The hidden dynamics of the USA-Mexico trade relationship: a partial export data decomposition approach

ABSTRACT

This study employs a unique methodology to uncover the hidden dynamics of the USA-Mexico trade relationship under the United States-Mexico-Canada Agreement (USMCA) agreement. The conventional bilateral trade balance (BTB) only considers total export data, which may need to be revised for testing the J-curve hypothesis since countries (such as the USA) also re-export to their partners (e.g., Mexico). To address this, the study decomposes total export data into re-export data and domestic export data and proposes two new forms of J-curve hypothesis testing: the partial-domestic-J-curve hypothesis BTB and the partial-re-export-J-curve hypothesis BTB. The study's empirical findings suggest that the partial methodology should be used for asymmetric J-curve hypothesis testing in the USA-Mexico trade. The findings also indicate that Mexican consumers are more sensitive to changes in the value of the peso for US domestic products than re-exported products, and they purchased more US domestic products than re-exported products during the COVID-19 pandemic.

KEYWORDS:

• Partially J-curve hypothesis testing
• nonlinear approach
• Mexico
• USA

JEL:

• F14
• F17
• F31

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

DATA AVAILABILITY STATEMENT

The data that support the findings of this study are available from the corresponding author upon reasonable request.

Notes

1 The Economic Complexity Index ranks countries based on the diversity and complexity of their export basket. A high index corresponds to a highly diversified set of complex products. For details, refer to the Atlas of Economic Complexity (CID) by Harvard University. https://atlas.cid.harvard.edu/rankings.

2 Domestic Exports are ‘commodities grown, produced or manufactured in the US, including commodities imported from foreign countries that have been significantly changed or enhanced in value, in either the United States or a Foreign Trade Zone’ (ITA, 2021).

3 Re-exports are ‘foreign goods (goods produced in other economies and previously imported) that are exported with no substantial transformation from the state in which they were previously imported’ (IMF, 2015).

4 It is expected that the local currency depreciation or devaluation will initially worsen and eventually improve this country’s bilateral balance over time. Magee (1973) labelled this the J-curve effect since the pattern of this movement resembles the letter J.

5 For detailed instructions, please refer to Hofstede (1980).