Labour market adjustment to third‐party competition: Evidence from Mexico

• Published date: 01 July 2020
• Author: Raymond Robertson,Sindhu Vasireddy,Timothy J. Halliday
• DOI: http://doi.org/10.1111/twec.12918
• Date: 01 July 2020

World Econ. 2020;43:1977–2006. wileyonlinelibrary.com/journal/twec

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1977

© 2020 John Wiley & Sons Ltd

Received: 15 January 2019

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Revised: 10 July 2019

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Accepted: 12 January 2020

DOI: 10.1111/twec.12918

ORIGINAL ARTICLE

Labour market adjustment to third-party

competition: Evidence from Mexico

RaymondRobertson1

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Timothy J.Halliday2

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SindhuVasireddy3

1The Bush School of Government and Public Service, Texas A&M University, IZA, College Station, TX, USA

2Department of Economics and the University of Hawaii Economic Research Organization, University of Hawaii at Manoa,

IZA, Honolulu, HI, USA

3Department of Economics, University of Hawaii at Manoa, Honolulu, HI, USA

KEYWORDS

apparel, China, inequality, Mexico, trade, wages

1

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INTRODUCTION

Over the last two decades, China's growth has profoundly changed global trade. Mounting evidence

shows that rising Chinese trade has been associated with significant changes in wages and employ-

ment in Chinese trading partner countries. For example, rising Chinese exports to the United States

have substantially lowered wages and employment among the low-skilled in the United States (Autor,

Dorn, & Hanson, 2013; Shen & Silva, 2018). In addition, China's commodity imports from Latin

America corresponded with a period of economic growth and falling inequality for many Latin

American countries.

Mexico, however, was an exception. Trade with China remains small relative to trade with the

United States, and therefore Mexico did not benefit much from the China-driven commodity boom.1

At the same time, Mexican imports from China were relatively small, limiting potential labour market

effects.2

Mexican labour markets, however, were not immune from Chinese trade. After the North American

Free Trade Agreement (NAFTA) came into effect in 1994, Mexico's apparel sector increased exports

to the United States. By 2000, Mexico's apparel exports were 16% of total US apparel imports. Figure1

1 For the 2007–17 period, the US share of total Mexican imports averaged 48.5% and the share of Mexico's total annual

exports sent to the United States averaged 80.2%. See http://www.inegi.org.mx/siste mas/bie/cuadr osest adist icos/Gener aCuad

ro.aspx?s=est&nc=566&c=24791 .

2 According to https ://atlas.media.mit.edu/en/profi le/count ry/mex/, in 2016 Mexico's total imports were US$369 billion, of

which US$63.7 billion came from China. Mexico's imports of apparel and textile goods from China were US$2.67 billion, or

about 25% of Mexico's US$10.4 billion in apparel and textile imports from the world. $4.29B came from the United States.

Mexico's total apparel and textile exports in 2016 were US$6.51billion (US$5.81B went to the United States). In 2016,

according to Mexico's national accounts (http://www.inegi.org.mx/siste mas/bie/), production in apparel and textiles was

about US$16.2billion.

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ROBERTSON ET al.

shows that China's share was about 6% of total imports in 2000. By 2016, however, the situation had

changed dramatically. Figure2 shows that China's share of total US apparel imports had increased to

42%. Mexico's share had fallen to 3% by 2016. Related, Figure 3 shows that the relative prices of

Chinese apparel fell when China entered the World Trade Organization in 2001.3 On the other hand,

Mexican prices rise slightly between 2000 and 2017.

China's growth was an exogenous change for Mexico and offers the opportunity to explore the

relatively unexamined question of how domestic labour markets change when competition in an ex-

port destination increases.4 Figure 4 offers some initial impressions by showing the strong positive

association between Mexican exports to the United States in the apparel and textile industries and

employment shares in the same industries.5 The decline in US clothing and textile imports from

Mexico was primarily driven by increases in exports from China as shown in Figure 5. In this paper,

we investigate how the Mexican labour market adjusted to the decline in labour demand in these

industries.

We focus on apparel and textiles for five reasons. First, apparel and textiles together make up the

third largest Mexican manufacturing industry in terms of employment share following food products

and transportation equipment (see Table 1). Food products are largely domestic, and automobiles

are highly integrated into the North American value chain. Second, the United States is the primary

export destination for Mexican apparel and textile production by far. Third, apparel is a highly sensi-

tive industry because it is labour-intensive and therefore would potentially illustrate the employment

and wage effects of increased competition in an export destination. Fourth, China's growth in apparel

production affected global markets, most notably after the end of the Multifibre Arrangement on 31

December 2004 and therefore offers the potential for a large and exogenous third-party shock. Finally,

apparel was a key sector in early NAFTA trade.

Mexico's experience also offers an opportunity to address several other questions. For example,

there is some debate about whether a change in labour demand (e.g. due to a change in exports or

imports) affects wages or employment. Second, our high-frequency data give us the opportunity to

estimate the relative speed of adjustment by estimating the dynamic response of outcomes to trade

shocks. Third, it is possible that changes in the apparel and textile sectors had spillovers into other

industries. That is, it is also possible to estimate cross-industry effects of trade-induced demand shocks

from the apparel and textile industry. Finally, given the relatively high levels of inequality in Latin

America generally and Mexico in particular, the Mexican case also offers the opportunity to contrib-

ute to the debate about trade and inequality but from a very different angle than the vast majority of

previous studies.6

Several recent papers estimate the effects of Chinese competition on Mexican production.

Many of these focus on assembly plants located along the United States–Mexican border known as

3 We use average unit values calculated from US apparel import value divided by quantity imported. Quantity is measured by

squaremetre equivalent. See also Harrigan and Barrows (2009) for evidence of apparel price changes.

4 Further supporting the idea that Chinese exports are not driven by Mexican considerations (and therefore likely to be

exogenous to Mexican factors), Carillo Garcia, Chen, and Goodman (2011) note that China is much more relevant to

Mexico's economic ambitions than Mexico is to China's.

5 In an earlier version of the paper, we separated the apparel and textile sectors. While the two sectors are different in terms of

output, employment, and production technology, the main results for the two sectors were very similar. At a referee's request,

in this version the two sectors are pooled. Throughout this manuscript, we use the words apparel and clothing

interchangeably.

6 Chiquiar (2008) finds that the results are consistent with Stolper–Samuelson. Wages, both overall and unskilled, increased in

regions with strong ties to the United States.