Does Mexico need free trade with the United States?

Abstract

Free trade between the United States and Mexico is credited with having developed one of the largest bilateral trading relationships in the world. Yet Mexico-United States trade has been significant for more than a century. Our objective is to show how bilateral trade increased independently of the trade agreement that took effect in 1994, and to specify the other reasons why trade grew. We measure trade flows from the 1880s to the present and estimate a gravity model for the period 1948-2006. The gravity model shows that the fundamental characteristics of Mexico and the United States explain the volume of trade independently of the trade agreement. The trade agreement reduced uncertainty which likely had a positive effect on trade flows. Our analysis does not estimate the quantitative impact of reduced uncertainty but shows that proximity and size of the market were more significant that the trade agreement.

Keywords

• free trade
• gravity model
• bilateral trade
• trade reform
• panel data