Impact of Globalization on Mexicos Trade Relations with the USA – Term Paper

Impact of Globalization on Mexicos Trade Relations with the USA

Due to its all-encompassing nature, globalization has different implications for countries economies, politics, and cultures based on the level of their level of development. For instance, the effect of this phenomenon on the United States of America as a developed country might be drastically different than on its neighbor Mexico, who is only developing. Globalization has led to intensification of the trade relations between the USA and Mexico. Despite the rough beginnings, when jobs were lost, low-quality products dumped from one country to another, and market for local products declined, globalization has ultimately led to the reduction or complete removal of the policy barriers to trade and investment between the partner countries (Dollar 145).

However, since the North American Free Trade Agreement (NAFTA) conclusion, both countries have experienced tremendous economic growth. Currently, the United States is Mexicos key trade partner, with 14.5% of the total physical goods imported to the US (Sokoloff and Engerman 217). Thus, this paper will focus on the impact of globalization on the trade relations between Mexico and the US, with specific attention paid to the wage gap through the prism of the Stolper-Samuelson theorem and HeckscherOhlin theorem.

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Currently, the US and Mexico are protected by NAFTA, which provides them with preferential trading status. These two countries and Canada, the third signatory to the Agreement, are free to move their goods and services to each others territories without significant restrictions. Even though the trade relations have significantly contributed to the economic growth of the US and Mexico, they had a different impact for either party due to their differing comparative advantages. The US export to Mexico has increased by more than 500%, from $41.6 billion in 1993 to $231 billion in 2016, while Mexicos export to the US increased by 640% between 1993 and 2016. The trade balance of the US and Mexico in merchandise had a significant surplus of $59.0 billion. On the other hand, the service sector has also registered a significant increase in trade value between the two countries, albeit lower than merchandise (Williamson 117).

Globalization had a negative effect on most of developing companies in Mexico. For example, some of the products that were formerly manufactured in Mexico lost their place in the American market, and their prices declined significantly because the US was able to import from China at a lower price. With the loss of the market, many people lost their jobs while private entrepreneurs suffered losses in revenues. For example, farm workers lost their jobs, and it took a lot of time for the farmers to shift to other cash crops. The US has a comparative advantage, and only 5 million jobs in the US depended on the Mexican trade, while only 1.29 million people were employed in Mexico on the basis of bilateral trade relations between the two countries (Bernanke n.p.).

Mexico has leveraged its comparative advantage in many areas such as labor costs and land. The US has shifted manufacturing and other labor-intensive production to other countries, including Mexico, where labor costs are lower, thereby creating jobs in the respective country. Therefore, Mexico has benefited from new jobs and capital investments, which has ultimately led to rapid economic growth and development. The US has also benefited Mexico regarding capital and knowledge (Bailey, Goldstein, and Weingast 309). Nevertheless, with the outsourcing jobs to developing countries, American  middle class lost jobs as they could not compete with the low-cost labor from countries such as Mexico and China. With the lower skilled workers in developed countries losing jobs to Mexico and China, the wage gap increased (Frankel 45).

The Stolper-Samuelson theorem states that if the prices of goods or services produced by a country rise or fall, then the cost of the factors of production used intensively in the industry will also rise or fall commensurately. The changes also lead to a fall or rise in the cost of other factors of production (Schonhardt-Bailey 87). Therefore, when the market for the products and the price of the same products fall in the US, the cost of the factors of production such as labor in Mexico also fall, while the cost of other factors of production rises. This means that with the decline in the price of Mexican products, the labor cost falls leading to an increase in the wage gap (Elliott 1).

The comparative advantage enjoyed by trading partners can be attributed to the fact that they can produce certain goods at a lower opportunity cost than other economic actors. However, the HeckscherOhlin theorem suggests that countries such as Mexico only imported goods that used its scarce resources intensively and produced the goods for which they have abundant resources. The US is a capital abundant country and has the capacity to export the capital intensive goods, while Mexico is a labor abundant country that exports the labor intensive products. In this case, globalization and international trade can be considered as a self-compensating mechanism for which countries produce what they are good at for export at lower labor cost, and import capital intensive goods at lower cost. However, the HeckscherOhlin theorem is based on the assumption that the two trading partners are identical despite the difference in resource endowment, which is not the case and may only be accurate if labor is categorized into skilled labor (US) and unskilled labor (Mexico).

In conclusion, as a developing country, Mexico has experienced a more negative impact of globalization than the USA, which is a developed economy that can afford to make choices regarding trade and labor without experiencing a trade balance deficit. Mexico, even having gained in know-how and investments, has experienced sudden losses of jobs due to businesses closing and the USs choice to outsource labor from China, which is cheaper. Thus, it is evident that globalization can be somewhat detrimental to a developing economy, but with neighboring countries willing to cooperate on an ultimately mutually beneficial basis, a developing country can show significant growth.

Works Cited

Bailey,M., Goldstein, J., and Weingast, B. R. .The Institutional Roots of American Trade Policy: Politics, Coalitions, and International Trade. World Politics 49, 3 (April      1997) pp. 309-338.

Bernanke, B. Global Economic Integration: What’s New and What’s Not?. Speech at the 30th Annual Economic Symposium, Jackson Hole, WY, 2006.

Dollar, D. Globalization, Poverty, and Inequality since 1980. World Bank Research Observer 20, 2, 2005

Elliott, K. Big Sugar and the Political Economy of US Agricultural Policy. Center for  Global Development Brief, April 2005.

Frankel, J. Globalization of the Economy. In Nye, Joseph and John Donahue (eds.) Governance in a Globalizing World, Visions of Governance Project. Washington, DC:         Brookings Institution Press, 2000.

Schonhardt-Bailey, C. Free Trade: Repeal of the Corn Laws. In Frieden, Jeffry A., David A. Lake and J. Lawrence Broz (eds.), International Political Economy. 5th Edition. New York: Norton, 2009.

Sokoloff, K. L. and Engerman, S. L. History Lessons: Institutions, Factor        Endowments, and Paths of Development in the New World. Journal of Economic Perspectives 14, 3, 2000.

Williamson, J. G. Globalization and Inequality: Past and Present. World Bank Research Observer 12, 2 ,1997,