Nature of U.S.-mexican Trade Relations, It Is Term Paper

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nature of U.S.-Mexican trade relations, it is difficult indeed not to think of the statement of Mexican President Porfirio Diaz at the turn of the last century, "Poor Mexico, so far from God, and so close to the United States." For Mexico does continue to seem to occupy a benighted position vis-a-vis its richer and more powerful neighbor to the north, a position that is in no small measure defined and continually recreated by the nature and mechanisms of international trade between the two nations. This paper examines the nature of the trade relations between the United States and Mexico in the light of several classical economics theories and models as well as in respect to recent developments in the wake of the 1992 signing of the NAFTA accord and the last decade's worth of increasing globalization.

Economic Theories and Models

We begin by discussing and summarizing some of the useful models and theories from the realm of classical economics, including two models developed by David Ricardo, the 18th and 19th century economist who was especially concerned with understanding the ways in which wages and value are determined in a society.

Ricardo believed in what he termed the "iron law of wages," which is to say that he believed that wages tend to settle at the subsistence level and while they may rise temporarily above that level, any such rise will be temporary because of the effects of competition among workers. This is an important point for the topic in question because a more open trade relationship between the United States and Mexico (as has existed since NAFTA went into effect in 1994, for example) tends to produce a de facto larger workforce (since workers from both countries are now competing directly with each other in ways that they were not before) than is the case when workers in each individual country are relatively more isolated from each other because of various forms of economic protectionism.

Any rise in wage rates above subsistence will cause the working population to increase to the point that heightened competition among the glut of laborers will merely cause their wages to fall back to the subsistence level (www.encyclopedia.com).

Ricardo was also determined to understand the ways in which the value of goods (both products and services) was established. He came to believe that value was a direct and relatively function of the labor needed to produce the good in question. This is important in regards to the nature of trade relations between the United States and Mexico precisely because the value of labor in the two countries is not the same, and so more labor is available (on, for example, an hourly basis) from Mexican workers.

According to his labor theory of value, a clock costing $100 required 10 times as much labor for its production as did a pair of shoes costing $10 (www.encyclopedia.com).

Finally, and perhaps most relevant of all of these three concepts to the topic at hand, Ricardo also developed an economic model to help explain the dynamics of international trade. His most important work in this are is the theory of comparative advantage.

In a now classic illustration, Ricardo explained how it was advantageous for England to produce cloth and Portugal to produce wine, as long as both countries traded freely with each other, even though Portugal might have produced both wine and cloth at a lower cost than England did (www.encyclopedia.com).

The following table further explains Ricardo's theory of why it is so very often economically advantageous for a nation to specialize in certain products (or certain goods) and then to trade in those products that it has specialized in rather than trying to compete in terms of trade in all of the commodities that it can or even does produce.

Table 1

Country

Wheat

Wine

Cost Per Unit In Man Hours

Cost Per Unit In Man Hours

England

15

30

Portugal

10

15

In Table 1, a unit of wine in England costs the same amount to produce as 2 units of wheat. Production of an extra unit of wine means foregoing production of 2 units of wheat (ie the opportunity cost of a unit of wine is 2 units of wheat). In Portugal, a unit of wine costs 1.5 units of wheat to produce (ie the opportunity cost of a unit of wine is 1.5 units of wheat in Portugal). Because relative or comparative costs differ, it will still be mutually advantageous for both countries to trade even though Portugal has an absolute advantage in both commodities (http://www.

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systemics.com/docs/ricardo/david.html).

It can be seen in this example that Portugal is relatively better at producing wine than wheat. Ricardo saw this as Portugal's comparative advantage in producing wine just as England can be seen to be relatively better at producing wheat than wine giving Britain a comparative advantage in the production of wheat.

[The table below] shows how trade might be advantageous. Costs of production are as set out in Table 1. England is assumed to have 270 man hours available for production. Before trade takes place it produces and consumes 8 units of wheat and 5 units of wine. Portugal has fewer labour resources with 180 man hours of labour available for production. Before trade takes place it produces and consumes 9 units of wheat and 6 units of wine. Total production between the two economies is 17 units of wheat and 11 units of wine.

Country

Production

Production

BeforeTrade

After Trade

Wheat

Wine

Wheat

Wine

E n g l a n d

8

5

18

0

P o r t u g a l

9

6

0

12

T o t a l

17

11

18

12

If both countries now specialise, Portugal producing only wine and England producing only wheat, total production is 18 units of wheat and 12 units of wine. Specialisation has enabled the world economy to increase production by 1 unit of wheat and 1 unit of wine (http://www.systemics.com/docs/ricardo/david.html).

It should be noted that while Ricardo's model of comparative advantage is still widely accepted by many important economists working today, it does make (as is typical of classical economic theories) a number of assumptions that do not in fact obtain in the real world of trade relations between the United States and Mexico or in any other on-the-ground situation. Among the important assumptions that this model makes that are contrary to fact are the following: there are no transportation costs involved in shipping goods, there are no economies of scale, there are no trade barriers, and there exists a state of perfect knowledge on the part of the economic agents involved so that all buyers and all sellers at all times know where the cheapest example of any given product may be found (http://www.systemics.com/docs/ricardo/david.html).

Another important well-established economic model to understand in considering the status and nature of trade relations between the United States and Mexico is the factor proportions theory, which is a model that predicts that the United States and Mexico, like all other countries, will over time be net exporters of those products that make intensive use of the country's relatively abundant factors. Thus if we want to understand why a Canada is a primary exporter of newsprint to the rest of the world, we must understand that "newsprint makes intensive use of two factors "forest land" and "capital" that are relatively abundant in Canada" (http://pacific.commerce.ubc.ca/keith/Lectures/fpt.html).

The Heckscher-Ohlin may be seen to be related to the factor productions theory if not to be actually derived from it. It should be clear from the above explanation of the factor productions theory (and in fact this should be fairly clear simply from an examination of economic factors by common sense) that any nation that has abundant natural resources has in most cases a comparative advantage in producing goods that use those same resources over nations that do not have an abundance of the particular raw materials needed to produce those same goods. is obvious and straightforward. The Heckscher-Ohlin model is more complex and more subtle and thus not so obvious to a commonsensical examination of the issue, but it should be clear that the same basic concepts are involved.

The Heckscher-Ohlin theorem states that a country which is capital-abundant will export the capital-intensive good. Likewise, the country which is labor-abundant will export the labor-intensive good. Each country exports that good which it produces relatively better than the other country. In this model a country's advantage in production arises solely from its relative factor abundance (http://internationalecon.com/v1.0/ch60/60c110.html).

It may be seen from the above description that the Heckscher-Ohlin theory is primarily concerned with what must be considered to be two most significant elements involved in the production of goods: labor and capital. Some countries, like the United States, have relatively high rates of capitalization. This means that the average worker has an abundance of machinery and technology available to him or her. This high degree of capitalization is associated with relatively higher….....

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