definition of a large manufacturing plant than used by Otero and Pagan (2002), who consider a large plant to be one employing more than 100 workers.

8. Specifically, the Secretaría de Hacienda y Crédito Público or The Secretariat of the Treasury and Public Credit.