The views expressed in this presentation are strictly those of the author.

Texas Border Cities IllustrateBenefits and Challenges of TradeU.S.–Mexico Ties in the 21st Century: Trade and Immigration in a New Era

Centro de Investigación y Docencia Económicas (CIDE)Federal Reserve Bank of DallasMay 12, 2017

Jesus CañasSenior Business EconomistFederal Reserve Bank of Dallas

Outline

Brief discussion about NAFTA In terms of trade and Growth

Texas and NAFTA

Border cities Have they progressed?

How?

Summary

A Historic Agreement Canada and U.S. already had an agreement Adding Mexico broke the mold

NAFTA’s stated objectives Eliminate barriers to trade & investment Remove tariffs and non-tariff barriers Facilitate cross border movement Resolve disputes

U.S. fears: Massive job losses, falling wages Fears unrealized, but so were aspirations Elusive Mexican economic development

U.S. Trade with NAFTA Partners More than Doubled Since 1993

1993 2016Exports Billions of Dollars % ChangeCanada 166.9 266.8 59.9Mexico 69.1 231.0 234.4

ImportsCanada 184.8 278.1 50.5Mexico 66.3 294.2 343.6

NOTE: Data is in billions of 2016 U.S. dollars.SOURCE: U.S. Census Bureau.

Foreign Direct Investment Higher After NAFTA

5

1.6

0.3

8.4

1.5

0

1

2

3

4

5

6

7

8

9

US to Mexico Mexico to US

Billions, Real 2016 $

Average Pre-NAFTAAverage NAFTA

NOTE: Pre-NAFTA U.S. to Mexico represents years 1982-1993; Pre-NAFTA Mexico to U.S. represents years 1987-1993.SOURCE: Bureau of Economic Analysis.

Trade, Wage Effects of NAFTA Tariff Reductions

Country Volume of Trade Terms of Trade Real Wages

Mexico ++ - ++

Canada + - +

United States + + +

SOURCE: Lorenzo Caliendo and Fernando Parro, “Estimates of the Trade and Welfare Effects of NAFTA,” NBER working paper No. 18508, 2012.

Trade, Wage Effects of NAFTA Tariff Reductions On the other hand, recent research suggests: Blue-collar workers, whose industries have been most affected by

Mexican imports—including along the border—experienced substantially lower wage growth than their counterparts in other industries

Limitations on the mobility of workers both geographically and across industries appear to be very important

SOURCE: “Looking for Local Labor Market Effects of NAFTA,” by John McLaren and Hakobyan Shushanik, Review of Economics and Statistics, vol. 98, no. 4, October 2016.

U.S. manufacturing has been able to mitigate some of the impact of economic shocks

China’s entry to the World Trade Organization in 2002

Labor displacement resulting from increased automation

Great Recession

SOURCE: “Offshoring and Volatility: Evidence from Mexico’s Maquiladora Industry,” by Paul R. Bergin, Robert C. Feenstra, and Gordon H. Hanson, American Economic Review, vol. 99, no. 4, 2009, pp. 1664–71

Still Unequal Trading Partners

SOURCE: OECD.

0

10,000

20,000

30,000

40,000

50,000

60,000

Canada Mexico U.S.

19942015

GDP per capita

2005 U.S. $, PPP adjusted

-20

-15

-10

-5

0

5

10

15

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

Mexico U.S.

U.S. and Mexico Business Cycle Synchronicity Grows post NAFTA

Corr: 0.78Corr: 0.13

Percent

NOTE: Monthly changes in manufacturing component of industrial production.SOURCES: INEGI; Federal Reserve Board.

NAFTA and Texas

Texas Exports Grow Faster in Post-NAFTA Period

0

100

200

300

400

500

600

700

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015SOURCES: WISERTrade; Census Bureau.

Index, 1988 = 100; real values

Texas

U.S. without Texas

Pre-NAFTA Post-NAFTA

NAFTA and Texas Texas exports reached $247 billion in 2015 California at $163 billion Washington state $86 billion

Manufactured goods exports supported an estimated 990,000 jobs in Texas in 2015 Equal to 8.2 of the total

75 percent of U.S.–Mexico land trade (some $343 billion in 2015) crosses via a Texas port of entry

Texas Exports to Mexico Quite Diverse

Computers and electronics, 26%

Transportation equipment, 12%

Petroleum & coal products, 11%

Chemicals, 10%

Electrical equipment, 8%

Other, 7%

Machinery, ex. electrical, 6%

Plastics & rubber products, 4%

Primary metal mfg., 4%

Fabricated metal products, 4%Food & kindred products, 3%

Oil & gas, 3% Misc. manufactured goods, 2%

NOTES: Data from 2015. "Other" includes all categories under 2 percent.SOURCE: U.S. Trade Database, Census Bureau.

Texas Border Cities More than 45 percent of an estimated 49,652 Texas

job losses due to NAFTA were concentrated along the Texas–Mexico border

Foreign Firms’ Hiring Offsets Job Lost

Texas Exports Mainly go to Northern States

SOURCE: Bureau of Transportation Statistics.

NorthernPer capita income: $12,627Informal labor: 43% of LF

Poverty rate: 30%

North-centralPer capita income: $8,777Informal labor: 57% of LF

Poverty rate: 43%

CentralPer capita income: $10,415Informal labor: 63% of LF

Poverty rate: 49%

SouthernPer capita income: $6,597Informal labor: 69% of LF

Poverty rate: 57%

Texas Trades with the Rich and Industrialized North

Title in here

Maquiladoras Drive Employment Growth In Texas Border Cities

Estimation method: IV El Paso Laredo McAllen BrownsvilleCity Level 2.77* 4.62 6.58* 2.21

Construction 0.20 3.19 4.04* 1.29*Manufacturing -1.28 1.02 1.64 0.66Transportation 5.30* 7.21* 6.63* 4.6*Wholesale 0.43 1.96 4.01* 0.84Retail 1.31 0.66 3.21* 1.34*FIRE 2.12* 8.23* 4.63* 0.64Services 1.84* 5.93* 7.38* 3.89*

NOTES: This table shows elasticity estimates. That is the table shows the percentage increase in local employment from a 10 percent increase in maquiladora production for each Texas Border Cities. * indicates significant at the 10% level.SOURCE: J. Cañas, R. Coronado, R. Gilmer, E. Saucedo (2011) “The Impact of Maquiladoras on U.S. Border Cities”, Federal Reserve Bank of Dallas, working paper.

Average Unemployment Rate Declined Along The Texas–Mexico Border After NAFTA

13.3

10.8

14.0

18.6

9.48.2 7.5

11.6

02468

101214161820

Brownsville El Paso Laredo McAllen

1980-19931994-2016

Percent

Source: Bureau of Labor Statistics.

Texas Border Cities Narrowing the Income Gap With Nation

(income as a share of U.S. total)

64.6

49.3 48.151.2

67.8

61.9

51.1

55.8

40

45

50

55

60

65

70

75

El Paso Laredo McAllen Brownsville

1990 2015

Percent

SOURCE: Bureau of Economic Analysis.

Texas More Competitive Domestically (RCAs)

0.00.20.40.60.81.01.21.41.61.82.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Percent

Texas

California

Illinois

Ohio

SOURCE: “Texas Comparative Advantage and Manufacturing Exports,” by Jesus Cañas, Luis Bernardo Torres Ruiz and Christina English, in Ten-Gallon Economy, Pia M. Orrenius, Jesus Cañas and Michael Weiss, eds., New York, Palgrave Macmillan, 2015 , pp. 159–179

Summary More trade and investment NAFTA record on growth mixed

The Texas economy has been transitioning toward a service-based economy Lean and increasingly productive manufacturing sector 4 million jobs gained in Texas between 1994 and 2015 Per capita real income up from $30,000 to $47,000

Texas border cities have adjusted to trade taking advantage of geographic location growth in northern Mexico supplying business services

Useful case study to help trade-impacted communities transition to the next level of economic development