Economic modeling of NAFTA: Results and pitfalls

Economic Modeling of NAFTA: Results and Pitfalls LARRY J. KIMBELL The two purposes of this article are: (1) to summarize for public policy discussion the economic modeling research on the impacts of NAFTA; and (2) to analyze critically the strengths and weaknesses of the modeling techniques developed to guide public policy decisions. The article is organized as follows: the second section summarizes the NAFTA research results. The third section classifies and describes the four types of approaches that have been applied to estimate the impacts of NAFTA. The fourth section summarizes and criticizes the results of the most intuitively accessible approach, the Historical Analogy Approach, applied by researchers at the influential Institute of International Economics. The fifth section summarizes and criticizes a representative example of the Macroeconometric Approach, developed by Ciemex-WEFA, one of the leading firms forecasting the Mexican economy. The sixth section summarizes and criticizes a larger collection of models developed using the Computable General Equilibrium Approach. This approach, the most widely adopted approach, is by far the most ambitious, providing detailed predictions for a comprehensive set of variables, by industry, country, and type of worker. Not surprisingly, there is more to criticize in this approach. The seventh section summarizes and criticizes the Trade-Theory Specification Approach, developed by Edward Learner, one of the leading econometricians investigating empirical evidence bearing on international trade issues.

SUMMARY OF PUBLIC POLICY RESULTS OF THE NAFTA RESEARCH Key public policy makers in Canada, Mexico, and the United States are generally supportive of the North American Free Trade Agreement. The chief executives of these countries signed an agreement it in October 1992, and President Clinton has indicated general support for the concept, subject to safeguards and careful scrutiny of the details negotiated by his predecessor. Are these generally favorable positions well-founded? Who is likely to win or lose from NAFTA? Researchers have developed several approaches to model the impacts of NAFTA on various collections of countries, regions, industries, and workers. Does this research provide a clear consensus answer to these L8n-j J. Kimbell

Department of Business Economics, Anderson Graduate School of Management, University of California, Los Angeles, CA. North American ISSN 1062-9408

l

Journal of Economics

& Finance, Y1):29-50 Copyright 0 1993 by JAI Press, Inc. All rights of reproduction in any form reserved

KIMBELL

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questions? A reasonably clear consensus is available on a few broad questions, with considerably greater dispersion of results on most of the more detailed questions. The consensus view is that: l

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NAFTA will raise real incomes, on average, in all three countries directly involved, with the largest percentage gain, by far, accruing to Mexico (see Table 1). NAFTA will have an extremely small impact on any key aggregate describing the U.S. economy: Real incomes will rise much less than one percent. Real wage impacts will be small positive values for most workers, on the order of 0.2 percent. Job gains, over a decade after NAFTA is implemented, will be about as large as one month’s growth in a healthy expansion (see Table 2).

Even though the consensus view is that NAFTA will be a small, positive development for the United States, there are strong dissents from this view. A few argue that NAFTA will be very positive for the United States as well as Mexico, emphasizing that NAFTA will alter the growth and composition of trade so substantially that simple extrapolations of the status quo are likely to underestimate potential benefits very significantly.* F’roduction will become more specialized according to the comparative advantages of each region/country, with industries that intensively utilize low-skilled labor expanding in Mexico. Mexico will have an incentive to shift domestic production northward and to import substitutes from the far east. Foreign capital can be more assured of permanent committment to trade liberalization, since NAFTA will be ratified by formal treaties. All of these forces, in combination, can expand activities to the benefit of major producers on both sides of the border. Although not all types of workers or owners of other resources will win from NAFTA, the aggregate effects are likely to be significant, according to this dissenting view. Others are less sanguine. They warn that there is a substantial risk that some workers or owners of capital could be harmed significantly, especially during the transition period.2 Emphasis is placed on the wide wage disparities between the United States and Mexico, and on alleged laxity in enforcing environmental and worker protection laws in Mexico. Clearly, the adjustment process needs to be very carefully prepared if gains are to be more widely shared. Two major groups at risk are identified as follows: l

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Unskilled U.S. workers are especially vulnerable. NAFTA will probably expand trade and result in a convergence of wages between Mexican and the industrialized north. But less skilled Mexican labor is likely to complement skilled and professional workers, and compete with unskilled workers. One estimate places the annual loss of earnings of unskilled workers at $1,900 per year. Even though Mexico appears to gain substantially from freer trade, there are risks for some Mexican workers. A complete program of liberalization, including reductions in subsidies to Mexican corn farmers, could displace thousands of poor families, who might migrate to Mexican cities. This would apply heavy pressure to unskilled urban wages in Mexican and might induce secondary migrations to the United States.

Economic

Modeling

of NAFTA

31

Unskilled workers in the United States, in addition to facing stronger competition from low-cost Mexican goods, would more directly face labor market competition from additional Mexican migrants. In broad outline, the economic modeling research supports the policy position taken. Freer trade appears to have enough benefits for enough people to pursue it to completion. At the same time, it is not without major risks to some subsets of individuals. These people at serious risk, perhaps not coincidentally, are among the poorest in Mexican and the poorest in the United States.

CLASSIFICATION

OF APPROACHES USED TO ESTIMATE THE IMPACTS OF NAFTA

A wide variety of approaches have been developed to provide guidance to public-policy makers concerned about opportunities and risks involved in freer trade in the North American continent. This section briefly identifies the basis for these approaches. Subsequent sections summarize the results estimated by these approaches and criticize their weaknesses. Many analysts of NAFTA do not employ forThe Historical Analogies Approach. mal models and do not make quantitative estimates of its impacts over time. They often cite the experience of other countries joining the European Community, appealing to our intuition to accept these developments as paradigms for what will now take place on the North American continent. A carefully presented example of this Historical Analogies Approach is by Gary Clyde Hufbauer and Jeffrey J. Schott (1992) of the Institute for International Economics (IIE). Macroeconometric models are a widely The Macroeconometric Model Approach. used short-term forecasting tool designed to capture business cycle fluctuations in resource utilization; they are used, with considerable judgmental guidance, to make long-term projections of capital accumulation, productivity gains, and economic growth. The extent to which the expansion of trade expected from NAFTA can be accommodated by using idle capital and unemployed workers, has a key influence on the optimism of this approach. Starting a simulation from a situation, like today, when the United States and Canada have low-capacity utilization rates and high unemployment rates, makes the results of these models more optimistic than they would be if the starting point were when resources were fully utilized. This is because more resources devoted to export-oriented industries tends to mean that fewer resources are available for other purposes. The Ciemex-WEFA Group, a leading firm forecasting the Mexican economy, uses this modeling technique to reach its projections of the impact of NAFTA. The Computable General Equilibrium (CGE) Approach. The most widely adopted approach for formal modeling of the impact of NAFTA is the computable general equilibrium approach. This approach finds a set of prices, wages, and capital returns that makes supply equal demand in all goods and factor markets. In computing this price vector, it estimates the quantities of production, consumption, factor employment, and trade for households, business, government, and the foreign sector. NAFfA will lower tariffs, among other things, which will induce changes in resource allocations across

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industries, tracked exhaustively in the CGE approach. In some applications, intemational labor migration is treated explicitly as well, as a function of changing tariff and nontariff barriers. The Trade-Theory Specification/Econometric Approach. Edward Learner investigates a substantial body of empirical evidence guided by a rigorously developed set of theoretical principles. This makes his approach considerably more disciplined in its reasoning than the historical analogies or macroeconometric approaches, and much more tightly linked to empirical evidence than the CGE approach, which is parameterized from evidence developed elsewhere. The relationships estimated are far more limited than in the computable general equilibrium approach, focusing on linkages between industry outputs and factor supplies, or between output prices and factor returns.

THE HISTORICAL

ANALOGIES

APPROACH

Hufbauer and Schott (1992), in their IIE study, analyzed the impacts of NAFTA on the U.S. economy by drawing analogies with historical experiences in other countries. An important historical compendium is a seven-volume study published by the World Bank covering 31 episodes of economic liberalization. The integration of Portugal and Spain into the European Community, for example, is a reference point for the outlook for Mexican steel exports.3 They argue that gains from trade will probably be larger than those estimated by CGE or econometric models. Highlights of the BE model results include: l

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United States exports to Mexico would increase U.S. $16.7 billion as a consequence of NAFTA, an estimate that is at least double the estimate of other approaches.4 The U.S. trade balance would increase by U.S. $9 billion while the Mexican trade balance decreased by $12 billion. In 1995, U.S. employment would increase 130,000 while Mexican employment rose about 2%, or by 609,000 persons.5 Mexican exports would grow faster under both NAFTA and continued internal policy reforms. Real exports would grow at average annual rates of 11.2%, the average rate experienced by countries in the World Bank liberalization studies. If NAFTA failed, Hufbauer and Schott assume that other Mexican reforms would collapse as well. The combination of NAFI’A failure and collapsed liberalization leads them to project annual real growth of 7.9%, 3.3% less than otherwise. Mexican imports are projected to be 40% higher, by 1995, with NAFTA and liberalization, with a substantial part financed by capital inflows attracted to Mexico by NAFTA. (This assumption is, of course, an integral reason for the optimistic projection of export gains by the United States to Mexico cited above.)

Pitfalls in the Historical Analogies Approach Hufbauer and Schott (1992, p. 51) state plainly that their selection of historical experiences is “designed to be ‘responsibly optimistic.’ ” One example is their answer to the question: Will not large imports of capital goods by Mexico depress domestic produc-

Economic Modeling of NAFTA

33

tion and employment in some of the machinery and related industries? They explicitly assume that these foreign equipment flows will not compete with domestic supplies since supply availability is the constraining factor. This assumption “reflects our belief that the Mexican economy is limited neither by inadequate demand in a Keynesian sense, nor by labor shortages, but rather by supply constraints on capital equipment and intermediate goods” (Hufbauer and Schott 1992, p. 56). Another example of optimism concerns the impact of NAFTA on real wages and the real exchange rate. The authors dismiss any impact of the substantial job creation in Mexico on the real wage of unskilled labor, arguing that “Mexico has an abundant supply of unemployment labor” (Hufbauer and Schott 1992, p. 57). But the optimistic outlook for Mexican investment raises the real value of the peso by 29%, and this generates an 8.7% gain in real Mexican wages. Logical consistency is not being maintained in this combination of results. On the one hand, they argue that the Mexican labor market is insulated against economic forces but responsive to changes in the value of the peso. A more plausible interpretation is that their methodology did not lend itself to tracing the multitude of effects NAFTA will introduce across labor, capital, and goods markets internationally. The historical analogies approach provides a simple, intuitive example of what might develop. By construction, it is not out of line with previous experience. But any historical period that follows passage of a trade liberalization agreement reflects the confluence of a wide set of forces bearing on the economy, forces that the more theoretically structured approaches hold constant. To give the simplest example, suppose it was argued that what will follow NAFTA for Mexico is analogous to what happened to Canada after the Canadian-U.S. Free Trade Agreement (FTA)was reached. What conclusion would you reach? Probably the same erroneous conclusion reached by many Canadians. Forty-nine percent of the Canadian public maintains that the Canadian-U.S. PTA has hurt the Canadian economy and is the cause of higher interest rates, greater inflation, and more unemployment (see USITC 1991, p. 3.1, n. 3). Canadian employment fell after the Canadian-U.S. PTA was passed, but the dominant factor, in the opinion of Canadian economists, was a strong anti-inflation policy instituted by the Canadian central bank, which raised interest rates, drove up the Canadian dollar, devastated manufacturing exports, and masked what might have been small gains from the PTA. History will never “show,” in an intuitively obvious way, what actually would have happened if nothing but the FTA had changed.

Macro-model Impact Estimates for the Mexican Economy The Ciemex-WEFA Group has estimated the impacts of NAFTA on the Mexican economy by simulating its macroeconometric model of that economy over the period 1992-2002, with and without NAFTA. The highlights of their estimates include: l

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NAFTA is estimated to speed up real GDP growth by 1.2%, raising the outlook from 4.2% average compound growth to 5.4%. Capital account inflows are raised by better investment prospects under NAFTA, rising from an annual average of 10.6 billion U.S. dollars to 14.7 billion. Private investment in Mexico rises from 9.6% of GDP to 10.7%. Foreign direct investment in Mexico is more than 50% higher, with an

KIMBELL

34

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average annual contribution of U.S. $9.2 billion, compared with $6 billion without NAFTA. Merchandise imports to Mexico rise from 8.3% of GDP to 10.4%. Since the United States is Mexico’s largest trading partner, this implies an increase in U.S. exports to Mexico. A significantly faster growth rate in Mexico implies better job prospects, reducing undocumented Mexican migration to the United States. The cumulative migration, over the entire period from 1992 through 2002, without NAFTA, is estimated to be 3.2 million. Passage of NAFTA lowers the estimated migration to 2.6 million persons. a reduction of more than half a million persons. All major industrial sectors are projected to grow faster under NAFTA, with the greatest acceleration of growth in basic metals, construction, machinery and equipment, transportation and communications, and financial services. These sectors show growth rates that are 1.5% faster or higher, under NAFTA.

Pitfalls of the Macroeconometric Model Approach The projections of the Ciemex-WEFA Group are unambiguously optimistic, with one table emphatically declaring that there are “no losers” among major industrial sectors. Higher investment is a characteristic feature that makes the outlook more optimistic. Where does the added capital come from? If the answer is from the United States, Canada, or the rest of the world, then would this investment be taken out of their capital accumulation and shifted to Mexico, or would the prospect of a high rate of return on investment in Mexico be able to induce higher saving and/or higher resource utilization in any of those foreign sources. A pitfall of single-country macroeconometric models is that this approach is silent about the source of capital. Macroeconometric models tend to be exhaustive for the countries treated but, by contrast with CGE models, lack the discipline of strong theoretical underpinnings. The CGE approach tends to impose the “no free lunch” principle. Resources that augment one industry must be bid away from other industries explicitly, whereas in macroeconometric models, higher degrees of resource utilization can often account for the “win-win” characterization of impacts. From my experience with macroeconometric forecasting models of the U.S. economy, I conjecture that if a complementary simulation of the U.S. economy were performed, higher aggregate U.S. investment would be projected to come from higher resource utilization. In essence, a boom in capital exports to Mexico would be the ideal stimulus in the early 1990s to help the U.S. economy grow faster and absorb the unemployment built up from the recession/slow recovery period of 1990-1992. The problem this result poses when comparing a macro simulation with one from the computable general equilibrium approach is simple: Any scenario tends to be more optimistic if you give more capital to one country at no cost to anyone, anywhere, at any time in the future. That is, the specific features of NAFTA may have nothing to do with the source of optimism. Notice that the Ciemex-WEFA Group scenario may be quite reasonable-the U.S and Canadian economies both show available, under-utilized resources of labor and capital, reflected in higher unemployment rates and lower capacity utilization in the early 1990s. But if this is a reasonable assumption for a macro-modeler to make, it should also be reasonable for CGE approaches as well. Alternatively, if CGE always imposes the dis-

Economic Modeling of NAFTA

35

cipline of “no free lunch,” then macro-model simulations ought to start from a hypothetical departure point of a fully employed economy.

THE COMPUTABLE

GENERAL

EQUILIBRIUM

APPROACH

There are a large number of CGE model simulations of the impacts of NAFTA on the United States, Canada, Mexico, and the rest of the world. Each is a comprehensive and detailed simulation. Only the highlights can be summarized here. Focus will be on the estimated real-income gains, real-wage changes, and migration potential. Summary of Estimates of Real-income Gains Using CGE Models The estimates of the impact of NAFTA on aggregate real incomes in the United States and Mexico are all positive, and four out of five are positive for Canada. (see Figure 1). This persistent pattern suggests that all countries are expected to benefit from freer trade. This is important, since it implies that those who lose from NAFTA in either country could be compensated for their losses by those who benefit. The percentage gains from NAFTA tend to be about an order of magnitude smaller in the United States than in Mexico. The maximum percent gain estimated for the United States, across study and simulation variations, is 0.3%, one-eighth of the decline in real GDP that took place during the recent 1990-1991 recession. The estimates made under the assumption that capital and labor resources are fixed in aggregate supply to both countries substantially reduces the estimates of real-income gains to Mexico. If, on the other hand, the capital flight of the early 1980s is reversed, as seems to be the case, even with the prospect of NAFTA, then Mexican growth will accelerate and its real-income gains will be correspondingly larger as well. Brown, Deardorff, and Stem (1992) obtained an estimate of 5% real-income gain for Mexico under higher capital inflows, more than triple the gain estimated with constant capital resources. Higher income growth stimulates Mexican imports, so U.S. exports, particularly of capital goods, would improve. If industries that expand under NAFTA enjoy increasing returns to scale, then costs will tend to be lower, even if wages and rents are the same. This is a two-edged sword, of course, since industries that contract tend to face higher costs. Notice that these cost advantages are not zero-sum gains, where one set of factors loses income to another’s benefit. Estimates of Real-wage Impacts of NAFTA One of the key concerns about the potential negative impacts of NAFTA is that it could lead to lower wages in the United States and Canada, especially for less-skilled workers. Some convergence of wages could take place, of course, without lower U.S. wages, if Mexican wages were to rise faster than those in the United States. What are the estimates for wage adjustments in the FfA? How would various groups of workers fair, by country, region, or industry? Most studies have concentrated on the impacts of NAFTA on mean wages without breakdowns by region or industry. These aggregate impact estimates are shown in Table 3. NAFTA is estimated to raise the real purchasing power of wage earners in all three countries and for most types of workers. Fifteen out of sixteen estimates of wage

KIMBELL

(Percent Gains)

7 6 5 4 3 2 1

I

0 -1

UnitedStates I I I I

I

I

I

I

Mexico I I I I I I I I I

Canada I

I

I

I

I

I

1 2 3 4 5 6 7 8 9 1011121314151617161920212223242526

StudyNumber Figure 1.

Real Income Gains from NAFTA-Estimates States, Mexico, and Canada

for the United

changes induced by NAFTA are positive for the United States. Ten out of twelve wageimpact estimates are positive for Mexico. The three available estimates for Canada are positive. Two out of the three negative wage-impact estimates are for low-skilled urban and rural Mexican workers! What could explain the predominance of positive effects from a trade liberalization with countries that have such extreme initial wage levels? The dominant positive force is estimated to be lower prices, brought about by lower tariff and other nontariff barriers. That is, nominal wages may actually decline, but by less than the drop in prices, raising real-wage incomes. Job losses are viewed mostly as transitional, and these studies focus on long-run equilibrium conditions, once adjustments are phased in. Aggregate employment, therefore, by construction in the simplest static CGE models, cannot fall.

Estimates of the Migration Potential of NAFTA NAFTA does not directly change legal barriers to international labor migration, in sharp contrast with European integration, where capital and labor are permitted to relocate across national boundaries. Changes in economic conditions in Mexico and the United States can,

Economic Modeling of NAFTA

TABLE Source

1.

37

Real Income Impacts Returns to Scale

of NAFTA:

CGE Models

Capital (Other)

Real Income Gains (%) 0.00

Constant Increasing Constant Constant Increasing

Constant K (Steel) (Textiles) Constant K Augmented K Constant K Migration + Augmented K Augmented K

Constant Constant Constant Constant Constant Increasing Increasing Increasing Increasing Increasing Constant Constant

Constant K Augmented K Constant K (Textiles) (Steel) Constant K (Exog. Wage) (Exog. Exch) (Exog. Rental) Augmented K Augmented K Migration +

0.02 0.04 0.30 1.20 1.60 1.60 2.00 2.30 2.40 5.00 6.40 6.80

Constant Constant Increasing Increasing Increasing

(Steel) (Textiles) Constant K Constant K Augmented K

-0.01 0.00 0.03 0.70 0.70

United States

Hinojosa-Robinson Trela and Whalley Trela and Whalley KPMG Peat Marwick KPMG Peat Marwick Brown/Deardorff/Stem Hinojosa-Robinson Hinojosa-Robinson Brown/Deardorff/Stem

Constant Constant Constant

0.01 0.01 0.02 0.04 0.10 0.10 0.10 0.30

Mexico

KPMG Peat Marwick KPMG Peat Marwick Hinojosa-Robinson Ttela and Whalley Trela and Whalley Brown/Deardorff/Stem Sobarzo Sobarzo Sobatzo Brown/Deardorff/Stem Hinojosa-Robinson Hinojosa-Robinson Canadb

Trela and Whalley Trela and Whalley cox/Harris Brown/Deardorff/Stem Brown/Deardorff/Stem

nevertheless, have major impacts on migration. Agricultural-policy changes in Mexico, especially those involving the subsidy to corn farmers, could change the economic conditions for a large number of people. To study this potential, among other issues, Robinson, Burfisher, Hinojosa-Ojeda, and Thierfelder (1992) specified a model of the United States, Mexico, and the rest of the world, with disaggregation of sectors tailored to treating agricultural issues. Considerable details of the agricultural trade barriers is included; tariffs, quotas, and subsidies to farmers and urban consumers are policy-levers. Robinson and his co-authors estimated that the best policy environment in Mexico, combined with a 10% greater capital stock, could promote growth rapid enough to reduce migration from Mexico to the United States by more than 50,000 persons (see Table 4).6 At the other extreme, almost complete liberalization might raise this migration by over 700,000. Policymakers on both sides of the border are aware of the potential for dislocations of this magnitude, partly as a consequence of such studies as this one. Accordingly, it is unlikely that the most extreme trade and subsidy liberalization policies would ever be adopted. This scenario may motivate patience with a relatively long implementation period and, possibly, a willingness to continue the Mexican farm subsidies and capital grants from the United States that together amount to small fractions of the gains from trade.

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KIMBELL TABLE

2.

CGE Estimated Real Wage Impacts Average for All Types of Workers

Source

of NAFTA:

Returns

Setting

Historical Example constant constant Increasing Increasing

Tariffs/NTBs + K-flows TariffsNIBs + K-flows

Percent

United States

BE KPMG Peat Marwick KPMG Peat Marwick Brown/Deardorff/Stem BrownlDeardorfflStem

0.00 0.02 0.03 0.20 0.20

Mexico

BrownDeardorff/Stem BE BrownlDeardorfflStem Sobarzo

Increasing Historical Example Increasing Increasing

TariffsNIBs

Increasing Increasing Increasing

TariffsNIBs + K-flows TariffsNIBs

0.70 8.70 9.30 16.20

+ K-flows + Exog. Exch

Canada

BrownlDeardorfflStem Brown/Deardorff/Stem cox/Harris TABLE

3.

CGE Estimated

Real Wage Impacts of NAFTA Hinojosa and Robinson

Rural

Setting

Urban Unskilled

0.40 0.50

0.40

Types of Workers:

Skilled

White-collar

United States

TariffsNI’Bs + K-flows + Migration

0.30 -0.40 1.80

0.40 0.70 1.80

0.00 0.10 0.00

0.00 0.30 0.20

-0.20 9.20 4.70

-0.20 9.20 4.70

1.00 7.40 7.70

1.00 8.80 9.10

Mexico

TariffsNI’Bs + K-flows + Migration TABLE

4.

Estimates

of Migration Under Alternative Scenarios: Thousands of Persons

Agricultural

Policy

Migration

Scenario

Industry Trade Liberalization All Trade Liberalization Trade Plus All Agriculture Trade Plus Corn Common Agriculture Policy Partial Trade Liberalization Growth Plus Partial Liberalization Note: See Robinson,

Burfisher. Hinojosa-Ojeda,

Mexican Rural to U.S. Rural

Mexican Urban to U.S. Urban

Mexican Rural to Mexican Urban

4 21 31 25 11 10 8

142 406 685 500 130 188 -61

68 343 637 452 37 104 -94

and Thierfelder

(1992). p. 24.

Economic Modeling of NAFTA

39

Pkfalls of the Computable General Equilibrium Approach Unquestionably the most ambitious approach to estimating the impacts of NAFTA is the multi-country computable general equilibrium approach. The scope of CGE model coverage, in principle, is exhaustive: CGE models explicitly cover all countries of the world-that is, Canada, United States, Mexico, and rest of world. It is obviously difficult for one group of researchers to have special knowledge about each of several countries, so this inclusiveness is often dropped. A major discipline of the CGE approach can then be lost, depending on how the implicit “rest of world” is modeled. CGE models treat all sources of income and expenditure endogenously, that is, for the household, government, business, and foreign sectors of the economy. A critical problem with the CGE approach is, therefore, the parameter demands, the inevitable result of their ambitions. Consider the following demands: l

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Consumer behavior must be represented concerning the demand for all goods, labor/leisure choices that determine labor supply, preferences for location, including local public goods, if migration is allowed. Rarely are these systems of demand functions estimated by econometric techniques, so virtually no indication is available concerning how well the postulated numerical values actually fit the historical record. Neither are the simulations accompanied by studies of robustness, which could bring out the sensitivity of impact estimates to parameter estimates. Business behavior-in particular, its profit-maximizing characterization-is required. Thus, all markets for final demands and intermediate goods, and all factor markets, must be characterized in terms of their competitive structure. The easiest assumption is that all markets are perfectly competitive. Making this assumption for regulated utilities, govemment-subsidized agriculture, and defense industries that sell to one buyer strains credibility. Recent extensions have relaxed this treatment, but the persuasiveness of the characterizations is incomplete at present. A characterization of the behavior of governments is required. The most obvious question is how are governments assumed to determine trade barriers? Is NAFTA but a strategic game to deal with Japan and east Asian newly industrialized countries (NICs)? Is the U.S. government really bargaining with Europe by threatening to retreat behind a North American fortress? Recent developments in the trade war literature hold some promise to make trade protection an endogenous policy choice, but the research on NAFTA has largely accepted the task at face value.

Most CGE models are static, depicting, for example, the interindustry state of technology at a point in time. The reference year, or benchmark period, is often dictated by the available of input-output matrices, which are notoriously out of date when published. An energy shock may have set in and been adjusted to after the data were frozen. Since the impacts of NAFTA are long term, the gap between historical data and the forecast period could be several decades long. Major technological shifts can not only take place but, indeed, be induced by freer trade itself. A common supposition is that NAFTA will raise the confidence of foreign investors in Mexico, and foreign direct investment will

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bring important technology transfers as well as larger amounts of capital. Specialized training programs may upgrade the skill mix for industries induced to expand. Although exogenous adjustments can be made to the technological matrices specified, these adjustments are clearly ad hoc. They are also so detailed that no reader will normally be aware of the importance of any adjustments that are made. The CGE models seem to provide extraordinary potential for disaggregation, since the limits of industrial breakdowns are set by the availability of input-output matrices, which can disaggregate to hundreds of industries. But the critical disaggregation needed identify the winners and losers from NAFTA is likely to be by type or location of worker, as well as by industry. In principle, the CGE approach can readily handle disaggregations of this type, but in practice the small effects estimated may be due to averaging across too many types of workers who are vulnerable to NAFTA.

THE TRADE-THEORY

SPECIFICATION/ECONOMETRIC

APPROACH

Edward E. Learner’ has developed distinctive approaches to the problem of estimating some of the impacts of NAFTA on the U.S. and California economies. His approach, for the U.S. analysis, starts with rigorous neoclassical trade theory to develop the specification of a set of propositions which guide data investigations. These empirical studies are conducted at two levels: (1) Historical comparisons across countries and across industries within the United States are intuitively examined in tables and graphs; and (2) regression analysis is used to estimate equations, and the resulting model is simulated to predict U.S. factor return impacts and Mexican industrial production, after NAFTA.

Three Key Trade-theory Propositions Three trade-theory

propositions

form the basis for Learner’s empirical

analysis:

The Factor Price Equalization theorem states that factor returns tend toward equality from movement of goods, even if factors are immobile. That is, even if Mexicans did not migrate northward, there would tend to be downward pressure on U.S. wages since labor-intensive goods are imported from Mexico. Correspondingly, U.S. exports of capital-intensive goods, such as machinery, would tend to lower capital returns in Mexico even if there were no direct foreign investment in Mexico by U.S. companies.8 The Stolper-Samuelson theorem links changes in prices of internationally traded goods to changes in wages and capital returns, recognizing that reductions in the relative price of labor-intensive clothing will lower real wages and raise the real returns to capital (see Caves and Jones 1981, p. 117). Furthermore, factor price changes are magnified reflections of commodity price changes, since commodity prices are weighted averages of factor prices. The Stolper-Samuelson theorem suggests that modest reductions in the prices of previously protected goods may lead to more substantial declines in the wages of some workers, or in the returns to some types of capital.

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The Rybczynski theorem (Caves and Jones 198 1, p. 120) deals with the growth of the capital stock once trade has been liberalized, linking the growth of one factor to increases and decreases in the outputs of associated goods. It states that growth of capital stock relative to labor supply will raise the output of capital-intensive goods and lower the output of labor-intensive goods.

Historical Evidence on Wage Equalization Regarding wage equalization in the United States, Learner examines data on the industrial composition of exports, imports, output, and employment from 1972 to 1985. The degree of aggregation in two-digit manufacturing data masks wide variations at the subindustry level, so Learner reconstructs nine industry aggregates according to variations in capital per employee and percent of employees with professional skills. Apparel is a typical industry with low capital and low skills; steel is representative of high capital but low skills; rockets emerge as low capital but high-skill requirements; and chemicals are high capital and high-skilled industries. Changes in price, trade, and employment patterns basically conform with theoretical predictions, with a shift in comparative advantage away from labor-intensive manufacturing, particularly apparel and textiles. For example, the relative price of Apparel fell 44% whereas the price of chemicals rose 80%. The net trade balance dropped most in apparel and textiles. Employment in this cluster dropped 18%, with 17% for textiles, compared to 3% for all manufacturing. Learner also reviewed data on wage equalization among a large group of countries over a period of three decades. The experience of low-wage countries joining the European Economic Community is analyzed as a potential analogy for Mexico. Between 1978 and 1989, Spain and Ireland showed significant convergence in real wages toward the high-wage countries, such as Germany, Belgium, and the Netherlands. A better analogy may be provided by Portugal or Greece, which showed real-wage gains although they were less than those for Spain and Ireland. The bottom line, according to Learner, is that these empirical investigations of industry and country factor supplies and trade support the general proposition that wage equalization is working as predicted by trade theory.9

Econometric Model Estimates of Rybczynski Relationships For the econometric model specification, Learner depended on a close connection between the Stolper-Samuelson theorem and the Rybczynski theorem. His regression estimates directly focus on Rybczynski relationships between output and factor supplies. He then exploits the duality between the Stolper-Samuelson and the Rybczynski relationships to translate an assumed price change into a predicted factor price change. Thus, if the Rybczynski regressions link increases in textile output to increases in high-school graduates, then the dual Stolper-Samuelson result argues that an increase in the price of textiles should raise the wages of high-school graduates. Three factors are used: capital and labor divided into two categories according to skill level, professional workers, and other workers. For each of 38 manufacturing industries, and for 1972 and 1985, output is regressed on the capital stock, number of professional workers, and number of other workers for 13 OECD countries.

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42

This model is used to predict the way NAFTA will impact the trade structure of Mexico. Mexican production patterns are projected three ways: (1) Mexican supplies of capital, high-skilled and low-skilled labor are substituted as arguments in the industry regression equations; (2) same as (1) except Mexican capital is assumed to close half of the gap between the U.S. and Mexican capital per worker; and (3) Italian (higher) productivity is assumed to apply to Mexican labor supplies. The central result is the same for all three ways of predicting the Mexican industrial pattern, namely, that Mexico is projected to expand output significantly relative to U.S. imports. Rarely do predicted Mexican output increases exceed the critical point where all U.S. consumption could be satisfied from Mexican imports-at which point all protection against countries not members of NAFTA ceases to be relevant. (NAFTA, therefore, threatens Korea, Taiwan, and other low-wage exporters to the United States.) A second application of the model is to the impacts on U.S. factor returns. Assuming that NAFTA will lower the relative U.S. price of labor-intensive imported goods leads to estimates that the returns to $1,000 of capital will rise $13/year and the annual earnings of professional and technical workers will rise $6,OOO/year, but the annual earnings of other, less skilled workers will drop $1,9OO/year. This estimate is quite sensitive to alternative assumptions. Other assumptions can lead to estimates of low-wage losses as high as $9,3OO/year, or as low as $230/year, a forty-fold variation.

Pitfalls of the Trade-theory Specification/Econometric

Approach

The CGE literature strongly suggests that freer trade with Mexico will have very small, positive impacts on wages in the United States. Learner, on the other hand, estimates that wages will rise for skilled workers, or fall for unskilled workers, by amounts on the order of 10 times larger than the CGE estimates. Obviously, these wage-impact estimates are far apart. Why are they so different? The CGE models are calibrated to the scale of the U.S. and Mexican economies as of a given historical period, typically between 1975 and 1985. Measured by real GDP, the Mexican economy a decade ago was the size of the economy of Los Angeles county. That is, Mexican real GDP was only 3% of the size of the U.S. economy. The real question, however, is not how Mexico compared 10 years ago, but how will Mexico compare 10 or 20 years from now. NAFTA can mean several significant changes in Mexico’s competitive position, all of which may make it a more formidable challenger in some strategic industries. Effectively, Learner argues that low-skilled workers face a substantial risk that their real wages will fall far more than the current CGE models allow. Learner makes three arguments to counter the view that Mexico is too small to matter: l

l

NAFTA will encourage Mexico to specialize in industries that export to the United States, directly by lowering tariffs and nontariff barriers to some extent, but also indirectly through increased foreign direct investment, for example, by U.S. or Japanese auto producers. NAFTA gives Mexico an incentive to import from low-cost, nonmember countries, goods for its own domestic consumption. The proposed NAFTA agreement has local-content rules drafted to prevent Mexico from simply importing goods from, say, NICs in Asia, then reexporting them immediately to the United States. But an equivalent strategy is

Economic Modeling of NAFTA

l

43

available: Mexico can import low-cost goods for its own domestic consumption, then export to the United States goods it produces domestically but would consume without NAFTA. NAFTA will accelerate Mexican economic growth. The NAFTA agreement is phased in over a 15year period; clearly, it looks to costs and benefits over several decades. Over this time horizon, the Mexican economy will grow substantially, due to rapid population growth, migration from rural areas, improved quality of labor from training provided, in part, by U.S. firms locating in Mexico, capital accumulation induced by NAFTA, and technology transfer.

Growth, specialization, and redirection of domestic consumption could make Mexico large enough, at the margin, to displace completely other low-cost providers to the United States. But this would mean that NAFTA, designed to free trade on the North American continent, could effectively eliminate all protection currently afforded low-skilled workers. The trade-theory propositions Learner relies upon make predictions that may be far too extreme. For example, they tend to predict more extreme specialization than is actually observed. Many countries export and import the same commodities, even at fairly refined levels of disaggregation. The United States exports and imports wine, electronic components, and so forth.‘0 Changes in the prices of imported goods tend to be only partially transmitted to domestic prices. The CGE models are commonly specified to keep separate goods from different origins, so they naturally tend not to predict such extreme specialization. Unfortunately for policymakers, the “glue” that this Armington assumption allows CGE modelers to administer is specified without econometric evidence to support the degree of substitution imposed on the models. The empirical results Learner reaches are fragile in several respects: The signs of many coefficients are inconsistent with theory. In particular, a large group of commodities have all positive coefficients, whereas the Rybczynski theorem predicts at least one negative coefficient. The explanatory power of the equations are low, with many having R-squares less than 0.5. At first glance, Learner’s manifest difficulties with the empirical data might suggest that his econometric approach is less robust than say, the CGE modelers, whose models never have signs contrary to theory. The strongest advantage of Learner’s approach is that he confronts the theory with the empirical evidence. The CGE approach, to a very large extent, never risks being wrong because it simply imposes numerical values on parameters that are theory driven. No hint of the empirical strength or weakness of these assumptions is presented.” A final question accepts Learner’s pessimistic wage predictions as correct, given his assumption that policymakers passively allow low-skilled wages to fall or actively prefer the decline to raise real incomes of others. Suppose initially NAFTA does cause substantial declines in U.S. real wages. Why will not the same interest groups that support current protection head off the threat Learner fears will develop from NAFTA? Learner rebuts this argument by saying that NAFTA means is a strong commitment to free trade, institutionalized by a process intended to bind future Presidents and Congresses against easy reversals. Any agreement can be broken, of course, but not by a simple executive decision. Indeed, once the President and Congress ratify the Agreement, it would be a major process to reverse or even to revise it.

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44

A Regression/Extrapolation

Approach to Regional Impact Analysis

Learner also developed another empirical approach to estimate the potential impacts of NAFTA on manufacturing trade between Mexico and the United States, and between California and northern Mexico. The questions addressed in this article focus on the effects of (1) distance, (2) resource supplies, (3) trade barriers, and (4) technology. This effort is more directly empirical and exploratory than the paper discussed above, which was more theoretically structured. There are three parts to this study: (1) an examination of data on how distance affects trade, (2) a study of patterns of trade among countries classified by level of wages, and (3) a set of predictions for manufacturing trade. Learner developed an interesting data base on the impact of distance on the volume of trade that took place among 22 OECD countries for 1970 and 1985. He showed convincingly that distance matters and is not becoming less important. California, like Texas, a state close to Mexico, undoubtedly is strategically positioned to take advantage of this adjacency factor. A second investigation studied the role of wage differences on trade, with special attention paid to commodities that tend to be traded between pairs of low- and highwage countries (instead of between two high-wage or two low-wage countries). A feature of apparel trade that figures importantly in projected trade is that Mexico appears to have been far more closed to trade that would be expected based on its wage comparisons with, say, southeast Asia. Specifically, Learner argued: “If the Mexican data had conformed to the general pattern, U.S. exports to Mexico would have been less by TABLE

5.

Commodity U.S. Manufacturing

Total Trans. Equip.’ Apparel*

Potential Manufacturing Trade Stimulus From NAFTA and Mexican Liberalization Regression Estimate

Predicted Without Latin American Effect

10,850 2,000 164

21,567 6,723 9

58,520 20,357 31

NA NA NA

99% 236% -95%

439% 918% -81%

2,861 38 21

18,662 616 8,362

1985 Actual Exports to Mexico

% Ch. from Actual Total Trans. Equip. Apparel U.S. Manufacturing Total Elec. Mach.3 Apparel4

Imports from Mexico

9,974 3,296 292

% Ch. from Actual Total Elec. Mach. Apparel

NA NA NA

U.S. Surplus with Mexico in Manufachred 876 Total Notes:

-71% -99% -93%

87% -81% 2764%

Goods Trade

18,706

All amounts in U.S. $ millions. ‘Fastest growing commodity. U.S. exports to Mexico. *Slowest growing commodity, U.S. exports to Mexico. ‘Slowest growing commodity, U.S. imports from Mexico, excluding Appatel. 4Fastest growing commodity, U.S. imports from Mexico.

39,858

Economic Modeling of NAFTA TABLE

6.

Potential Manufacturing

45 Trade: California

Trade with Baja Mexico

Predicted with l/IO Mexican Economy Distribution = 500

California Wages Up from 9.54 to II.00

Predicted Without Latin American Effect

Net Exports

498 257 242

377 200 177

1,189 734 455

Exports Imports

NA NA

-24% -22%

Commodiry Exports

Imports

% Ch. from Base

Note:

139% 186%

All amounts in U.S. $ millions.

a factor of above five.” However, as Mexico liberalizes, it may raise its trade volume to closer to the proportions shown by other low-wage countries, especially in view of its proximity to the US. market. The third part of the paper used a cross-sectional regression model to predict real exports and imports based on distance, wages, real GNP, population, arable land, and a “Latin American” effect. The latter is a dummy variable that captures the descriptive fact that countries in Latin America do far worse than expected, based on other factors. Eliminating the Latin American effect, assumed by Learner to attend Mexico’s liberalization and North American free trade area membership, is predicted to expand trade between the United States and Mexico. Table 5 summarizes alternative estimates of manufacturing goods trade between Mexico and the United States. Table 6 makes estimates for California by resealing the U.S. regression predictions, and also shows estimates expected for Baja (northern) Mexico (Learner also estimated trade with all of Mexico, which is characterized as larger in size and farther in distance). The columns in Table 5 show: (1) the 1985 actual trade in manufactured goods; (2) projected trade as predicted by the regression model; (3) trade predicted by the regression model with the Latin American effect switched off. The rows in Table 5 show estimates for total trade and for two commodities, which represent the extremes in terms of growth rate impacts. For example, the fastest growth of U.S. exports to Mexico is predicted to be in transportation equipment; the slowest growth, or actual decline, is expected for apparel.

Highlights of the Predictions for U.S. Manufacturing Trade Highlights l

l

l

of the model’s predictions

for manufacturing

trade are striking:

Total real manufacturing exports to Mexico rise 99% between the actual 1985 level and the highest alternative projections, by the regression equation predictions. These exports would rise 439%, almost tripling the regression predictions, if Mexico could raise its total factor productivity in line with lowwage Asia or European competitors, based on successful liberalization and increased investment. The fastest growing industry, according to the regression model, is transportation equipment, (mostly automobiles). The model predicts these exports will increase significantly. They will more than double or, with successful liberalization, will rise more than nine-fold.

KIMBELL

46 l

l

l

l

.

For the worst positioned industry, apparel, exports to Mexico will drop to small fractions of 1985 levels. With the Latin American effect eliminated, which is the best case for U.S. exporters, they are predicted to be only one-fifth the 1985 level. The real import impacts predicted by the regression model are more mixed. With the Latin American effect, U.S. manufactured goods imports are predicted to drop 71%; with the effect removed, imports rise 87%. The most negatively impacted imports are electrical machinery, which drops 99% or 81%, according to the degree of success of liberalization. The category of imports from Mexico that rises most is apparel goods, which rise 27-fold from 1985 levels to the successful-liberalization projection.projection. The U.S. trade surplus with Mexico in manufactured goods is projected to rise very substantially, especially if Mexico can liberalize successfully. From a 1985 level of $0.8 billion, it is projected to rise to $40 billion (1985 dollars) in the best case. Indeed, since liberalization means capital expansion, substantial foreign investment in Mexico, from the U.S. foremost, will be required.

Highlights of the Predictions for California-Baja Mexico Manufacturing Trade Learner used the regression model to estimate trade potential between California and northern Mexico, called Baja California for brevity. He essentially resealed the U.S.Mexican trade projections, making Mexico one-tenth as large and reducing the average distance variable to 500 miles (compared with 2000 miles, on average). l

l

l

l

Exports and imports both drop under the regression equation predictions if California wages increase. The implication should be clear; it will be hard for wages to rise significantly in California and still participate fully in any NAFTA-induced trade boom with Mexico. Why California imports drop when California wages rise relative to Mexican wages is not clear. California exports to Baja Mexico more than double, assuming successful liberalization, but still lag behind rates of increase projected for the United States. The Californian results reflect data on composition of trade, so the possibility exists that California’s smaller share of U.S. automobile production than other exports to Mexico accounts for this. California imports from Baja Mexico increase by 186%, eliminating the Latin American effect. Californian net exports to Baja Mexico rise, even though the percentage increase in imports exceeds the percentage increase in exports, since the base levels in 1985 were much higher for exports.

Pitfalls in the Regression/Extrapolation

Approach

The elimination of the Latin American effect may come rapidly, or it may be a slow process. Learner’s regression equation approach says nothing about the speed of adjustment after liberalization is fully institutionalized. Clearly, even if Mexico can absorb

Economic Modeling of NAFTA

47

capital goods rapidly, this may ignore the realistic timing of the expansion by at least a decade or more. Imports of apparel rise substantially under successful liberalization, raising questions about Mexico’s competitors, in South Korea, Taiwan, China, or Italy. Imports from other countries are not predicted, but U.S. demand may not absorb all of this expansion, so exports from countries not members of NAFTA would be squeezed by Mexico’s penetration. Clearly, if they reduce their costs or profit margins sufficiently, they may retain market share in spite of Mexico’s advantage under NAFTA. Learner’s predictions depend critically on expansion of investment in Mexico. This theme is also echoed by many other authors. If NAFTA is inextricably linked to investment opportunities, then it may be valid to compare Mexico under two scenarios, one without freer trade and with limited foreign investment compared with the opposite assumptions. However, Mexico began liberalization before the start of negotiations over NAFTA, and it could continue liberalization even if NAFTA is never ratified by Congress. Suppose 90% of the optimistic expansion of trade projected by Learner is due to liberalization and only 10% is due to NAFTA. Is is fair to summarize the gains in trade as due to NAFTA? The analysis of Learner and others would be more informative if they addressed more precisely the extend to which higher investment is a highly likely complement to NAFTA, or could continue without it. The literature reviewed here suggests that NAFTA is likely to have a very small aggregate impact on the U.S. economy. A policymaker who accepts this interpretation, to be worried or excited about NmA, would have to care about particular regions, such as Los Angeles, or specific industries, such as apparel manufacturing, or types of workers, such as low-wage recent immigrants. Learner’s bold projections challenge the consensus view, indicating that Mexican liberalization combined with freer trade under NAFTA holds some promise of benefiting the United States more than alternative studies suggest. Learner’s key conclusion is: substantial potential exists for expansion of trade between the United States and Mexico, or between border regions of the two countries. It is possible to accept this conclusion yet not predict that the actual growth in U.S.-Mexican trade will match Learner’s most optimistic projections. Many other complications, such as supply bottlenecks, financing difficulties, exchange rate imbalances, or east Asian competitive responses, could prevent this potential from being fully realized. A number of research questions, beyond those Learner could reasonably address, will need to be answered before policymakers can count on the job-creating potential in U.S. manufacturing that is suggested here. Acknowledgment:

This article is a revised version of a paper presented at “California Business and an Emerging Mexico,” the First Annual Conference on Public Policy and California Business Opportunities,Anderson School, University of California, Los Angeles, December, 1992.

NOTES 1. Learner (1992) argues this case, especially for regions in close proximity to Mexico, such as California. 2. Views sympathetic to organized labor tend to warn of this possibility. See also Koechlin and Larudee (1991). 3. Portuguese exports of steel increased eight-fold in six years after accession to the Euro-

KIMBELL

48

pean Community. Spanish steel exports more than doubled. Textile exports of Portugal and Spain nearly tripled. See Hufbauer and Schott [1992], p. 254 and p. 278. 4. U.S. exports in 1990 were 40 times larger than this increment. See the Economic Report of the President, 1992, p. 286. 5. The estimated gain is therefore less than one-tenth of the drop in employment during a mild recession. U.S. employment fell 1.47 million during the recent recession, from the second quarter of 1990 to the third quarter of 1991. In a vigorous expansion, one expects 130,000 job growth monthly. 6. Three migration flows are actually calculated: (1) Mexican rural to U.S. rural; (2) Mexican urban to U.S. urban; (3) Mexican rural to Mexican urban. Displaced Mexican farm families are likely to migrate to Mexican cities, inducing low-skilled urban residents to migrate to the United States. See Robinson, et al., p. 24. 7. See Learner (1991) and (1992) for U.S. and California applications, respectively. 8. Learner carefully examines historical data bearing on wage equalization, with a strong conclusion: “I believe that in the absence of very substantial increases in trade barriers, real wages of low-skilled workers in the United States are virtually certain to decline over the next decade because of the forces of wage equalization. This is true regardless of the existence of a U.S.-Mexican free trade agreement” (Learner 1992, p. 13, emphasis added). 9. Labor economists have estimated the impacts of Mexican and other migration on wages of domestic workers. LaLonde and Topel (1991). p. 190, conclude that increased immigration does not impact native workers wages, even those of seemingly close substitutes, such as young blacks or hispanics. Small transitory effects are felt on recent other immigrant wages, but these disappear as immigrants assimilate to the American labor market fairly quickly. Hensley challenges this conclusion, using data disaggregated by region and industry. He finds that a white male working in Los Angeles in an industry with an eleven percent Mexican immigrant concentration would earn about three percent less than he would if the industry employed no Mexican immigrants. However, less-educated workers in the furniture industry may lose as much as 12.6 percent. See. Hensley (1989), p. 5.5, 56. 10. See Devarajan, Lewis and Robinson for a critique of the “law of one price” and other limitations of standard neoclassical trade-theory models. 11. Elsewhere, I have urged CGE modelers to face the same risks that single-equation econometricians or macroeconometric forecasters encounter, namely, develop some techniques that expose the frailties of the predictions. See Harrison, Jones, Kimbell and Wigle (1992). Perhaps CGE modelers are so pessimistic about the robustness of their models that they have chosen to abandon the scientific task of evaluating the reliability of their technique. After many hard years of exposing my forecasts in public, I love the security of CGE work-there is no risk in making theory-bound predictions that are virtually impossible to verify.

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Trade Agreement: Analytical Issues and Computational Assessment.” The World Economy 15(January): 1l-29. Caves, Richard E., and Ronald W. Jones. 1981. World Trade and Payments: An Introduction. Boston: Little, Brown & Co.

Ciemex-WEFA. 1992. Mexican Economic Outlook: Executive Summary. Bala Cynwyd, PA: Ciemex-WEFA. Cox, David, and Richard G. Harris. 1992. “North American Free. Trade and Its Implications for Canada: Results from a CGE Model of North American Trade.” The World Economy lS(January): 314.

Cypher, James M. 1992. “Labor Market Implications of the Mexico-US Free Trade Agreement.” Washington, DC: Economic Policy Institute. Devaragan, Shantayanan, Jeffrey D. Lewis, and Sherman Robinson. 1990. “Policy Lessons from Trade-Focused Two-Sector Models.” Journal of Policy Modelling 12(4): 625-657. Harrison, Glenn W., Richard Jones, Larry J. Kimbell, and Randall Wigle. 1993. “How Robust is Applied General Equilibrium Analysis 7” Journal of Policy Modelling 15( 1): 99-l 15. Hayes-Bautista, David E., Werner 0. Schink, and Jorge Chapa. 1992. “The Young Latin0 Population in an Aging American Society: Policy Issues Evoked by the Emergence of an Age-Race Stratified Society.” Pp. 196-2 13 in U.S.-Mexico Relations: Labor Market Interdependence, edited by Jorge A. Bustamante, Clark W. Reynolds, and Raul A. Hinojosa-Ojeda. Stanford, CA: Stanford University Press. Hensley, David G. 1989. ‘The Effects of Mexican Immigration to Los Angeles on the Wages of Native Workers.” Unpublished Ph.D. thesis, University of California, Los Angeles. Hinojosa-Ojeda, Raul A., and Robert K. McCleery. 1992. “U.S.-Mexico Interdependence, Social Pacts, and Policy Perspectives: A Computable General Equilibrium Approach.‘* Pp. 113- 154 in U.S.-Mexico Relations: Labor Market Interdependence, edited by Jorge A, Bustamante, Clark W. Reynolds, and Raul A. Hinojosa-Ojeda. Stanford, CA: Stanford University Press. Hinojosa-Ojeda, Raul A., and Rebecca Morales. 1992. “International Restructuring and Labor Market Interdependence: The Automobile Industry in Mexico and the United State.” Pp. 113154 in U.S.-Mexico Relations: Labor Market Interdependence, edited by Jorge A. Bustamante, Clark W. Reynolds, and Raul A. Hinojosa-Ojeda. Stanford, CA: Stanford University Press. Hinojosa-Ojeda, Raul A., and Sherman Robinson. 1992. “Labor Issues in a North American Free Trade Area.” Pp. 26-68 in North American Free Trade: Assessing the Impact, edited by Nora Lustig, Barry P. Bosworth, and Robert Lawrence. Washington, DC: The Brookings Institution. Hinojosa-Ojeda, Raul, Sherman Robinson, and Goetz Wolff. 1992(September). “The Impact of a North American Free Trade Agreement on California: A Summary of Key Research Findings.” Working Paper No. 3, Lewis Center for Regional Policy Studies, University of California-Los Angeles. Hutbauer, Gary Clyde, and Jeffrey J. Schott. 1992. North American Free Trade: Issues and Recommendations. Washington, DC: Institute for International Economics. Hunter, Linda, James R. Markusen, and Thomas F. Rutherford. 1992. “US-Mexico Free Trade and the North American Auto Industry: Effects of Spatial Organization of Production of Finished Autos.” The World Economy 15(January): 65-82. Josling, Tim. 1992. “NAFTA and Agriculture: A Review of the Economic Impacts.” Pp. 26-68 in North American Free Trade: Assessing the Impact, edited by Nora Lustig, Barry P. Bosworth, and Robert Lawrence. Washington, DC: The Brookings Institution. Koechlin, Timothy, and Mehrene Larudee. 1991. “The High Cost of NAFTA.” Challenge (September/October): 19-26. KPMG Peat Marwick. 1991. “Summary.” Pp. l-43 in The Effects of a Free Trade Agreement Between the U.S. and Mexico. Washington, DC: U.S. Council on the Mexico-U.S. Business Committee. Kuhn, Peter, and Ian Wooton. 1991. “Immigration, International Trade, and the Wages of Native

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Workers.” Pp. 285304 in Immigration, Trade and the Labor Market, edited by John M. Abowd and Richard B. Freeman. Chicago: The University of Chicago Press. LaLonde, Robert J., and Robert H. Topel. 1991. “Labor Market Adjustments to Increased Migration.” Pp. 285304 in Immigration, Trade and the Labor Market, edited by John M. Abowd and Richard B. Freeman. Chicago: The University of Chicago Press. Learner, Edward E. Forthcoming. “Wage Effects of a U.S.-Mexican Free Trade Agreement.” In Mexico-U.S. FTA Conference Proceedings, edited by Peter Garber. Cambridge: MIT Press. Learner, Edward E. 1992. “U.S. Manufacturing and an Emerging Mexico.” Paper presented at “California Business and An Emerging Mexico: Opportunities and Challenges,” the First Annual Conference on Public Policy and California Business Opportunities, December. Martin, Philip. 1992. “NAFTA and Rural Mexican Migration.” Pp. 63-92 in North American Free Trade Agreement: Implications for California Agriculture, Davis, CA: Agricultural Issues Center, University of California. Pastor, Robert A. 1992. “NAFTA as the Center of an Integration Process: The Nontrade Issues.” Pp. 26-68 in North American Free Trade: Assessing the Impact, edited by Nora Lustig, Barry P. Bosworth, and Robert Lawrence. Washington, DC: The Brookings Institution. Prestowitz, Clyde V., Jr. 1991. The New North American Order: A Win-Win Strategy for U.S.Mexican Trade. Washington, DC: Economic Strategy Institute. Reynolds, Clark W. 1992. “Will a Free Trade Agreement Lead to Wage Convergence? Implications for Mexico and the United States.” Pp. 477-486 in U.S.-Mexico Relations: Labor Market Interdependence, edited by Jorge A. Bustamante, Clark W. Reynolds, and Raul A. HinojosaOjeda. Stanford, CA: Stanford University Press. Robinson, Sherman. 1992. “Macroeconomic Implications of NAFTA for California.” Pp. 27-52 in North American Free Trade Agreement: Implications for California Agriculture, Davis, CA: Agricultural Issues Center, University of California. Robinson, Sherman, Mary E. Burfisher, Raul Hinojosa-Ojeda, and Karen E. Thierfelder. Forthcoming. “Agricultural Policies and Migration in a U.S.-Mexico Free Trade Area: A Computable General Equilibrium Analysis.” Journal of Policy Modelling. Runsten, David, and Sandra 0. Archibald. 1992. “Technology and Labor-Intensive Agriculture: Competition Between Mexico and the United States. ” Pp. 113-154 in U.S.-Mexico Relations: Labor Market Interdependence, edited by Jorge A. Bustamante, Clark W. Reynolds, and Raul A. Hinojosa-Ojeda. Stanford, CA: Stanford University Press. Sobarzo, Horatio E. 1992. “A General Equilibrium Analysis of the Gains from Trade for the Mexican Economy of a North American Free Trade Agreement.” The World Economy 15(January): 83-100. Trela, Irene, and John Whalley. 1992. “Trade Liberalization in Quota Restricted Items: US and Mexico in Textiles and Steel.” The World Economy 15(January): 45-64. United States International Trade Commission (USITC). 1991. The Likely Impact on the United States of a Free Trade Agreement with Mexico. Washington, DC: USITC. Waverman, Leonard. 1992. “Mini Symposium: Modelling American Free Trade: Editorial Introduction.” The World Economy 15(January): l-10. Weintraub, Sidney. 1992. “Modelling the Industrial Effects of NAFTA.” Pp. 109-143 in North American Free Trade: Assessing the Impact, edited by Nora Lustig, Barry P. Bosworth, and Robert Lawrence. Washington, DC: The Brookings Institution.